| Copyright 2005 Washington Magazine, Inc.
Washingtonian August, 2005 SECTION: REAL ESTATE; Pg. 193-194, 200 LENGTH: 1834 words HEADLINE: Hot Condos BYLINE: Cohen, Mark Francis; Articles by contributing editor Mark Francis Cohen can be found at www.markfranciscohen.com. HIGHLIGHT: Once the laggard of the real-estate market, condos are selling in record numbers--and for record prices. But how long can the boom last? BODY: Brandon Green is steering his black Lexus SUV up Connecticut Avenue when he snatches up his calculator. "Wait," he says, pondering the condominium in Kalorama that he just saw, which listed at $399,000. "What they're asking for is only $470 per square foot. That's very low." In hot neighborhoods like Kalorama, where bidding wars are common, prices are running well above the DC average of $510 per square foot. Punching numbers, Green announces that the condo will probably go for $456,000. That's bad news for Bridget Merrick, Green's client and passenger. Merrick, a 28-year-old former pro tennis player and instructor, wants to get out of her one-bedroom rental in Georgetown and buy a home in the city. Merrick is prepared to spend up to $400,000, but condo prices are at historic levels, with the average price around $410,000. "I don't know," Merrick says. "I do like it." Merrick ultimately decides she can't afford the place. Within days, she'd expanded her search to include what she calls the "edgier parts of town." For the better part of the past decade, apartment homes were the sleepiest segment of the Washington property market. Condos were relatively inexpensive and typically attracted young first-time buyers who, like Merrick, couldn't afford a townhouse or single-family home. Today condos are no longer the homes of last resort. They account for the majority of all home sales in DC, Alexandria, and Arlington. Condo construction, sales, and prices are at levels that would have been unimaginable a few years ago. Most new buildings are swathed in luxuries--concierge services, stainless-steel kitchen appliances, and Italian-tiled bathrooms--that attract young professionals, middle-age empty-nesters, and an increasing number of speculators hoping to make a quick buck. Even as the condo market soars to new heights, there are worries that it's headed for a fall. Washington's real-estate market is one of the country's hottest, with some economists warning that it could be overheated. Should the economy stumble or interest rates jump, condos could be poised to take a hit. The boom in the condo market dates to 2001. Washington's real-estate boom was a few years old then, and demand for homes was feverish. Interest rates were at a record low, stock prices were languishing, the local job market was expanding, and city living was becoming fashionable. As house prices soared--particularly prices for townhouses, the traditional entry point for many first-time buyers--more first-time buyers started purchasing condos. About the same time, developers found a new attraction in condos. With land in and around the District growing scarce--and expensive--they were finding it hard to recoup their investment in property by building single-family homes and townhomes. Multiunit condo buildings, by contrast, offered more potential sales income per acre. Virtually overnight, condos shed their sleepy image. According to a market analysis by Fred Kendrick and Peter Clute of Coldwell Banker Residential Brokerage, people in the District rushed to become condo buyers in 2001. The average price for a condo increased by 38 percent that year, going from $166,608 to $230,186--the highest annual appreciation for condos on record. With the average sale now $410,000, condo prices have climbed nearly 150 percent in five years. By contrast, from 1990 to 2000, condo prices barely budged. What once was seen as a speculative investment now seems like a great deal. "It used to be that my clients would say, 'I should buy a single-family home because it appreciates better,' " says Nathan Carnes, who manages 53 agents at W.C. & A.N. Miller Realtors' Chevy Chase offices. "Then they started saying, 'I should buy a two-bedroom condo because it appreciates better.' Now people are perfectly comfortable buying a one-bedroom condo. All the old myths have gone out the window." As condos proved themselves, developers began scrambling to meet what turned out to be a big appetite to buy urban lofts and inside-the-Beltway duplexes. Dozens of new condo projects, which take about three years to complete, were stuffed into the pipeline in DC neighborhoods such as Adams Morgan, Penn Quarter, and Logan Circle as well as in suburbs such as Reston, Sterling, Bethesda, and Silver Spring. Extravagant buildings like the Ritz-Carlton in DC's West End persuaded empty-nesters and baby boomers to sell their suburban Colonials and move to the city for easier commutes and better nightlife. Condo-building and -buying mania continues today. "The condominium market is on fire, but it's been long overdue," says Ken Taylor of DC's Taylor Associates, which markets and develops condominium buildings. "There was such pent-up demand in the market for so long, and it's like the flood-gates have been opened. It's the best of times." Delta Associates, an Alexandria-based real-estate research firm, estimates that the number of condo projects in the works in the metro area has doubled since 2004. Hot condo areas in DC include Mount Vernon Triangle, between Union Station and the new convention center, with buildings like the Sonata--a condo house that sold out even before construction started, with 75 loft units featuring ten-foot ceilings and granite kitchen countertops; the U Street corridor, where cranes are cracking through large parcels of land to make mid-rise buildings, and areas like Capitol Hill and Friendship Heights, where pricey condos are being shoehorned into tiny parcels of land. Outside DC, there's a plan to build loft apartments at the old prison in Lorton. PN Hoffman, the aggressive urban developer that put up warehouse-style condos in Adams Morgan and Logan Circle, is constructing a 145-unit building near Old Town Alexandria, replete with concrete ceilings and exposed duct work. Sales for the Bearings, a rental property in Old Town that's being converted into condos, began in May; 5,000 people put in reservations for 158 units, which are being sold at $480 a square foot. The Odyssey, a 15-story upscale Arlington condo near the Court House Metro stop, is selling apartments for more than $1 million. In Silver Spring, the Silverton project has been selling more than 100 units a month since sales began this year. In North Bethesda, the Grosvenor House apartment complex is being converted into the 404-unit TenTenOne condominiums. More condo projects are in the works for downtown Bethesda and Rockville. Some argue that the condo bonanza is unsustainable. The market, they say, is on the verge of slowing down--or collapsing. Several indicators foreshadow a downturn. Economy.com, a research firm, ranks the Washington metro area as the second-most-overpriced housing market in the country, behind only Las Vegas. Another sign is the Washington homebuyer's reliance on risky forms of financing. LoanPerformance, a San Francisco-based mortgage-information provider, analyzed the rate at which homebuyers were financing their purchases using interest-only mortgages--mortgages with low starter rates that grow within a few years. The analysis found that 40 percent of District homebuyers relied on interest-only mortgages, making DC the number-one place in the country for such loans. Virginia ranked sixth, Maryland eighth. "If people take out loans that they can't afford in the future, then there's a good chance they're going to lose their home and have bad credit scores," says Mark Obrinsky, chief economist at the National Multi Housing Council, a DC-based trade organization representing apartment firms. "These things will hurt them financially for a long, long time." A comparison of the rental market with the homebuying market reveals a price imbalance. Nationally, the cost of renting is about the same as the cost of owning, according to Torto Wheaton Research, a Boston-based consulting firm. But in the DC area, the monthly rent for a median-price home--about $350,000--is roughly 40 percent cheaper than the monthly mortgage payment on such a home. Consider two one-bedroom apartments--one for rent and one for sale--in the luxury Gallery Place building in downtown DC's Penn Quarter. Both are on the ninth floor, with hardwood floors, granite kitchen countertops, and track lighting. The rental advertised recently on Craigslist.com at $1,650 a month. The condo for sale listed for $459,950--or $2,031 a month after putting 20 percent down and taking out a conventional 30-year mortgage. Include the condo fee of $431 and the price of the for-sale unit climbs to $2,462 a month--about $800 more than the rental. "The cost of renting versus the cost of owning has never been so out of whack," says Josh Bernstein, president of Bernstein Management, which owns 17 midprice and upscale rental buildings in DC. "But people are buying because if you're 28 years old and you're renting, you feel like you're missing the boat." Many experts dismiss the "sky is falling" warnings about the real-estate market. Price increases will slow in the coming years, they say, but the market won't collapse. The area is projected to generate tens of thousands of new jobs in the coming year, they say, bringing new residents to the area and guaranteeing continued demand for houses. Nevertheless, the condo market may be more vulnerable than other parts of real estate. A family that buys a house is usually in it for the long term and will ride out cycles of rising and falling prices. Condo buyers are often short-term purchasers. A National Association of Home Builders survey suggests that about 15 percent of condo buyers in hot markets like DC are investors--buyers who are likely to sell fast if prices falter. Young professionals, another major segment of condo buyers, are also likely to sell as prices drop. They often live in small apartments and plan to stay only for a few years. If prices dip, they may dump their condos, either because they don't want to lose money or because they have outgrown the space. Worst-case scenario: Owners panic and rush to dump their condos, triggering a market slide. "The condo boom will end in a mess, and it's going to have a profound and lasting impact on the city," Bernstein says. Ultimately, today's condo market is unlike anything the area has ever seen. And no one knows for sure what will happen. For 30-year-old Alison Brett, buying a loft with her boyfriend near U Street in early June wasn't a hard decision. "Neither of our families can understand why we paid so much for this place," Brett says, as she stands in the bedroom of her new 850-square-foot apartment, which cost $450,000 and has high ceilings, bamboo floors, soaring windows, and exposed duct work. "But if you want to live in the city and be near everything and be safe and have everything be nice, then you're going to have to spend more than you really want to. All that's really missing here is a little more space." GRAPHIC: Picture, New deal: Condos like Brad Smith and Alison Brett's one-bedroom loft go for $400,000 and up.; Photograph for The Washingtonian by Ron Blunt; Picture, Realtor Brandon Green is filling his appointment book with clients who want to see condos--once the last choice for first-time homebuyers.; Photograph for The Washingtonian by Ron Blunt LOAD-DATE: July 29, 2005 |