(To read more on the multifamily market, click here.)
WASHINGTON, DC—The peak building period typically starts in May. But as the cost of construction materials continues its sharp ascent, the Washington market is bracing for an impact. That's especially true as signs emerge that certain segments are already starting to slow.
Already the DC condo market is showing signs, if not of distress, then of declining growth, as prices have been flat since August 2005. "If you look at same store pricing, you can see that we are experiencing the same [condo] prices now as we did last summer," says Greg Leisch, chief executive of Delta Associates, a national consulting firm in Alexandria, VA.
Over the next six to 18 months, he says, there is a good chance prices are likely to decline. Leisch says the decline--if it happens--will be modest. Other Washington-area market observers, he points out, predict a far harsher drop of 20%. Rising construction costs, though, will have little to do with any decline, which he attributes to market supply and demand dynamics.
In other markets, he notes, construction costs are, in fact, having an impact on development decisions. "I see them dictating supply in Texas. We have seen a number of projects cancelled because construction costs came out so high the developers realized the projects wouldn't sell."
"I don't think rising construction costs have anything to do with the problems in the DC condo markets," Leisch says. "All the cost rises mean is that the development community will lose more money if costs rise and prices stay flat or go down."
Conversely, Richard Preston and Robert Bodansky, real estate attorneys with Seyfarth Shaw's Washington, DC office, believe that fewer new condo projects will be entering the pipeline over the next six months and construction costs will indeed play a role. "It discourages people from taking on projects," Bodansky says."There has been a slowdown in demand already," Preston notes. "So purchase prices are coming down as costs are continuing to rise. That leaves a big question mark for developers and for the near-term prospects of that market. The most sophisticated and experienced condo developers are being more discriminating on what they take on."
"If this cycle is like the last four housing cycles, undifferentiated poorly located product will feel a decline the most," Leisch says. For instance, condos in the District are performing better than the suburbs. Last month, GoldenTree InSite Partners announced it provided mezzanine financing for a $36-million condominium development at 2501 Pennsylvania Avenue. The project is sponsored by Intrepid Real Estate LLC and senior financing was provided by Branch Banking and Trust Company of Virginia. "Although the DC area has seen considerable growth in condo supply in recent years, units catering to the high-end luxury segment of the market are still undersupplied," Joshua Pristaw, managing director of GoldenTree InSite, said at the time of the announcement.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
