Rising Construction Costs, 500,000 Vacant Units in ‘Busted’ Condos Plague Multifamily Market, Says RERC Report

By Anuradha Kher, Online News EditorChicago–Construction costs for multifamily projects are continuing to rise, obtaining entitlements is getting harder and the condominium market is in trouble, according to the Real Estate Research Corp. quarterly real estate report, titled “Uncovering the Facts-Risk Under Examination.”About 18 months ago, the market for condominiums was enjoying a solid five- to six-year run. Today, however, many areas of the nation are scattered with “busted” condos, some of them under construction or just completed, others that are condominium conversions and partially sold. “The formerly most-booming “boom areas”—Florida, Arizona, Nevada, and California—have the largest inventory of busted condos, but this situation exists in almost all parts of the country,” Jules Marling, executive vice president and partner of RERC, tells MHN.RERC estimates that there are at least 500,000 units available in busted condominiums across the country. In a typical recent year, approximately 2,000,000 new housing units (all types) have been added to the nation’s housing stock. “Builders have overbuilt in some parts of the country, like Chicago, where there has been a drop in rents,” Marling tells MHN. “It is now significantly cheaper to rent than to buy. Mortgages are becoming harder to get and, as a result the number of renters is steadily going up.”At the same time, the broken condo market is a newly developing area of opportunity where a prudent purchaser and a good operator can probably reap large returns if they are careful about their property selection and the price that they pay, says the report.While rents in most parts of the country are going down due to an oversupply of units, New York might currently be the only exception. Marling tells MHN that the New York market is largely dependent on Wall Street and it will take a few months for the effects to trickle down. “Right now, New York does not have a demand and supply imbalance and it is well occupied, but in another six months, there might be job extraction, which will result in an apartment downturn,” says Marling.Going forward, Marling says, there will be fewer multifamily buildings being built than there have been in the last few years. In the next 12 to 18 months, things should be back on track, says Marling, “and maybe they will swing 180 degrees in the other direction. That always tends to happen.”Some other significant trends mentioned in the report:•    RERC’s fourth-quarter 2007 institutional investment survey respondents gave the apartment sector an investment conditions rating of 5.7 on a scale of one to 10, with 10 being high. •    RERC’s required going-in and terminal capitalization rates for the apartment sector for the fourth quarter of 2007 increased 10 basis points from the rates reported last quarter.•    Though the expected rental growth rate for fourth quarter 2007 was less than that reported for third quarter, it remains positive. •    Average vacancy in the apartment sector was 5.4 percent during fourth quarter 2007, down slightly as compared to the third quarter, according to Reis Inc.•    Respondents to RERC’s fourth-quarter 2007 institutional investment survey gave the apartment sector the highest “return versus risk” rating when compared to the other sectors tracked by RERC.