January 16, 2007
The Economics Of Apartments Versus Condominiums In Washington
The New York Times looks at the struggling new condo development market in Washington D.C. and the impact of developers changing course from sales to rentals.
“After six weeks of failing to lure more than a couple of dozen buyers, Mr. Franco and his partner, Jeff Blum, joined the builders of nearly 6,000 condominium units in the Washington metropolitan area who have decided in the last three months to recast their projects as rental apartment buildings.”
“The latest salvage operation on the part of condo developers is far from a sure bet, however. Condominium buildings generally cost more to build and operate than those built for apartments from scratch. And while rents are high and rising in most cities, in many cases they still are not sufficient to turn a profit.
Industry analysts also point out that rents may start sagging if too many condos are converted into apartments too quickly.”
And while we’re not suggesting that Washington is the best barometer for the San Francisco condominium market, with 188 King reverting to rentals for their unsold inventory, and rumors of The Palms and a number of other higher profile buildings considering following suit, it’s simply additional insight into the impact and implications of local developers changing course.
∙ Buyers Scarce, Many Condos Are for Rent [NYTimes]
∙ 188 King Street: The Rents [SocketSite]
∙ The Palms: Financing Incentives And Inventory Update [SocketSite]
First Published: January 16, 2007 7:44 AM
Comments from "Plugged In" Readers
What is the impact for buyers at 188King or the Palms when the developer decides to rent the unsold inventory? Does it impact the value of the units or make it more difficult to sell?
Posted by: Potential buyer at January 16, 2007 12:17 PM
Good point in this article about how renting is a pretty inferior financial option for condo buyers. It's pretty much the same financial equation for the developers with renting being less profitable than a sellout. However, sometimes smaller/local developers want to push profits from a development into another tax year by renting them for a short period. Also, sometimes a smaller developer will turn a building into rentals as a sort of retirement fund - knowing they can sell them at a later point and cash in their retirement fund. Overall, though, until rents appreciate a lot more, renting is a pretty inferior financial option and this is mostly a bet that the sale market will improve in the near term.
Posted by: Anonymous at January 16, 2007 12:25 PM
Anon of 12:25PM, how can you say that renting is an inferior option for both condo buyers and developers? Or is any commission-free transaction by definition inferior?
Posted by: Delancey St Resident at January 16, 2007 2:11 PM
Does it impact the value of the units or make it more difficult to sell?
In a word, yes. Or rather it can. Almost all buildings - existing or new - have some units that are rentals, and it’s really the percentage of units that are non-owner occupied that matters the most. A high percentage of rental units can not only impact the market’s perception of the building (less exclusive/desirable), but also the upkeep (non-owner occupiers tend to skimp on maintenance and ongoing investment) and ability of new buyers to get financing for the purchase of a resale unit (which I believe SocketSite once pointed out).
And finally, you can find yourself competing with the developer (who has a lower original cost and more room to bargain) when it comes time to sell.
Posted by: ex-agent at January 16, 2007 3:31 PM
Easy there pal - I'm not an agent so I don't care if the transaction generates a commission or not. This is just the financial reality of the sale and rental market currently. The article pointed out some pretty typical math in these equations - a buyer of a condo can rarely cover their monthly nut by renting (unless they put down a significantly larger downpayment to lower their loan costs). A developer is lucky to break even on the holding costs by renting it out and makes significantly more money selling these units at $800/SF rather then renting them out at $2.50/SF/month. This is why every two unit building in the city is being turned into a TIC and sold as a condo (rather than rented) and why every developer is building condos for sale rather than apartments for rent - the math isn't even close.
Posted by: Anon of 12:25 at January 16, 2007 5:22 PM
I agree with ex-agent. The main reason for the lack of new rental product in San Francisco is because it is very difficult if not impossible for a new rental building to pencil out. With the high value of land and increased construction costs (though they have come down a bit recently), it is very challenging to make a rental project cover the monthly mortgage...the only new recent rental buildings I'm aware of are at the building on California & Polk and one to come on Bluxome....
Posted by: Anon at January 16, 2007 7:40 PM
Good points, but it's more complicated than that. When a bunch of units come on the market, that drops rents. Ok, that's easy: supply and demand, but it gets more complex. Because when rents drop, it becomes that much harder for former renters to justify paying the premium to buy, so sale prices drop further. That makes it more difficult for the new places being built to sell, so they rent them out (and same for people who wanted to sell at a higher price), and, well, you can see where this is headed.
Each individual builder or homeowner who decides to rent instead of selling, by itself, has very little impact on the market. So they fail to take this added impact into account. But when lots of units come onto the rental market, that's exactly what happens.
So the answer to your question is: prices start to fall. Exactly the opposite of what the builder or other new landlords have in mind, but that's what happens.
Posted by: tipster at January 16, 2007 8:07 PM
ex-agent re renting: My error; I misread your posting as condo buyer deciding to occupy a unit via renting. As far as merits of renting out a property today, I agree its a lousy return for either the buyer or developer.
Posted by: Delancey St Resident at January 16, 2007 9:03 PM
Socketsite...."and number of other higher profile buildings considering following suit"
Can you please name the other higher profile buildings taking suit? That would be interesting.
Also, Tipster, keep up your ever educating posts. You should write a book. It should be called "The Self-proclaimed expert on everyting real esate." I can't wait to read it.
Posted by: Anonymous at January 17, 2007 1:27 PM
Can someone who deals with renting apartments in SF please comment on the state of the rental market? I have very limited experience, only rented one unit this year, but I found the rents to be moving up rather than down.
Posted by: Anonymous at January 17, 2007 3:42 PM
Well, I don't rent places for a living, but recently moved so I have some insight. From what I've seen, rents are up around 15 - 20% in most areas from roughly a year ago.
Posted by: Dude at January 17, 2007 5:15 PM