Rental Conversions, Condos and the Future of the Housing Market

As overall residential building declines, the multifamily and single-family housing markets are having two very separate experiences: Although both were down in March, they were down in varying amounts, and for different reasons.

And that’s painting an interesting picture of how each may start to recover as we tentatively try to claw out of the housing slump.

Thursday’s news showed that building in general has slowed considerably: Total housing starts fell 34.5 percent to 1.035 million in the first quarter.

They’ll probably remain under 1 million until the middle of 2009, according to The Wall Street Journal.

But single-family starts fell 5.7 percent in March. Multifamily unit starts declined much more–24.6 percent.

Permits for single-family homes dropped 6.2 percent in the month; but multifamily permits only fell 5 percent, according to government data released in mid-April.

Why the difference?

Consider the new $20 million, 75-unit condo building in Charlotte, N.C.

Condo sales began in November; since home sales have slowed nationally and lending standards have become stricter, risk has risen–which caused the project’s developers to radically alter their plans.

They’ve stopped selling units–and are officially becoming a rental property, according to the Charlotte Observer.

"We are returning deposits and releasing buyers from their contracts," Terrence Llewellyn, whose company is developing the project with Dean Kiriluk of Kirco, told the paper.

In some places, like Miami, luxury real estate helped keep the condo market going during the housing slump–at least for awhile.

As condo prices in the rest of the state fell 25 percent or more, Miami prices grew by 6 percent in 2007, according to the Florida Association of Realtors–but in January, the median condo price dropped by $32,000. Sales fell 30 percent.

That shift is causing some developers, like Llewellyn, to switch gears–and change their for-sale projects into rental ones.

Which may explain why multifamily starts would be down in March, but multifamily permits–indicative of future construction activity–would show an increase that the single-family home market did not.

More profitability options; more faith in the industry–and more funding.

But why? Is changing a multifamily unit into a rental property really more profitable than converting a single-family home into one?

Join us Monday for the answer–and part two of our look at how condos may be able to recover sooner, even if foreclosures continue to rise  …