Keeping an Eye on the Condo Market
Consider recent trends and regional factors when anticipating the future of this sector
By Abraham J. Hidary, president, Hidrock Realty Inc.
I
n recent years, thousands of con-
dominiums have been built throughout the
country. From New York to Texas to Florida,
new submarkets have emerged with a seemingly
perpetual demand for units that range from tiny
to spacious.
To determine where the market is headed, we
first must look at how and why it got so hot in
the first place. Real estate prices are a function
of supply and demand. From third-quarter 2002
to fourth-quarter 2005, the largest influences
on demand came from interest rates hitting
historic lows.
Starting in 2000, at the first sign of an
oncoming recession, the Federal Reserve Board
and former Chairman Alan Greenspan began a
series of reductions in the federal funds rate so
that banks could charge lower interest rates to
borrowers. While the cost of money decreased,
businesses and consumers could borrow more
than ever while still able to afford debt service.
The plan worked — borrowers spent the
funds on consumer products, homes and business-expansion. The recession was short lived,
and today, the job market is tight.
While the economy improved, many cities
saw greater revenues because of the increased
money flow. The revenues came from factors
such as:
Higher business payrolls, which resulted in
higher income-tax collections;
■
Greater consumer spending, which resulted
in higher sales-tax collections; and
■
More property sales and higher prices, which
resulted in higher transfer and property-tax
collections.
■
These cities spent their revenue to develop
neighborhoods and reduce crime. In less than a
decade, areas that were once considered dangerous became hot spots.
As interest rates kept dropping, people paid
higher prices to buy in these neighborhoods. With
the low rates, many working couples suddenly
could afford high-priced condos. A couple making a combined $150,000 per year could borrow
$950,000 to buy a new two-bedroom condo.
As this growth trend became evident, investors jumped on the bandwagon. Soon, buildings
were selling out before they were completed.
Investors purchased multiple units sight-unseen
to flip the units at a profit. While such strategies
seemed to be working, many experienced real
estate professionals remained on the sidelines as
they saw the market getting out of control.
Throughout the past six months, though,
interest rates have ticked up, and the press has
reported enough about a bubble that the trend
may have turned. Brokers are reporting that
apartments are staying on the market longer.
Prices aren’t dropping, though. Those bullish
on the market point out that although interest
rates have increased, they have been offset by
increasing personal income. Further, they say
baby boomers will be selling their homes and
buying condos to put away retirement money
and not have to care for a home.
So where’s the market headed? It depends
on where the property is. Going back to fundamentals, prices are set by supply and demand.
There are markets where supply exceeds demand
(South Florida) and markets where demand
exceeds supply (New York City). Indeed, New
York City’s population is growing faster than
new housing is being built. This is creating a
housing shortage for the city.
But even in New York, developers must be
careful. Demand could be strong at the low to
middle segments of the market and weak at the
high end. Ultimately, real estate is ultimately a
local business.
Thus, investors and brokers must be careful
to consider all factors in evaluating any particular deal.
Abraham J. Hidary is president of Hidrock Realty Inc., a 25-year-old private real estate
firm with properties throughout the East Coast. Hidrock develops and owns residential and
commercial buildings and operates them with a dedicated management and leasing staff.
Whether it’s electronically filing leases offsite or giving tenants access to a secure Web site to
register and monitor complaints, Hidrock’s automated systems keep information accessible.
Contact Hidary at [email protected] or visit Hidrock’s Web site at www.hidrock.com.
Reprinted From Scotsman Guide Commercial Edition and scotsmanguide.com, May 2006
All rights reserved. Third-party reproduction for redistribution is prohibited without contractual consent from Scotsman Publishing Inc.