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Thursday, Mar 28, 2024

Caution Emerges For Developers In Condo Market

One local broker who has been very active in the condominium market has told his staffers not to take on any more new condo development assignments. The broker, who asked not to be named, said he fears that a perfect storm of rising land and materials costs, along with higher interest rates, could push the selling price of new condominiums outside the reach of the market for such products. Condo developers themselves have eased off on the land-buying frenzy that has characterized the past few years, and while no one expects that the market will disappear, there is a growing sense that condominiums could be far less resilient to the coming changes in the real estate market. “They’re being very cautious in terms of the time it takes to get a property approved,” said Dean Zander, a partner at Hendricks & Partners, referring to the developers eyeing condominium developments. Although Zander is still working with developers, and he notes that they are still bringing in projects for costs that allow for sale prices within the range the market will bear, he also noted that, these days, the changing market is often top-of-mind in development decisions. “They’re weighing that with the changing demand due to interest rates and supply of existing product. And yet, there’s a strong demand for housing.” The number of condos sold in the San Fernando Valley in April declined by 18.9 percent versus April, 2005, although the median price of those that were sold, $386,000, was up 11.9 percent versus the year ago period, according to data compiled by the Southland Regional Association of Realtors. Most believe that condominiums will continue to provide a lower cost alternative to single family homes, which have risen to levels out of reach by the majority of residents. At the same time, the supply of product now in the pipeline and rising development costs could further limit the market for these properties and future development opportunities as a result. Other factors too are impacting developers’ plans for new condominium development. Land prices have continued to escalate, and, at the same time, materials costs have skyrocketed. “Most of the increases have been stabilized, but they have not stopped, while land prices kept going up” said Shawn Evenhaim, president of California Home Builders in Canoga Park, “but in the last six months, home prices did not go up, so the margins are basically shrinking.” The price of steel and concrete has been rising for several years, and more recently, pricing for copper has surged, nearly doubling compared to last year. “Many materials are contributing to the increase,” said Ken Simonson, chief economist for The Associated General Contractors of America. “In the last 12 months, there have been increases of 87 percent for copper and brass mill shapes, 48 percent for asphalt, 40 percent for diesel fuel, 26 percent for gypsum products, 18 percent for plastic construction products and 15 percent for cement.” Outpacing inflation Worse yet, Simonson said that, although some of these commodities will level off in coming months, the increases, which are largely due to heightened worldwide demand, will continue to outpace the overall rate of inflation. Couple all that with a growing outcry from renters in rent controlled apartments, which are often torn down to build these new condos, and the outlook for these units has grown murky. “Developers are not acquiring property like they were even five months ago,” said Christopher Stewart, senior vice president of development at The DT Group, which is currently going through the design and permitting phase for a proposed ultra-luxury condominium development in Studio City. Studio City, along with a handful of other Valley neighborhoods is considered far less price sensitive, and as a result, DT Group is moving forward with its plans. What is troubling some condominium developers, though, is that it can take several years between the time land is purchased until the first bulldozers start to roll, a time frame that has been expanding as renters grow increasingly vocal in their opposition. And with so many of the cost factors involved in building in flux as well, planning has grown far more complex. Some see a silver lining in the new market dynamic. They point out that for some years now, as housing demand has far outstripped the supply, many investors without significant development experience entered the market, merely to capitalize on an opportunity. Working smarter Those same players, the reasoning goes, were also largely responsible for pushing the price of land up beyond its value, leading eventually to inflated home prices. “I think there are a lot of people today that got into this industry that are not developers and shouldn’t be,” said Evenhaim. “If your competitors don’t know what they’re doing, it’s hard to compete against them.” Indeed, a number of developers point out that the uncertainty in the market ahead just means they have to work smarter. “Our stuff is more in the $400,000 to mid-$600,000 range; for that they’re getting 1,700-square-feet, which we think is a good value in today’s market,” said Gary Schaffel, whose company, Schaffel Development Co. Inc. currently has three condominium projects under construction. “Sales are still going strong and we’re still looking for more properties and hoping to break ground on a few more.” Schaffel Development is factoring the likely start date of a project into the company’s planning process so that subcontractors can lock in prices for materials and plan accordingly. Others are doing the same. “There’s no doubt that costs are going up, but I think that the demand is still going to be strong,” said Scott Dinovitz, president of D2 Development Inc., which is still about two years out on a condominium project in Woodland Hills. “I think there just has to be some innovative ways of looking at construction. When things like this happen, people just have to be creative and try to work around it.”

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