Rental developments —-> condos?
In the past 10 years, it definitely made sense for everyone to develop rentals over condos with lower interest rates and availability of capital etc. everyone and their mothers were purely apartment builders if your shop is a development shop…it isn’t common to see condo projects being built.
However, with cap rates expanding, rent growth slowing, returns looking not as pleasant and deals not penciling for rentals, I wonder if some peoples and or companies strategies will shift to building condos? Anyone have insight into this?
Will we ever see condo development being a thing or is the liability risk post tax returns and loan guarantees just not worth risking?
Based on the WSO Dataset, there are several factors that could influence a shift from rental developments to condos. These include expanding cap rates, slowing rent growth, and less attractive returns on rental properties. However, the decision to switch to condo development is not straightforward and involves considering various factors such as market conditions, tax implications, and potential risks.
The liability risk and post-tax returns are significant considerations. Condo development can come with its own set of challenges, including higher risk and potential legal complications. Additionally, loan guarantees can add another layer of complexity and risk.
Furthermore, the market conditions need to be favorable for condo sales. If the demand for condos is not strong enough, developers could end up with unsold units, which could lead to significant financial losses.
Lastly, tax implications can also play a crucial role. Changes in tax laws can significantly impact the profitability of condo developments.
So, while it's possible that some developers might consider shifting their strategy towards condo development, it's not a decision to be taken lightly. It requires careful analysis of various factors and a thorough understanding of both the rental and condo markets.
The WSO ChatGPT plugin goes hard!
I mean, you clearly haven't been in the industry long, because this is just a bad take. Bring a little nuance into the conversation, all right? Plenty of condos were built; in some markets (e.g. NYC) it was almost all that was getting built for most of the 2010s.
I mean, if you build MF, and you suddenly can't build rentals, no shit you're gonna branch out into a new-ish product and hope to keep up with the Joneses.
However, the longer answer is that crappy developers will switch from rentals to condos. The guys who were building rentals because that was the hot commodity. Good developers will keep doing whatever it was they were doing before, because the whole point of being good at your asset class is that you're whole business plan isn't "outbid the field and hope rents keep rising." You've got a competitive edge. All of that will still exist, so good rental builders will still build rentals. The guys who will suffer are the ones who started their own company, JVed into a minority stake on a deal, and then populated their website with all the deals they did in previous jobs, all so they could go to a dozen conferences in Vegas and Miami a year and say they were the CEO of their own development shop, but who had no idea how to run a deal without the sheltering hand of a major national developer to support them and bring in business.
And yes, I know a lot of those guys, and the schadenfreude is real
Yo OZY. Please don’t ever come at my industry experience and talk in your obnoxious and superior tone, like you’re better and more knowledgeable. Nothing I said was a bad take. Enough of your snobby comments. I like you man, no need to take a jab at me. Anyways thanks for the response. Just wish you weren’t an asshole :)
I mean, this was objectively a bad take. You made a blanket statement which was wildly over-generalized (as one would expect with a blanket statement), and now you're upset that someone called it out? Your opinion deserves only as much respect as it merits, no different than mine or anyone else's.
As long as your opinion is something as asinine as "it isn't common to see condo projects being built" you damn well better believe I'm going to assume you're not that knowledgeable. Either that, or you are so blinkered at looking at rental product that you don't notice the rest of the market... which would make you, objectively, worse.
I love that we're in a time and place as a society where someone disagreeing with a shit take makes them an asshole. I can be an asshole... but my response to you was perfectly reasonable. You haven't even bothered to defend your argument, which is the most telling sign of all! You went straight to offended, which tells me you don't really have an argument to support your conjecture (and honestly, it was such a broad argument that who could have a coherent defense). If you've got one, I'd love to hear it and discuss/debate it with you. If you don't, please please please don't act as though the mere act of opening your mouth to voice your opinion entitles you to respect and affirmation.
To be fair to Ozy, I was also a bit confused by your statement that in the past 10 years only apartments/mostly apartments were being built instead of condos, but I think the issue here is that it depends on your location. I live in a Tier 1 market where brand new condos can sell for $1000-$3000/SF and cost of construction is $300-$500/SF. Ozy lives in an expensive market as well (NYC it seems like from his comments). In these Tier 1 cities, there are certain sub-markets where building apartments for rent does not work (unless you use a lot of equity) because the cost of land and construction is too high even before rate hikes, and in these markets, condos are mostly built. I can see that for developers in the mid-west or south that mostly apartments are built because the sale $/SF is not high enough. If you're in a market where new condos sell for $500/SF, but your cost of construction is $250/SF + soft cost + land cost, then it may make a lot more sense to build apartments for rent.
To answer your question, I wouldn't be surprised if there was an uptick in condo developments instead of rentals because the high rates have made it difficult to refi into a permanent loan, but I think for the most part, projects that would have worked as apartment rentals 1 year ago will just go undeveloped rather than be built as condos because the sale $/SF isn't high enough and therefore the returns don't justify the risk/work
Mathematically it makes a ton of sense right now. Especially in tight housing markets with little to no supply of single family homes for sale. I think the additional benefit of lower price points for smaller units but more ammenities is a really interesting perspective this cycle. Hell, for me to buy even a starter home in SoCal right now would cost around $1.5M, which would get you a 5k sqft lot and a 950 sqft home built 60+ years ago… build a condo project and a 2 bed 950 sqft condo would probably sell for $1-1.3M… I’m thinking westside noncore/ DT SM, but really good neighborhoods. I think that’s a pretty interesting, winning combo in todays day and age…
PS: if you’re truly large enough and we’ll capitalized enough, you can do what the big home builders are doing and can carry the mortgages and offer a lower interest rate than market, but enough for you to get the higher price for the condo…
just spit ballin out loud like it seems the thread asked for 🤞🏼 lol
It would be hard to accept the liability for condos vs. apartments. The idea of getting sued 10, 20, 30 (or whatever) years down the road by some ambulance chaser equivalent attorney who convinces the HOA to lawyer up because they neglected their upkeep over the decades the day before the statute of limitations expires is not that desirable.
Now, I'm sure there's a certain amount of money that would make that more acceptable, but that's a big pill to swallow
How dumb am I for thinking you can just insure that?
I might be the dumb one for not realizing you can if it turns out that's possible.
I just know the two guys I develop for came from the condo world, and while I've tried to get them to do it again a handful of times, they have absolutely zero interest in ever going back. They can't stand that world anymore.
Thanks for your thoughts.
I've built a small condo project myself (not with the firm). The statute of limitations is generally a lot less than 30 years; in New York you can limit construction defect claims within the offering documents and furthermore the Board has like two months from its first meeting to bring construction defects to the notice of the developer. There is a longer timeline for claims brought by the Attorney General, but even that is only 6 years.
In other words, the only defect claims a developer is liable to see are ones for which it is honestly, genuinely responsible.
On the hook for 2 years following project completion.
Eum veniam est eaque omnis sit fugit et. Mollitia ut ea aut facere.
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