The DC Condo Market, Part 4: The Coming Condo Shortage (Maybe)

• September 29, 2009

by Will Smith

UrbanTurf and McWilliams|Ballard have partnered to produce a series of articles that look at the new condo market in the DC area over the last 18 months. Below is the fourth article of five in the series. The report upon which this article is based is available for free download here. Also be sure to read:

• The DC Condo Market, Part 1: State of the Market
• The DC Condo Market, Part 2: Rebounding from the Bottom
• The DC Condo Market, Part 3: Where the New Condos Are
• The DC Condo Market, Part 5: The Top 20 Fastest Selling Condos

Download Part 4 of the Condo Report

Within the next 12 to 18 months, there will likely be a shortage of new condos in the DC metropolitan area, according to real estate sales and marketing firm McWilliams|Ballard. Before you cry foul that a firm representing the real estate industry cannot be objective about the market, consider the logic:

A few years ago when credit was plentiful and real estate was appreciating, new condos sprang up all over the region. When demand softened in 2006 and the party started coming to an end, the market swung hard in the other direction and new development ground to a halt. Since then not much has been built, so the “pipeline” of new condos hasn’t been replenished as consumers have gradually bought up what’s out there. Effectively all of the new residential buildings under construction right now are slated to deliver as apartments, not condos. In 12 to 18 months, depending on the area, all of the new condos will have been purchased and buyers will be looking at a very small pool of available properties.

“There is a genuine possibility that some of these sub-markets could be lacking in new condo supply,” McWilliams|Ballard director of market research Mark Franceski told UrbanTurf. In certain popular areas, like the U Street-Logan Circle corridor and Mount Vernon Triangle, supply is already under 12 months.

On the flip side, there are a few reasons why a shortage might not occur. For one thing, the remaining new condos on the market are the larger, more expensive units that take longer to sell than the one-bedrooms and studios that have been selling out first. A slower sales pace would mean that inventory would take longer to absorb, long enough perhaps for new condos to be constructed to prevent any gap in supply.

Yale Steam Laundry in Mount Vernon Triangle

There is also the possibility that under-construction buildings currently planned as apartments—nearly 6,000 total units across the region—deliver as condominiums instead, if developers perceive enough demand. In addition, there are a number of buildings that have already delivered as apartments, despite being originally conceived as condos. These buildings could convert back to condos.

“Since we’re getting to a point where there might be a limited supply of condominiums, people might take their apartment buildings into condominiums, which is something that we saw in 2004 and 2005,” said Franceski. “It’s a faster way of creating condominium supply than actually constructing a building from the ground up.”

While it would seem that new buildings that have yet to begin construction would add to the supply pool, that reality may be a ways away. “No new condo project is expected to break ground until later this year at the very earliest,” Franceski said. He noted that it takes about two years to deliver a new condo project, so such buildings won’t have a meaningful impact on the market until 2012.

So which is it, shortage or no shortage? The unprecedented roller coaster that has defined the real estate market in recent years has made predicting very difficult. “The way things have gone in the last three years, there’s no telling exactly what the next few years holds for the condo market,” Franceski said. “We are really in uncharted territory.”

3 Comments

1. George said at 11:48 am on Tuesday September 29, 2009:

   As someone who thought that the condo shortage was a far-fetched idea, this piece does make a compelling piece for it. How easy is it for apartments to convert to condos, though? That seems like it would be just one headache after another.

1. mary said at 10:49 am on Wednesday September 30, 2009:

   if the building has no occupants, it’s very easy to convert apts to condos. much tougher if occupants are in and conversion happens.

1. Dennis said at 12:07 pm on Wednesday September 30, 2009:

   There will most likely be a shortage because the condo market will always be the most affordable segment of the market offering a specific lifestyle preferred by the largest demographic of DC residents.  As Mary mentioned, empty buildings are easy to convert but which and how many developers can afford to leave a building empty and forgo the cash flow in anticipation of demand?  At the same time financing for buildings that don’t meet owner occupied ratios is hard to come by since the loans can’t be sold on the secondary market and require a lender to “portfolio” the loans until such time they can be sold. Watch for the shortage - it will come quickly - since reaction times lag.  Just as the stop was slow to come when on line condos being built were “converted” to rentals, the new construction will lag.  Developers will be gun shy to get started, and rightfully so.  We just defied demographics and exeperienced the biggest real estate downtown in history, even though DC has come out of it nearly unscathed.