The High-Rise Condo and Condo Conversion markets are about to see project failures and possibly bank closures

Implications: The numbers of high rise and condo conversion projects planned and at least partially funded in Miami, San Diego, Las Vegas, Chicago, New York City, Los Angeles and even on Central Avenue and at Lake Tempe and throughout Phoenix and Scottsdale far exceeds the possible market. The plans were drawn to meet an investor or second home market which has evaporated. Even if the investor demand is still warm, the probability that good money will follow bad deposits to the close when the unit prices are under water compared to lukewarm resale market values is not high.

Analysis: The reality of condominiums is that buyers prefer all other forms of urban housing before they submit their money to the neighbors in the form of an HOA. Neighbors are always critical of the others’ lifestyle, but the normal neighborhood structure does not facilitate collective action by the majority against the neighbor who favors an individual look or lifestyle. The HOA sets up the process for the mean and critical to voice against the minority to the disadvantage of the minority’s investment. When considering this form of housing whether a first time buy, a move-up or a move-down, investment or second home, buyers are a lot more educated now about the negative aspects of HOA’s than they were in previous markets.

Corus and others like Fremont Investment gained growth and market share quickly by funding these markets with the thought that demand would be continuous. They acted as leaders in the market and placed investments far and above their ability to reserve for losses in the downturn. The downturn has arrived and the projects will default to the loan as developer equity vanishes.

These housing markets trend toward the results of the hospitality markets more than they do the primary urban housing arena. Investments in primary housing development are made with the thought that there is a lot more room when things go bad. This market is rough on single family detached now and the high rise and conversion condo markets will be even worse. As opposed to being alarmed at say new construction off 1/3 in detached housing, it is hard to envision even a minority of these projects being successfully marketed.

We’re going to be quite a while mopping up these projects and the institutions that led the market in funding them. When you see bank financial statements with a serious bias toward these developments, question the viability of the institution.