Supply and Demand for New Condos Completely Out of Whack

• March 18th 2011

by Will Smith

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The diminished supply of new condominiums in the DC metro area has gotten so tight that the next chapter of condo development could materialize this year. “Supply and demand are completely out of whack,” Mark Franceski, director of market research at real estate sales and marketing firm McWilliams|Ballard, told UrbanTurf. McWilliams|Ballard recently published its semi-annual report on the new condo market, 2010 Washington Metro Area Condominium Market Overview.

The shortage of new condos in the DC area has been anticipated for some time. Real estate watchers started predicting it in mid to late 2009, when it became clear that though there had been a glut of new condos just a couple years before, the intervening freeze in development meant that all those condos would be bought up, slowly but surely, until the supply had swung from abundant to dwindling. Fast forward a year and a half, and that supply has indeed dwindled — to an acute shortage.

Evidence of the shortage abounds. The number of new condos for sale across the metropolitan area stands at 3,542, the lowest it’s been in over seven years. This time last year that figure stood at 5,383; in 2006 it was around 18,000.

The available inventory represents 1.3 years of supply, meaning that at the 2010 sales pace it would take 1.3 years to sell out completely. While that may seem like a long time, little new inventory is being constructed to replenish the supply. In certain markets within the metro area — namely DC proper and Arlington — the supply is even more constrained (1.0 and 1.2 years, respectively).

It’s not just the low supply that is contributing to the shortage, it’s also the limited product mix that is available. McWilliams|Ballard’s Franceski points out that the average size of a new condo that sold in 2010 was 18 percent larger than in 2009, demonstrating that the few remaining condo projects with unsold inventory are selling larger units. Because a condo project’s largest units are the last to sell, the larger size of units sold in 2010 suggests that the shortage pushed buyers to finally acquire the hardest-to-sell inventory. This makes even more sense in light of the fact that the condo projects with unsold inventory in 2010 have been selling for an average of 3.6 years — an extremely long time for any market. With few exceptions, at this point all that’s left is the least desirable units.

Such an acute shortage of desirable new condos would suggest that the DC area is about to see a big increase in condo construction. Likely, but tight credit continues to hamper the market, both on the developer and consumer side. (Developers still find it hard to get financing to build condos, and buyers still find it hard to get mortgages to buy them.) If the few new sizable projects that have moved forward — like District Condos on 14th Street and Gaslight Square in Rosslyn — are successful, then new development could really accelerate.

Regardless of exactly when that surge in construction comes, McWilliams|Ballard does believe that the new condo market is at an inflection point between the last cycle and the next. From the report:

It seems that finally, nearly all of the necessary fundamentals are in place to allow for new condominiums to return and for developers to strongly consider them as a viable option. Debt and equity providers are recognizing the potential of the Washington Metro Area to absorb new condominium projects, especially in the most desirable submarkets and while end loan financing is still elusive, supply and demand are so imbalanced in some areas that properly designed and marketed new condominiums would be guaranteed successes…Early 2011 will see the overlap of the tail end of the last cycle and the budding of the next one.

This article originally published at http://dc.urbanturf.production.logicbrush.com/articles/blog/supply_and_demand_for_new_condos_completely_out_of_whack/3183.