Investor Drop-Off Doesn’t Slow Down Consumer Condo Demand

While condominium sales have stalled as investors flee, buyers continue to consider the condo market when faced with mortgage decisions.

At the International Builders show last week, builders said developers who jumped into the sector during the boom of the last three years are turning their attention back to rental apartments, where demand is expected to pick up.

But long-term demand for condominiums is expected to remain healthy, a new survey showed.

At the peak of the housing cycle in 2005, condominiums accounted for 50% of the 354,000 multifamily starts, up from 20% of the 340,000 starts in 2003. The National Association of Home Builders, which sponsors the show here, said it expects condos to make up just 30% of the projected 304,000 multifamily starts in 2007 and 328,000 starts in 2008.

“Most investors involved in condominium purchases in 2003 through 2006 were in a frenzy to buy into that market and as a developer we too moved into that craze,” said Bill Donges, chief executive of The Lane Co., an Atlanta-based multifamily developer. “But in the past year there has been a slowdown … and now we’re back to developing mostly apartments.”

However, this doesn’t mean condominiums have lost their allure to mortgage applicants, Donges said.

A 300-unit condo project his firm is developing in the Atlanta housing market opened Dec. 9 and 70 of those have been sold, he said, calling that a “normal sales pace” of 20 to 30 units per month. But it hardly compares to the 300-unit project in Hollywood, Fla., that sold out two years ago in just nine hours.

“The question is ‘are these units affordable?’ The upper end may not be moving but the lower end is still selling,” Donges said. “For the most part, condos were much more affordable than the houses that people could buy in these same areas. In urban areas, in mixed-use settings they still make sense. It’s a [housing affordability] issue, a lifestyle issue.”

Judd Boblin, executive vice president of The Novare Group, an Atlanta-based condo developer, said investors may have skewed the condo numbers in the last two years, but that has not lessened demand among his core group of home mortgage borrowers.

He said his sales and traffic in the first two months of 2007 were almost equal to the sales and traffic in those same months in 2004, before investors flooded the market.

“We’re active in Tampa, Nashville, Charlotte and Austin and we’re moving units there,” he said. “These are pieds-a-terre, second homes in urban locations and not resorts. There were a lot more investors looking at these in 2004 and 2005, but today most of our buyers come from the neighborhoods near the development.”

For nearly half of all condominium buyers, the decision to purchase is a lifestyle consideration, according to an NAHB surveyed released this week, with both young professionals seeking a first home close to urban amenities and older households wanting to downsize from suburban homes contributing to long-term demand.

“Condos are here to stay,” said Sharon Dworkin Bell, senior staff vice president for multifamily with the NAHB. “It’s a growing phenomenon across the country, in places large and small that have never had condos before.”

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