DC Area Has Too Many Apartments, Too Few Condos, Report Says

• April 3, 2014
• 25 Comments

by Lark Turner

A rendering of a 40-unit condo project planned near the U Street Corridor.

There still aren’t enough condos being built to meet demand in the DC region, mostly because financing for such projects hasn’t fully rebounded since the housing crisis, according to a new report. The Delta Associates report released Wednesday also found that the oversupply of apartments and an undersupply of condos can’t be fixed by converting rentals into condos.

“With less than 10 months of supply, there are simply too few new units available in the market,” the report concluded. (In many parts of DC proper, the supply is less than six months, Delta’s William Rice tells UrbanTurf.) Delta goes on to say that developers are attributing the shortage to “construction financing and end-loan financing obstacles.” The problem will take time to fix, because condo conversions aren’t likely for most of the apartment buildings coming onto the market this year.

A chart showing the months of inventory available in DC-area markets.

From Delta:

“…financial markets are hampering condo conversions of larger properties as an overreaction to the credit crunch in the latter part of the last decade. We count only 1,662 rental apartment units that would make sensible candidates to convert to condo – not enough to help either an overbuilt apartment market or under-served condo market. As a result, condo supply remains tight and will remain tight in the metro area for the foreseeable future.”

Here are some other key findings:

• The area had its strongest annual new condo price increase since 2005. Prices rose by 6.7 percent for the year ending in March 2014, that measure’s strongest showing since 2005.

• New condo sales went down in the first quarter of 2014, with 376 sales in the DC area, but sales volume is up 26 percent in the central and eastern sections of DC, which the report called “a testament to the shift in market trends to urban living.”

• The condo market shifts depending on where you’re looking. New condo sales activity is highest in Prince William and Loudoun counties, followed by Arlington and Alexandria. In suburban Maryland, Montgomery County has the highest sales activity, while in DC, the mideast region has the most activity.

• There is some relief coming for the new condo market. By the end of the year, more than 2,000 new units should be under construction, and the number of units planning to begin sales in the next three years — 2,730 — is at the highest level since 2011.

This article originally published at http://dc.urbanturf.com/articles/blog/dc_has_too_many_apartments_and_too_few_condos_report_says/8314

25 Comments

1. Joe said at 8:01 pm on Thursday April 3, 2014:
   "end-loan financing obstacles" code for the gov't screwed things up pre-bubble by making financing too easy and now they are screwing it up because they made it too hard. this is going to be an issue for years to come because even if, by some miracle, the government figured out that they are always the problem, it would take years to fill in the years of supply gap (and if not we'll just see another bubble). Sigh.

1. Jason Gerber said at 8:18 pm on Thursday April 3, 2014:
   "end-loan financing obstacles" is actually code for the prices on condos are too high for DC's upper middle class to get a mortgage. If the top government and contractor salaries are around $130k, how do you sell a $500-750k condo with a $500 monthly fee? for even though the government relaxed restrictions on financing for levels of owner-occupied in condo building to just 51%.

1. Confused said at 9:05 pm on Thursday April 3, 2014:
   I regularly see ads for condos for rent. they could easily be converted back into for sale units. Why arent they, if the condo market is so strong, and the rental market so weak?

1. Justin S said at 9:21 pm on Thursday April 3, 2014:
   This whole article seems like an obnoxious ostrich with its head in the sand. Let's get the facts straight first: Here is the current market comparison http://dc.urbanturf.com/articles/blog/trulia_buying_is_34_percent_cheaper_than_renting_in_dc_area/8170 Does anyone care to explain how someone can, with a straight face, suggest that even though buying is dramatically cheaper than renting, that there's a shortage of condos and a surplus or rentals? Seriously? This is painfully obvious. If you can build a residential building and rent it for dramatically more profit than you could get by selling the units, why would you sell them? When condo prices surpass rental prices, THEN we can say there's a shortage, but not until then. In the meantime, we've got a shortage of rentals.

1. V. Fox said at 9:37 pm on Thursday April 3, 2014:
   I thought the Real Estate industry considered a six-months-supply inventory to be optimum.

1. H Morgan said at 9:37 pm on Thursday April 3, 2014:
   I've been saying this for at least three years now. Every new building the comes up in DC and NOVA are apartments. For those of us looking to buy this has been evident for a few years now. What I really don't understand is why its not changing. There certainly is demand for condos especially since older units come with hefty maintenance fees.

1. Libertarians are Idiots said at 9:38 pm on Thursday April 3, 2014:
   <i>gov’t screwed things up pre-bubble by making financing too easy and now they are screwing it up because they made it too hard. </i> LOL. Yeah, because we all know the banksters always get it right.

1. Lark Turner said at 9:40 pm on Thursday April 3, 2014:
   Hi Justin, Thanks for writing in. The report shows that condo inventory is low compared with demand, and that rental inventory — at this precise moment — is high compared with demand. That's for the entire DC metro area, which extends well beyond the District's borders. We've written about the excess in apartment inventory for 2014 <a href="http://dc.urbanturf.com/articles/blog/why_2014_could_be_the_year_of_the_renter/7928" title="here">here</a>. It's a real trend, but you're right that in the long run, the DC area is going to need a lot more of both condos and especially rentals. The report reflects the pulse of the market at a specific point in time. That doesn't necessarily negate your points; it's just more specific information about what the market's doing right now.

1. Skidrowe said at 10:07 pm on Thursday April 3, 2014:
   Financing remains a problem, yes: the segment of the 1% who finance projects all think the same things at the same time (thus repeated bubbles), and at the moment they're still thinking rentals. That may change: these folks (being very wealthy) are insulated from market realities and thus slow to respond to market forces, but usually they eventually do it. But there are other problems: Builders, many of whom were burned by the years-long punchlists of picky buyers during the boom, aren't in any hurry to get back into condos; they'd much rather do rentals where they answer to 1 owner. Some builders won't do condos at all (at least not until they get desperate, which currently none are); others jack up the price to reflect the reality of a problematic back-end. Also in DC, the well-intentioned Inclusionary Zoning (put in place in 2009) has worked okay for rentals (especially large buildings) but so far is a disaster for condos. At this point, developers of new condo buildings with more than 9 units must essentially write off 8-10% of the units, because the IZ's restrictions make it almost impossible for any affordable-needs person to finance (and affordable-needs buyers, pretty much by definition, aren't paying cash!). From the affordable buyers' perspective, it's not so great either: They have to sell under the same terms they bought, so they are essentially accepting the risks of homeownership but get very little of the potential reward. DC officialdom seems to be slowly realizing this unfortunate reality, but given the political sensitivities, none seem willing to suggest reforms. In the meantime, IZ is another reason, in DC at least, that rentals rule.

1. answers given said at 10:21 pm on Thursday April 3, 2014:
   @Joe: the US govt provides heavy subsidies for consumer housing loans. US housing consumers have it better than pretty much anywhere else in the world, pre-, during, and post crisis. The US govt may be "the problem" in some ways, but you definitely cannot say that the US govt is an obstacle to ease of mortgage financing in this country. @confused: probably because those owners have a long term plan for the unit. It may be the only one they own. They don't own a portfolio of condos and other real estate assets. They won't act on short term phenomena like a developer will. @Justin S: that trulia analysis has been thoroughly debunked elsewhere, and I think on this site too. When making the comparison it ignores the down payment which greatly under estimates the cost of owning relative to renting. Remember, Trulia is in the business of selling houses, indirectly at least. @H Morgan: it probably will change now. The apartments being delivered now were planned and financed years ago. There is a lag on these things.

1. Justin S said at 10:21 pm on Thursday April 3, 2014:
   Lark, I guess I wasn't specific enough. What I'm trying to point out is that since 1.) we have strong growth in the number of apartment buildings (combined rentals and owner-occupied), and 2.) the cost spread between rental buildings and and condo buildings is still strongly favoring buying over renting, It isn't very fair to say that there is an over-supply/undersupply issue until the numbers change dramatically. It can't be "the year of the renter" if it still costs 30%+ more to rent then it does to buy a similar unit... even if the year before it cost 40% more to rent. It'll be the year of the renter when we start seeing NYC-style spreads where ownership costs actually do occasionally exceed rental costs.

1. answers given said at 10:28 pm on Thursday April 3, 2014:
   @Skidrowe: your analysis is solid, however I have a question for you. Do you think IZ buyers should be able to sell at full market? I think it's better the way it is, in that respect. It's crazy to me for tax payers to subsidize buyers at the front end and let them reap all the reward at the back end. They don't take full ownership risk by the way, because they pay artificially low prices. Like getting a big discount on a stock price that no one else enjoys. It might be better to abolish IZ for owners than try to fix it by allowing full equity capture for owners. Keep it for rentals.

1. Jimbo said at 10:43 pm on Thursday April 3, 2014:
   @answers - Why not set up some sort of agreement where the city/owners share some of the (potential) profit? That money could then go into funding other affordable housing projects. Granted, this would be tricky to implement, but it doesn't seem to be an insurmountable problem.

1. @thefirstdraw said at 1:03 am on Friday April 4, 2014:
   Don't forget that DC charges a 5% condo conversion fee on gross sales. Combine that with selling costs and you easily increase prices by 12% or more. This makes many conversions prohibitive.

1. answers given said at 3:20 am on Friday April 4, 2014:
   @Jimbo, that's a good idea - I'd vote for that. I do support programs that make housing more affordable! Just want them to be fair. Your proposal is a good compromise, with taxpayers getting a return on their investment in affordable housing.

1. Developer dude said at 4:43 am on Friday April 4, 2014:
   Unfair federal tax treatment of condos + 10% structural warranty bond + 5% DC condo conversion tax + cost of sales + high financing costs = makes Jack a very dull boy :-(

1. Developer dude said at 4:50 am on Friday April 4, 2014:
   Oh sorry I forgot the elephant in the room! DC IZ rules ensure that you can't sell 8% of your inventory. So that's the final nail in the coffin for you.

1. Developer dude said at 5:08 am on Friday April 4, 2014:
   The IZ rule can be compared to the idea of a grocery store selling milk at a considerable discount to some people who cannot afford it. This in turn forces the owner to charge more for the milk it sells to everybody else therefore raising the price of milk unfairly for most. Same thing with housing, by forcing developers to sell units at a loss then they have to raise the price on everyone else to make up for it. IZ might provide a few lottery winners with an affordable home in a good building, but it leaves many more homebuyers who are neither rich or poor in the cold.

1. Jpreal said at 12:08 pm on Friday April 4, 2014:
   Correct me if I'm wrong, but won't the oversupply drive down rental rates for apartments making them more competitive with the cost of condo ownership?

1. confused said at 2:54 pm on Friday April 4, 2014:
   answers given Yeah, I was thinking it might be something like that. Still, color me skeptical. Developers are looking at ROI, and they don't get all that in the first year or two the building is open. I can't imagine there are that many owners of one or two condos who wouldn't sell if the condos are so hot. I think its more what Justin said (and see what Jpreal said for context) Yes, the condo market is tightening, and yes the rental market is softening with new supply. But even if rentals come down 3 to 5 %, that still leaves buying cheaper than renting. The real question is why, given that, there arent more people buying and really driving up condo prices further - and that I think, does have to do with inability to get financing.

1. Jimbo said at 4:43 pm on Friday April 4, 2014:
   @confused - I think the biggest reason that holds many back from buying is lack of a sufficient downpayment (which leads into the difficulty of obtaining financing). High rents preclude many from being able to save up enough money to buy their own place. Given DC's hot RE market, many sellers are turning down perfectly good offers for those that have larger downpayments.

1. Joe (Again) said at 6:50 pm on Friday April 4, 2014:
   I think I need to qualify my first comment. The quote “end-loan financing obstacles” does not mean the issue is buyer financing; anybody with half decent credit and some down payment can get a loan. What it does mean is that the government (e.g. Fannie and Freddy) has policies that make it IMPOSSIBLE for developers and investors to take the risk of building a condo of any meaningful size. For example, the aforementioned require that any new building be 70% pre-sold prior to the first unit closing. So in a normal sized building (call it 200 units because that is what needs to be built in order to have any kind of reasonable return given the costs to cover what @Developer dude lists out) and that means that 140 people have to write a contract and plunk down a deposit equal to roughly 5%-10% of the purchase price to hold a unit. It normally takes 2 years to build a building so would you as a buyer plunk down a $50k non-refundable deposit for a period of 2 years in hopes that there maybe 139 other people like you? What if there are only 50 other people like you and the building is built, what then? Will you wait another 6-8 months or longer to close? But in DC the law states that a contract is only valid for 24 months so you get frustrated and ask for your money back and cancel your contract and so the cycle continues. So if you are a developer and his/her financier would you take the risk of building a $200mm without a reasonably reliable timeline of when you could actually get your money back? Logic says no! PS This isn't a DC problem, this is a national problem which is why only super high end condos are being built- cash buyers don't need the government!

1. Sherman Circle said at 9:30 pm on Friday April 4, 2014:
   Address the height limit. Think how much bigger the margin would be for developers if the same parcel of ground supported an 7 story condo vs. 5. Why would a bank and developer want to invest so much cash all for razor-thin margins? They will invest if they have some room to breath and actually make money.

1. Skidrowe said at 10:12 pm on Friday April 4, 2014:
   @Answers given: I tend to think that the best move would be to restrict IZ to rentals. There are innumerable practical problems with affordable condos, for example what happens when there's a special assessment that the affordable buyer (moreso than market buyers) simply cannot pay? But that's probably not politically possible. What might be possible, however, would be to amend the ownership side of IZ to follow the Manna model. Manna, if you're not aware, is a 30-yr-old affordable housing developer here in DC which focuses on ownership. They are a significant success story, having completed over 1,000 units of affordable housing--and not having a single mortgage default among their buyers in the recent Great Recession. Their model is a sort of 15- to 20-year vesting period, in which the buyers gradually gain the ability to sell at market rate and market terms. This provides a reasonable balance between the risks and rewards of homeownership. If nothing else, it incentivizes stability and caring about the state of one's home, building, and neighborhood. As it happens, it also answers another thorny IZ-condo problem: what happens after 15-25 years, when expensive fixes are needed? In the Manna model, the owners can usually either borrow against equity or sell to a market-rate buyer. IZ condos, required to have "perpetual affordability," have no such mechanism to finance such necessary periodic replacements and upgrades. They can't borrow against equity because (from most any bank's perspective) there isn't any. New buyers can't afford it because, by definition, they're affordable-needs buyers. The Manna model has its weak aspects, and its buyers go through lengthy training in economics, personal finance, etc. which might not work on a larger scale. But the model is workable and proven in ways that the IZ condo model simply is not.

1. Jeremy said at 10:53 pm on Friday April 4, 2014:
   Lark, I would suggest an article all about IZ. That will rock some boats. After that maybe one about the condo conversion tax and then we can maybe see some real change to produce more condos!