Surplus of Units : Condos: It’s a Buyer’s Market Now
Raymond J. Hunt thought he was getting a sweet deal last year when he and wife, new arrivals to California from Oklahoma, bought a new condominium in elegant Pacific Palisades for less than $500,000.
Today, he’s not so sure.
None of the other condos in the project ever sold, making the Hunts the sole occupants of the eight-unit building and giving Hunt heartburn about the wisdom of his 35% down payment. Hunt, a petroleum-pipeline company president nearing retirement, said he is worried that the value of his home will plunge if the bank that owns the building sells the other condos at fire-sale prices.
“The situation could get better, and it could get a lot worse,” he said with an air of resignation.
Such tales of woe have become common in the condominium market these days, especially in Southern and Western states where condo owners, lenders and developers are battling hard times caused by swollen supplies and shriveling demand.
An estimated 2.6 million newly built or converted condominiums have flooded the market nationwide in the last 10 years, including about 700,000 in 1983 and 1984, according to industry figures.
Scores of thousands of condos, both new and resale, are being left vacant, converted into apartments or sold at ultra-cheap prices in states like Texas, Florida and California, where the market is most depressed.
The oversupply has been particularly difficult for middle-class owners who have been trying for months, if not years, to sell their condos. They often become reluctant landlords because they have to rent the homes instead.
“Everybody today has a war story about Joe trying to sell his condominium for the last 18 months,” said David Wayne, an Orange County investor who specializes in buying troubled condo projects.
Hard-to-Sell Luxury Condos
Builders are also finding few buyers for new luxury condos. Among the most conspicuously troubled projects in California are the largely vacant, unsold or unfinished luxury high-rises next to the Ventura Freeway in Glendale and along Wilshire Boulevard near UCLA.
The problem is more acute in Houston, which is burdened with an estimated 10-year supply of luxury condos priced for as much as $2 million apiece. Sales are so bad at one 96-unit building that only a single unit has been sold, according to Mike Castleman, president of American Metro Study Corp., a market research firm in Houston.
Condominiums typically have been attractive homes for young professionals, who want a real estate tax break without having to acquire a single-family home, and for older couples, like the Hunts, who don’t need big houses once their children have grown.
But many real estate industry experts say much of the bloom has faded from the condo market because the baby-boom generation--that post-World War II population bulge that ranges in age from about 27 to 40--wants single-family homes for their own families.
“When I first bought my condo,” said one Los Angeles woman who made the purchase five years ago, “I was single and it was a good deal for me. I needed the tax write-off and didn’t want the responsibility of a single-family home.”
Now, she is married, has a child, a new house in West Los Angeles and is trying without success to sell her Fox Hills condo, which she is renting out. “I’m tired of being a landlady,” she said.
Investor Market Drops
Another drag on demand is the investor market, which has virtually dried up because condominium values are not rising much, if at all. Investors, who would buy the condos and then rent them out, used to account for more than a third of the buyers in some Sun Belt states.
One such investor, Aram Ouzunian, is selling his two-bedroom condo in Van Nuys for $83,000, only 6% more than he paid for the investment property seven years ago. “Effectively, I’m taking a loss,” Ouzunian said. “It’s a buyer’s market. You can get some real steals out there now.”
List prices on many condos are being reduced between 10% and 50% just to get them sold, real estate specialists said. “Consumers are king in this market,” Orange County investor Wayne said.
Other factors hurting demand are more affordable single-family home prices and fewer first-time condo buyers because the migration into the Sun Belt has slowed from the heated levels of the last few years, real estate experts said.
Meanwhile, condominium construction continues at boom levels, so the oversupply may linger for years. About 270,000 condos, a 10-year high, were built last year in the United States, and nearly as many will be finished this year, according to U.S. Housing Markets, a real estate newsletter based in Detroit.
“Condo production has surged in the last year and a half in most Southern and Western markets, just in time to meet a shrinking demand,” according to the newsletter, which is owned by the large Dallas-based mortgage lender, Lomas & Nettleton Co.
“There’s an enormous inertia in this market,” U.S. Housing Markets Editor Sol Shiefman added in an interview. “The lenders catch on very slowly to what’s going on, and once the builder gets his money, he goes ahead no matter what the condition of the market is.”
Additionally, critics said, developers tend to be incorrigible optimists who often proceed without doing extensive market research. “Everyone thinks their project is the one that will succeed,” said Ken Rosen, chairman of the Center for Real Estate and Urban Economics at the University of California, Berkeley.
The best-selling condos these days tend to be low-rise, town house-style homes located in quiet neighborhoods, real estate insiders said. Mori Herscowitz, a Century 21 real estate salesman, said one such town house condo in Studio City was sold in two weeks for $138,000 by a couple who bought the home less than a year ago for $133,000.
Conversely, among the poorest prospects are the so-called stack condominiums, which are low- to mid-rise, apartment-style buildings. These were often built as apartments and later converted into condominiums.
The nationwide supply of stacked condos, which has ballooned almost threefold in five years through conversions and new construction, is “almost overwhelming,” the U.S. Housing Markets report said.
Losses for Sellers
The result can be heavy losses for sellers. Jim Groth, a public relations official at Harvey Mudd College in Claremont, said he lost $25,000 two years ago when he sold his apartment-style condominium in Pasadena. “I’ll never buy another one of those again,” he vowed.
The depressed market has produced a burgeoning sub-industry of entrepreneurs who are buying new, unsold condominiums at rock-bottom prices from the banks and turning them into apartments to meet a very strong rental demand. An estimated 50,000 to 100,000 condos completed in the second half of 1984 have been turned into apartments, Shiefman estimated.
Auction firms, such as the R. Thomas Ashley Co. in Newport Beach, are also busy. One of the firm’s best-publicized efforts was a February auction of a high-priced luxury condominium complex in San Francisco, known as Ocean Beach, that attracted more than 5,000 people.
The company has conducted other condo auctions throughout California and is “looking at half of Houston right now,” said James Lange, the firm’s president.
There are, of course, niches in the market that are quite healthy.
The condo market, both new and resale, is booming in Boston and New York, for example, and is generally holding its own in other major Eastern and Midwestern urban areas. “The denser the area, the better the chance condos have of making it,” American Metro’s Castleman said.
College Town Demand
Student-owned--or more accurately, parent-owned--condominiums are helping buoy demand in university towns like Chapel Hill, N.C., and Austin, Tex. The parents get a tax break and their children get a place to live in college towns where rental and dormitory housing is scare, brokers said.
“We literally get students coming in here with books in hand looking for a condo,” said Cari Aratoon, a broker in Austin, home of the University of Texas.
Even in Houston and Southern California, developers are selling new condos if the price is right--generally under $100,000 in California--the financing attractive and the location desirable.
Requiring almost no money down is another lure. Condominiums at South Coast Springs in Santa Ana began selling when the requisite down payment was cut to 2% from 5%. “People tell us that you can’t sell a condominium in Southern California these days,” project marketing manager David Flanders said. “Well, we’re selling them.”
Most often, it is the lender who pays the steepest price if a new project does not sell. If the developer cannot sell the homes, the building is usually deeded back to the financial institution.
That is what happened when a luxury high-rise condo project known as Monterey Island was built in Glendale last year.
Three of 88 Units Sold
So far, only three of 88 units have been sold because, as builder Frank Howard admitted, the prices were too high and the demand was not there. As a result, Crocker National Bank now owns the $21-million building and is trying to figure out how to sell the other 85 units.
Another high-priced project in trouble is just down the freeway in Glendale from Monterey Island. It is a $36-million, 180-unit complex known as The Park Towers, which was finished more than six months ago and advertised as a “Move Into the 21st Century.” The minimum price on the condos was $165,000.
“We have the highest level of amenities of any condominiums in the Western United States,” boasted developer Ed Babayan, alluding to the building’s racquetball and tennis courts and its outdoor running track. Nevertheless, he said, the condos in the twin-towered complex remain unsold because of mortgage financing problems.
A spokesman for San Mateo-based Bell Savings & Loan Assn., lead lender on the project and a company that has reported heavy real estate losses, said: “We’re trying to work this loan out. Other than that, we don’t have any comment.”
The Wilshire Corridor on Los Angeles’ Westside has been plagued for years by a well-publicized glut of expensive condos with prices as high as $11 million. Symbolizing the problem is the rusting skeleton of one condo project--easily visible to motorists on heavily traveled Wilshire--that was left unfinished.
In the case of the Hunts, their Pacific Palisades condominium is in a low-rise building at a busy intersection on Sunset Boulevard. Initial sale prices were more than $700,000, but they were slashed when no buyers appeared.
Hunt said he bought the condo because the first-floor location and ocean air of the Palisades were, literally, what the doctor ordered for his wife’s respiratory problems. He also said he felt reassured because two other condos were in escrow when he bought his unit, but those sales later fell through.
Sale to Investors
The future of the building now rests with First Interstate Bancorp, a large Los Angeles-based financial institution that is trying to sell the condos to investors, according to bank Senior Vice President Dan Denison.
“I have no idea what the retail value of these will be,” he said.
One problem is that the building is “not well-designed or well-conceived” because it is located on noisy Sunset and has no view of either the ocean or mountains, Denison said.
“This is not one of the ones we’re real proud of,” he added.