As condominium prices reach never-before-seen heights, a debate is
brewing over whether a fundamental demographic shift is driving the
trend or whether this is simply the latest speculative bubble in a
corner of the real-estate market that has seen plenty of them.
Last year, for the first time since the National
Association of Realtors started tracking the data, the national
median price of a condo was higher than that of a single-family
home. In June, the median price of a condo was $223,500, compared
with $218,600 for a traditional house. Between 2001 and 2004, condo
values appreciated 57%, while those of single-family homes rose 25%.
And the condo market is booming even in second-tier cities such as
Minneapolis, Charlotte, N.C., and Omaha, Neb.
Demographic changes in the middle class can
explain some of this. The ideal of the two-parent family with 2.2
children living in a suburban house is being supplanted by an array
of arrangements, including single professionals, divorcees, active
retirees and single parents. For many of these people, an urban
condo is both more luxurious and convenient than a house with a
"Today's middle class looks more like the cast of
'Friends' than 'Ozzie and Harriet,' " says Jason Schenker, an
economist at Wachovia Corp. in Charlotte. "They're younger, they're
urban and they live in high-cost areas of real estate -- these sorts
of things are all conducive to the growth in condominiums."
But economists and housing experts are
increasingly concerned that too many people, trying to cash in on
the phenomenon, are buying speculatively, causing prices to rise
faster than economic fundamentals can support.
Developers started construction on about 802,000
condo units in the past five years, according to the Census Bureau.
More are on the way. About 270,000 condos will be started in 2005
and a further 255,000 in 2006, estimates Michael Carliner, an
economist with the National Association of Home Builders, a
Washington-based trade association. That doesn't include the sizable
but hard-to-quantify number of new buildings that start life as
rentals and switch before completion, or the existing offices,
hotels and rental properties being converted into condo
"In the past, the highest and best uses of land
were commercial, but now with condo prices and single-family homes
getting such high prices, the demand for land that would have been
used for commercial is being shifted to residential," says Anthony
Downs, a senior fellow at the Brookings Institution and a
real-estate specialist. Median prices for condos may be skewed
because many of the newer properties tend to be located in pricey
coastal cities or in parts of town where land prices are higher.
Buyers like Keith Battaglia embody both the hot
money flowing into the condo market and the changing face of the
middle class. Last summer, when the single, 36-year-old hotel
executive relocated to Minneapolis, he quickly decided to ditch the
suburbs and embrace the city. He waited all night outside the sales
office of an unbuilt, luxury-condominium development called the
"I'm so excited to actually be moving to a place
that offers Central Park-style living without having to fly to New
York to get it," says Mr. Battaglia.
Instead of buying one apartment, he bought two: a
fifth-floor unit for $305,000 and a 19th-floor unit for $439,000.
When the building opens early next year, he plans to live in one and
rent out the other.
It's a new era for the condo, once viewed as the
stepchild of the housing market. Condominium owners buy the walls
and interior of their apartment and a percentage of the building's
common areas, which are typically managed by a condo association.
Condos leapt to prominence after the 1961 Housing Act enabled the
Federal Housing Administration to insure mortgages on the units. In
those days, the properties were simple and affordable, a starter
home for first-time buyers whose dream was to own a more substantial
home in the suburbs.
Because the condo market is liquid and prone to
speculation, these apartments -- or sometimes townhouses --
typically lost value more rapidly during recessions, compared with
other types of residential property. Beginning in the late 1980s,
condo prices in Boston fell by as much as 50% in some areas over
several years due to overbuilding and rapid conversions, says Karl
Case, professor of economics at Wellesley College. He adds that
single-family-home prices fell less than half that amount during
that time. It took nearly 10 years for condo prices to return to
their 1980s peak.
But now, families that can easily afford to buy a
home are choosing to live in condos, and that says a lot about
Americans' changing lifestyles. Between 1970 and 2000, the
percentage of nuclear families among U.S. households declined to 24%
from 40%, according to the Census Bureau. Some studies show that the
number of households without children will increase in the next 10
years, while those with children will fall slightly.
Home builders say the rise of the condo also
reflects a desire among buyers to live downtown, with easy access to
restaurants and entertainment, and no tough daily commute or
time-consuming domestic upkeep.
Pat Crosby, 38, who owns a Minneapolis company
selling products for commercial architects, lives with his
girlfriend, Marti Zacher, in Grant Park, a high-end condominium
development in town. The divorced father of two young girls lived in
the suburbs just a few years ago, gritting his teeth through a
45-minute commute to work.
Aside from offering massages and a 24-hour
concierge, Grant Park has guest suites and full-service business
facilities. That allows Mr. Crosby to conduct business meetings
while his daughters splash in the pool next door. "You can't get
back time, so I like to spend my free time doing what I like doing,
not shoveling snow or taking care of a lawn," says Mr. Crosby. "I
would much rather prefer a great sushi dinner and drinks with
Unlike the drab structures of yesteryear, many
newly constructed condos are plush abodes, containing the kinds of
amenities found only in the most upscale suburban developments, such
as marble bathrooms, gourmet kitchens, tennis courts, swimming pools
and health clubs. High-end features such as broadband access are
also becoming standard. Many new units are larger than those of the
Spanish View Tower Homes, a luxury development
five miles from the Las Vegas strip, sports a $6.3 million
penthouse. The four-bedroom apartment includes a Jacuzzi and warming
drawers for towels and robes, plus a 5,800-square-foot roof garden
with spa and barbecue area, a media room with a 100-inch television,
maid's quarters with separate entrance, wine-storage room and a
An unanswered question is whether developers are
flooding the market. "The froth in several of these markets is
approaching Cisco-stock-price levels circa 2000," says Hans G.
Nordby, an analyst with Property & Portfolio Research, a
Boston-based firm. Miami, for example, has so many investors, "it's
going to implode," he says, adding that he's not convinced there's
enough job growth there to support all the condos being built.
Mr. Nordby says Miami's market is dependent on
speculators buying condos before they're built and flipping them in
what is known as the preconstruction market. Developers building
high-end condominiums often sell individual units long before
construction is scheduled to begin, in part because banks won't
provide financing until a large percentage of the units are
reserved. In many cases, buyers can obtain a purchase contract by
putting down just 10% of the sale price.
Miami-based Zilbert Realty Group, one of the
city's largest brokers of preconstruction condos, has launched a Web
Condoflip.com, catering to these speculators. Mark Zilbert,
president of Zilbert Realty and creator of the site, says he's
received thousands of emails from condo owners who want to gauge the
market, but he doesn't yet see many interested buyers.
"Right now, people can just go ahead and buy a new
unit, so they aren't interested in going through the hassle of
buying a flip," says Mr. Zilbert.
Economists and real-estate investors say the ratio
of real buyers to investors will ultimately determine the strength
of the condo market. In Chicago, for instance, the large number of
condo constructions and conversions -- including plans for what
would be the nation's tallest building -- has created a supply glut.
Several luxury projects have suffered slower-than-expected sales and
some high-profile projects have narrowly averted foreclosure after
banks came to the rescue.
"In the past there wasn't a whole lot out there,
but you have a whole bunch of condos all over the place," complains
Serge Masyra, a 32-year-old ad-sales executive who put his
two-bedroom, two-bath condo on the market last month. He's asking
$399,000 for the property, located just five blocks north of
Chicago's Wrigley Field, about $50,000 more than he paid for the
brand-new unit in early 2004. A year ago, it would have been snapped
up in days. Mr. Masyra, so far, has no takers. Still, Chicago has
over 8,000 more condo units in the construction pipeline.
Condo fever is also hitting unlikely cities, like
Minneapolis, driven by young professionals who want to re-create a
big-city lifestyle. "High rises are such a notable change to the
landscape here," says Tom O'Neil, director of market research at DSU
Research, a unit of Minneapolis planning consultants Dahlgren,
Shardlow & Uban Inc. "There's some prestige to being in a tall
building, so people are getting excited about it."
Karen Van Dongen, a 34-year-old sales manager for
a consumer-products company, moved to Minneapolis from the suburban
town of Lodi, N.J., late last year to work on her company's Target
Corp. account. Target is based in Minneapolis. She initially
considered buying a loft in an old industrial building that needed
some work -- "something that would mirror a Manhattan, cosmopolitan
life" -- but ditched that plan after checking out the amenity-jammed
condos in Grant Park.
Ms. Van Dongen said she was making "a lifestyle
choice." Since she likes to spend her free time "doing nothing," she
wanted the extras offered at the condo without maintenance work.
In Omaha, out-of-town developers have proposed a
slew of condominium projects hoping to capitalize on the city's
relatively sparse market. A steady stream of companies has either
relocated to the city or expanded their local operations in recent
years, including Union Pacific Corp. and Gallup Organization.
Developers are betting on an influx of white-collar professionals
from cities such as Denver, St. Louis and Houston.
Omaha real-estate agents say the new residents
have brought along their tastes for city living. Most of the first
phase of condos and townhouses at the Riverfront Place development
have sold out at prices ranging from $250,000 to $1.65 million since
going on sale last November. Greg Deman, 50, who owns a
warehouse-distribution company in Sioux City, Iowa, earlier this
year purchased three condos in one Omaha building as an investment.
They cost between $250,000 and $350,000. He's looking for more.
"I might be guessing right or I might be guessing
wrong, but I think this area's going to continue to grow," says Mr.
Deman, who visits Omaha about six times a year. He's also interested
in investing in Phoenix and Las Vegas.
Developers along Alabama's Gulf Coast are
currently replacing beachfront property damaged by last year's
Hurricane Ivan with high-rise condo buildings. The area has 11,850
condominium units and 12,600 more are in the pipeline, according to
the Alabama Gulf Coast Convention and Visitors Bureau.
The market is drawing baby boomers and investors,
some of whom are using letters of credit instead of cash down
payments to reserve preconstruction units. A letter of credit is a
promise backed by a bank to make a future payment, sometimes secured
by personal assets. Local real-estate agents say these buyers are
requesting larger-than-average units, such as condos that take up
the whole floor of a building.
At the Admiral's Quarters condominium resort in
Orange Beach, Ala., a 1,500-square-foot two-bedroom condo sold for
$860,000 a few months ago, compared with $483,000 in 2003. The units
come with Jacuzzis, wet bars, walk-in closets and oversize balconies
with views of the Gulf of Mexico. Residents have access to a heated
indoor swimming pool, sauna and boardwalk to a private beach.
Over the past few years, these condos have
appreciated in value more than 70% each year. "The market down here
is extraordinary," says Elizabeth Helton Walls, an Orange Beach,
Ala., real-estate agent. "Since Ivan, people were worried that
properties were going to drop, but they've gone up every month."