Condo Recovery Underway and Likely to Accelerate
By Adam Duckerurban real estate
How to Ride the Wave This Time Around Without Losing Your Shirt
If there’s a single lesson from the recent real estate recession, it’s that history tends to repeat itself. Or as Mark Twain famously said, if it doesn’t exactly repeat itself it sure does seem to rhyme. The specific rhyming we are talking about here is the intensity of the condominium market cycle and the significant opportunities and significant risks posed by participating in this high-beta asset class.
RCLCO’s market outlook is that much like in the 1980s, 1990s, and 2000s, 2014 and for two to three years to follow will be a period of dramatic growth in volume of condominium transactions combined with significant upward price movement caused in part by the lack of available supply in most major urban markets.
These positive market conditions will last for the remaining years of the for-sale housing market recovery while the industry aggressively moves to service this need both with conversions of existing apartment buildings and increasingly new development. This will unfold as delivery of new projects financed as apartments (“switches”) first and purpose-built condo buildings thereafter. This shift will also have the benefit of reducing pipelines in the for-rent multifamily space, where several years of rapidly increasing rents have primed the marketplace for condominium activity.
While this shift is largely cyclical in nature—meaning that it will come to an end as the market becomes saturated and demand begins to ebb with the broader economy later this decade—there are also structural changes underway that will support and amplify the condominium resurgence this time around, and will probably make the sector less prone to contraction with the broader economy. These structural changes include renewed interest in urban or walkable neighborhoods among some household types and the related growing acceptance of high-density housing, the aging of the Baby Boomers, delayed marriage and child rearing among Millennials (Generation Y—see August 8, 2013, RCLCO Advisory), and so forth.
The tenure shift toward rental as opposed to homeownership, however, does not appear to reflect structural changes in preferences. Though economic realities faced by Millennials in particular (student loan debt burdens, higher unemployment rates, delayed wealth creation, and so forth) are real, many studies, including RCLCO’s own research (see sidebar), suggest that the desire for homeownership is as strong as it was for previous generations.
RCLCO is regularly called upon to design and execute consumer research to answer questions regarding program, target market, and positioning. High-density for-sale housing has been a focus of this practice in recent months, and one recent survey focused on affluent young households (ages 25-35) in the D.C. metro area. Questions regarding interest in homeownership—condominiums in particular—yielded particularly interesting insights into the young professional market.
As the industry begins to process this opportunity, we are
Article and Research prepared by Adam Ducker, Managing Director and Erin Talkington, Senior Associate.
RCLCO provides real estate economics, strategic planning, management consulting, and implementation services to real estate investors, developers, financial institutions, public agencies, and anchor institutions. Our real estate advisors help clients make the best decisions about real estate investment, repositioning, planning, and development.
RCLCO’s advisory groups provide market-driven, analytically based, and financially sound solutions. RCLCO’s Urban Real Estate Advisory Group produced this newsletter. Interested in learning more about RCLCO’s services? Please visit us at www.rclco.com/urban-real-estate.