What Challenges Does 2023 Pose for the Condo Market?
The final installment in our outlook series zeroes in on the crucial New York City and Miami condominium markets.
Considered by many a transitional year, 2023 is presenting itself as a bridge between the end of the pandemic—and its aftermath—and a return to a more stable economy. But for now, there are several pressing issues that multifamily players need to deal with. For those that are active in the condo market in particular, rising interest rates and inflation are and will continue to be a major impediment to both new construction and sales.
Generally, the condo market will need to overcome several economy-related obstacles this year, but some U.S. metros will have particular headwinds to face. Two of the most significant cities for condominium development, New York City and Miami, are currently experiencing very specific issues. For instance, Florida’s Building Safety Act is changing the parameters of owning, managing and building condominiums in the Sunshine State, while NYC is feeling the pressure from potential customers’ reduced buying power.
Listing inventory for condos in the Big Apple has been on a downward trajectory for the past six quarters, while the median sales price declined year-over-year for the first time in five quarters, according to a fourth quarter report by Douglas Elliman. Manhattan’s condo sector has slowed from the last couple of years’ frenzy, Francis Greenburger, chairman & CEO of Time Equities Inc., also noticed. It has resulted in a market where there are now more lookers than buyers.
“We have found that buyers have reduced their buying power by nearly 50 percent—which is a significant decrease,” Greenburger told Multi-Housing News.
Those who could previously afford a $600,000 mortgage, now can only afford half of that, which is why Greenburger expects to see substantial decrease in condo sales velocity in 2023.
Andrew Barrocas, CEO of MNS Real Estate, is also seeing the impact of high interest rates on the condo market, particularly at lower loan amounts. But this can also bring opportunities for brokers, he says, as buyers are now able to perceive value.
“This can be a successful market…When we can show someone that they can get the same apartment that sold last year for $1 million for $900,000, it can offset some of the other challenges in their minds,” Barrocas said.
What does the future hold for NYC’s condo market?
Interest rates will continue to rise and, according to Barrocas, hit their peak in the first or second quarter of 2023, and then stabilize in the following 12 to 18 months. But for a first-time homebuyer, the uncertainty of interest rates will definitely remain a significant obstacle.
However, the two-year supply of condo inventory in New York City is helpful in the current economy, Barrocas believes. And with financing still challenging, many developers will find it hard to deliver new product.
“There are a lot more projects looking for money than money looking for projects, a lot more people looking for financing than banks looking for money. 2023 will be an interesting year,” Barrocas expects.
For condominium projects that were already completed, one trend is gaining momentum. With buyer preferences shifting toward lifestyle ease and improved wellbeing, branded residences are now in high demand and their popularity is likely to continue to grow as the flight-to-quality movement—that is prevalent in the office sector today—continues to penetrate the residential market.
“The idea of five-star hotel living is only increasing in appeal,” Adelina Wong Ettelson, global head of residences marketing at the Mandarin Oriental Hotel Group, told MHN.
Florida’s condo market is adjusting
Chris Kennedy, vice president of preconstruction with national contractor Suffolk, also noticed that branded residences are becoming more attractive. As one of the largest building contractors in Florida, Suffolk is currently providing construction management services for Aman Miami Beach Hotel & Residences and the Ritz-Carlton Residences in Palm Beach Gardens, Fla.
Following the pandemic, Florida’s condo market experienced an influx of buyers coming from outside the state, searching for the “Florida lifestyle,” and a lower tax burden, Kennedy said. Some of them are now interested in more turnkey units—in lieu of designer-ready homes, where only baths and kitchens were finished.
Kennedy expects luxury projects in South Florida to continue to do well, as they are less impacted by interest rates due to the profile of the buyers and the high volume of cash deals. Oppositely, lower price point, urban condo projects, targeting buyers that are more dependent on traditional financing, will become harder to bring to market, Kennedy warned.
Furthermore, with Florida’s specific issues regarding climate change and flood protection, designers of new projects will have another issue to consider, particularly when building on the waterfront and on low-lying land: rising sea water levels. Since the Surfside condo collapse, there is additional sensitivity to best practices on structural design and waterproofing, Kennedy noted.
Florida’s Building Safety Act is changing the game
The Building Safety Act, which requires statewide recertification of condominiums over three stories tall, is pressing Florida condo owners and managers to update their properties. The new law requires that many buildings’ initial milestone inspection be performed before the end of 2024.
“Unfortunately, the law is requiring condo boards to step into the role of construction experts and that’s where a lot of things can go wrong for an association and its budget,” Greg Main-Baillie, executive managing director for the Florida Development Services Group at Colliers, told MHN. “No buyer would want to get near condo buildings tied up in disputes with contractors and unfinished work,” Main-Baillie added.
One of the main issues he sees in fulfilling the requirements of the Building Safety Act within the timeframe required by law is the lack of qualified people. From owner representatives and project managers to engineers and contractors, the industry is experiencing a shortage of seasoned professionals to handle the volume of work that will need to take place in Florida condo buildings in the next couple of years. According to Main-Baillie, their work is far more complex than when dealing with a new construction, as all of the projects are already built and, more importantly, occupied.
“We’re anticipating a lot of surprised condo owners looking to sell once they realize the upcoming increase in the cost of ownership,” Main-Baillie mentioned.