For-Sale Multifamily Is Warming Up for Investors and Homebuyers as Economy Recovers and Apartment Rents Increase
For six long years following the burst housing bubble and subsequent recession, residential condominium sales remained in a deep freeze. Late last year, however, the first green shoots of a condo recovery appeared in such gateway markets as Boston, San Francisco and New York.
More recently, analysts and major investors are starting to take serious notice of the emerging condo market after several large residential and commercial developers announced new condo development projects in previously overbuilt markets such as South Florida, and bulk condo portfolios begin trading in Las Vegas and other metros where the housing market cratered so deeply in 2007.
In a sign that demand is picking up, overall U.S. condominium investment sales volume and the average price paid per unit for condo projects reached their highest levels in seven years during the fourth quarter of 2012, according to an analysis of preliminary CoStar transaction data.
The small thaw in the condo market has even reached Las Vegas, where investors have been buying up a portion of the plentiful distressed properties. Late last month, Ladder Capital Finance Holdings LLLP acquired 427 luxury condo units at Veer Towers in the CityCenter project from MGM Resorts International for $119 million.
Tony Dennis, executive vice president of CityCenter Residential, said the sale "comes at a time when the Las Vegas housing market is seeing sustained improvement."
Another sign that condo markets are seeing recovery is the interest of large homebuilders such as Lennar and Toll Brothers, Inc., which are looking to diversify their portfolios by getting into other types of residential construction such as rental apartments and for-sale condos.
Toll Brothers, Inc. (NYSE:TOL
) a leading builder of luxury homes, this week announced a major push into the condo market beyond its New York City market with the acquisition of a development site in downtown Bethesda, MD.
In Bethesda, Toll plans to begin construction next fall on a seven-story building with 60 luxury condominiums and underground parking at 4915 Hampden Lane. In New York, Toll acquired 953-961 First Avenue between 52nd and 53rd streets in the Midtown East area, and 82 King Street, between Hudson and Varick Streets, in SoHo, where it will build luxury condos and retail space.
Meanwhile, other major players, such as The Related Group, which bet big and lost big in hard-hit areas like South Florida three to five years ago, are cautiously returning to the market. Privately held Related Group has seen a few boom and bust cycles, having built and managed more than 80,000 condominium and apartment residences in major markets throughout Florida since 1979.
Condo investment has always been vulnerable to cyclical booms and busts, most famously in markets like Miami, Orlando and Las Vegas, where thousands of new units and converted apartment units languished on the market in 2006 and 2007.
As the housing bubble burst, many under-construction condo developments froze virtually overnight, their towering ironwork and foundations haunting the urban landscape for years as ghostly monuments to the Great Recession and the tendency of developers to overbuild during the good times.
However, rock-bottom prices have allowed strongly capitalized firms to buy well-located projects at fire sale prices -- which is exactly what Related did last month in Miami, purchasing a 1.3-acre high-rise mixed-use development site at 1300 South Miami Ave. in the Brickell financial district for $18.5 million.
The site is approved for development of a 556-unit residential tower plus 15,049 square feet of retail space and 38,357 square feet of office space.
The gates are beginning to open to new development in supply constrained markets as San Francisco, where Trumark Companies this week announced the acquisition of six sites planned for mid- and high-rise condo projects, with plans in the works for more than 500 units representing an investment of north of $300 million.
Trumark principal and co-founder Gregg Nelson said demand for urban housing has rebounded along with the strengthening economy, particularly in top tier markets like San Francisco. But almost all the new development to date has been rental housing.
"We see an exploding opportunity, and an exploding demand, for for-sale housing in core urban areas because there's almost a complete lack of supply," Nelson said.
A November report on San Francisco housing inventory by the Polaris Group illustrates the dearth of condos in the supply pipeline, with new condominium inventory forecasted to be less than 200 units per year through 2015, which is “fairly remarkable” for a city of over 800,000 residents.
Constrained supply isn’t the only reason why the company is debuting its new multifamily division, Trumark Urban, in San Francisco. People are once again recognizing the value of buying versus renting in many urban markets.
"We are several years post the housing bust, and potential buyers have short memories of all things past," noted Michael B. Cohen, director of advisory services and multifamily specialist with Property and Portfolio Research (PPR), CoStar's analytics and economic forecasting company.
Trumark plans to capitalize on the younger tech company workers and retiring baby boomers who want to scale down from larger residences to own property in the City by the Bay, said Michael Maples, who co-founded Trumark with Nelson in 1988.
As attractive as demographics were in the mid-2000s boom years for residential condo investors, they're even better now as a wave of convenience-minded baby boomers begin to retire. Their echo boomer children -- those with jobs, anyway -- are also opting for ultra-hip, low-maintenance and compact high-rise condos over large single-family dwellings in far-flung suburbs.
The strengthening housing and job market has put such projects back on stronger footing, at least in coveted urban metros like San Francisco and Boston. In the past two years, housing prices have increased more than 10% in San Francisco, where higher-end Trumark condos are expected to fetch over $2 million for dwellings that max out at 1,500 square feet.
Three years of improving apartment occupancies and strong rent gains in some markets, combined with low mortgage rates, are again prompting financially stable renters to do the math and weigh buying versus renting, Cohen noted. At the same time, existing home sales and prices are improving. As inventory shrinks, developers are again circling a growing number of markets in hopes of building new product.