Editor’s note: Signs of a slowing real estate market raise questions about who in the industry will be most vulnerable to a housing recession. Fewer real estate transactions means there is less money to spread around, and that will impact everyone. But some will be hit harder than others – especially if they are not prepared. In this special series, we examine who’s most at risk. (See Part 2: Newbie real estate agents bet on survival and Part 3: ‘Exotic’ home loans put lenders at risk.)

Condo mania may be a bipolar phenomenon: The high-rise luxury condo building frenzy appears to be running out of steam in some markets, say real estate experts.

There are risks of oversupply in parts of South Florida and Las Vegas, in particular, said Jack McCabe, CEO of McCabe Research and Consulting LLC in Deerfield Beach, Fla., and there is less appetite among lenders to finance high-rise condo developments.

Condo developers could get hit much harder than other types of developers because they face more construction-cost risk. Unlike single-family subdivisions where homes are sold from sales offices before construction, condo developers could get hit hard if the market changes quickly. In past downturns, condo developers who were building during a market squeeze were forced to discount their units, shrinking or wiping out their margins. In some over-supplied markets, developers were forced to turn their projects back over to the banks that financed them.

“Some developers are switching gears right now because of an anticipated oversupply in Florida,” said McCabe, who offers real estate consulting services and is a specialist in multi-family residential projects and commercial mixed-use projects.

“In Miami alone we have over 100 residential towers that are either under construction or have been announced. Many of those projects that haven’t been started yet we are projecting will not get built or will resurface as different types of developments,” he said.

Condo and co-op prices have been rising faster than the price of single-family homes, the National Association of Realtors has reported, and condo sales have grown from about 9 percent of total real estate sales in 1994 to about 12 percent of all sales in 2004.

But while the condo market has surged during a nationwide, decade-long boom in housing prices and sales, there are warning signs that the luxury condo bandwagon is losing traction – at least in some areas – and developers are taking note.

There are already examples of developers refunding money to buyers of pre-construction condo units, McCabe said, because of a change in plans for the property. In some cases developers are suspending, delaying or totally changing project plans. McCabe said he has heard about a couple of planned residential projects that were redesigned for other uses. “They are not going to be residential. They are going to be office, hotel and commercial.”

There is a high potential for real estate price corrections in the South Florida and Las Vegas areas, he also said. “Some owners may have to sell these development sites at a loss,” he said, if projects don’t pencil out. Land prices have raced so high in some South Florida markets that developers are choosing to build in other markets in the state, such as Orlando, Tampa, Sarasota and Jacksonville.

Lenders are getting more selective in financing high-rise condo construction projects, McCabe said, so that developers will need to present a more convincing case for each project they propose. “We’re going to get out of this boom period where everybody was a success – we’re going to get back to real estate fundamentals again. It will weed out a lot of developers and investors we’ve seen in the marketplace over the last five years.”

Lenders and developers alike have taken some steps to curb speculators in super-hot markets, and developers are in some cases requiring pre-construction condo purchasers to pay a penalty if they attempt to resell units within a specified period of time.

There is some cause for alarm about the rapid rise of condo construction in some markets, according to a report released this week by the Mortgage Bankers Association, titled, “Housing and Mortgage Markets: An Analysis.”

The report states that “historically condos have experienced a greater level of price volatility” and “The ability of apartment owners and developers to quickly bring a large number of condo units onto the market is a risk factor in certain markets. A sudden ramp-up in supply could lead to a decline in prices. This is one explanation for the historically more volatile pattern of condo-price dynamics.”

In Las Vegas, the high-rise, high-cost condo market has been blazing, said Brian R. Gordon, principal of Applied Analysis, an economic research and analyses firm. “What we’ve seen in the last 24 months – there has really been an increased interest by developers to move into that luxury condo segment.”

He said developers have about a dozen projects under way in the downtown Las Vegas area. “(These projects) have been fairly successful for most of them,” he said. Many of the active and planned projects are focused on high-end market, as developers “are looking to take the cream off the top,” he said. But there has been such a rush in luxury condo proposals that it will be difficult to maintain the same pace of sales that has so far been fueling the projects.

In addition to the list of approved projects, another hundred or so projects are speculated for future development. “I don’t expect the majority or even half of those to move forward within a reasonable timeframe,” Gordon said. “It becomes difficult to keep that same pace of sales just given the number of potential units on the market.” Many of the high-rise condo proposals poured in from late 2004 through early 2005. Gordon’s firm is now tracking about 50,000 condo units that are in some stage of planning.

Already there have been some signs of slowdown in resale activity in the Las Vegas residential market, he said.

The Las Vegas developments that are most likely to succeed, regardless of the market, have solid brand identity – such as affiliations with a major hotel or casino – a good location that is close to other amenities, and good views, he said.

Lenders are becoming more cautious in financing new high-rise residential projects, Gordon said. “(They) clearly are making the financing requirements more stringent.” In some cases lenders are requiring a higher volume of presales activity before supporting projects.

While there is speculation about a housing bubble in the Las Vegas market, Gordon said he doesn’t believe the hype. Even if the luxury condo market cools, he expects developers to focus on building more affordable condo projects that are geared more toward locals than out-of-towners.

“We think the high-density residential concept is going to eventually be spread across all income demographics. We know for a fact that several regional and national home builders that traditionally built a single-family product are now investigating possibilities in the mid-rise to high-rise condo market. With land prices increasing so rapidly they are forced to increase densities…to make financial sense.”

But don’t expect the more affordable condo projects to grace the premier tourist areas of downtown Las Vegas – the pricing on Las Vegas Boulevard is upwards of $1,000 a square foot, in some cases, and starts at about $400 a square foot, Gordon said. “Those (more affordable) projects won’t be located within the resort corridor because of the land cost associated with it.”

The Washington, D.C., area also has seen a surge in luxury condo projects. But Stonebridge Associates, a development company that operates in the region, has sought out a niche that principal Douglas M. Firstenberg said should help the company weather any bumps in the real estate market. Stonebridge specializes in mixed-use urban infill projects.

“Right now we’re looking at a potential oversupply of residential. There is a lot of conversion of residential coming online, and huge price escalation. We’ve protected ourselves by going into supply-constrained markets,” Firstenberg said.

Building mixed-use projects gives developers some flexibility to change with the market conditions, he also said. “If the market is not right for that product at that time, if you do mixed-use you can change the product type or proportions.” Mixed-use developers can change the mix of office and retail, or the proportion of condo units to apartment units. These sorts of projects tend to have long lead times, though, he added.

In the past 18 months there has been a “clear frenzy” to build condo projects and other types of housing projects in the Washington, D.C., area, and to gain control of land for development. The condo push has driven up land costs in some areas to the point where other types of projects, such as apartment buildings, wouldn’t be feasible, Firstenberg said.

There still appears to be plenty of construction financing available in the region for condo projects and the market has a lot of momentum but could eventually slow down.

“You could have a period of much slower growth or no growth – that is especially true the closer in you get to the Beltway or in the Beltway. A period of flatness here would hurt some projects,” he said.

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Send tips or a Letter to the Editor to glenn@inman.com or call (510) 658-9252, ext. 137.

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