Condo-Modity

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Condo-modity
By Jennifer Martin

In some markets, investors viewing condominiums as commodities are making profits.

The condominium market saw record sales in 2005, and developers and investors are optimistic that the strong market will continue. In particular, flippingthe practice of buying a property and then selling it fairly quickly for a profithas skyrocketed among condo buyers in trendy cities such as Las Vegas and Washington, D.C. This year alone, 18,586 condo units were expected to be added to Miami, another 10,875 to San Diego and 8,533 to Chicago, according to the Wall Street Journal.

Developers say theres ample room for more purchases as European and Latin buyers flood the U.S. market. With the strength of the euro against the dollar, purchasing property in the U.S. has become much more feasible for European buyers, and Latin buyers are showing record levels of interest in Miami and other Florida cities.

Investors are eager to get in on the action early. Condos, particularly preconstruction condos, have become a somewhat commoditized product, says Richard Swerdlow, CEO of U.S. Condo Exchange, a Web site that serves as a virtual marketplace for buyers and sellers of Florida condos. Theyre boxes in the sky. Most of these units are sold sight unseen.

In Miami alone, real estate values have soared 85 percent since 2001. Flipping is such a hot trend that entrepreneur Mark Zilbert recently launched condoflip.com, a Web site solely devoted to Miami sellers whose condos are still in preconstruction. U.S. Condo Exchange (www.uscondex.com) does the same but expands the service to connect sellers with long-term buyers as well. U.S. Condo Exchange will list condos available in Las Vegas, Chicago and San Diego by early 2006.

Some analysts fear that the condo market could be looking at a bubble with so much speculation. However, others say the Internet has given the market an unprecedented level of exposure worldwide. We have quite a few European and South American buyers, Swerdlow says. Were averaging well over 200,000 page views per month.

Still, to protect themselves and their investors, some developers have taken control of the flipping process within their own high-rises. This type of servicecalled the Miami modellets developers govern resales of their own units and offer marketing services to investors.

With this type of marketing, we control the inventory, says Paul Scaringe, vice president of sales for Sasson Hallier Properties, which is developing the Panorama Towers complexes in Las Vegas. At any given point, there are only a few units available to end-line users. As long as there are ready, willing and able buyers, typically you have no downside at all.

Like many other developers, Sasson Hallier took several other steps to prevent a flood of new inventory. It sold half of its initial condo offerings to personal acquaintances of the developers, then opened sales to the general public, allowed only one unit per buyer, reserved the power to choose which units hit the resale market at which times, and set prices at the corporate level. We will not negotiate prices with our resale program, Scaringe says. That is the number one thing.

So far, the model seems to have worked: The companys three Panorama Towers sold out to the public in a matter of weeks, and Sasson Hallier has a waiting list of at least 900 buyers interested in picking up speculators units.

There are a few caveats for investors interested in flipping. Analysts say there could be a softening of prices in the next year as the supply of condominiums keeps rising. Weve had the perfect set of variables contributing to this boomhistorically low interest rates, an easing of credit restrictions and the euros very high valuation against the dollar, says Jack McCabe, CEO of McCabe Research & Consulting L.L.C., in Deerfield Beach, Fla. Our concern is that theres going to be a tremendous amount of competition.

While that creates grounds for caution for investors, from an end users perspective it creates an ideal opportunity. The Chicago market, for example, is already showing signs of an oversupply of inventory, giving long-term buyers a chance to take advantage of price discounts in the next six to 12 months. Analysts say if youre buying a condo, particularly new construction, its best to treat it as a long-term investment.

Still, in some markets, flipping will remain a viable option for the indefinite future. In Manhattan, where demand consistently outweighs supply, prices are jumping. From 1995 to 2004, condo prices in Manhattan rose from $250 per square foot to $800 per square foot, and the number of condo sales annually jumped from 3,000 to 8,500, according to the Prudential Douglas Elliman Manhattan Market Report.

In Manhattan, theres so little room for new construction that developers are converting older buildings. This is good news for investors and buyers with less discretionary income: Analysts expect converted condo units to retain their value more solidly in the next four to five years than newly constructed ones.

Las Vegas is another market thats considered more insulated from softening prices. Its employment rate has grown 7.9 percent in recent years as tourism continues to boom and a rising number of long-term buyers settle in the area. The existing inventory still remains in relatively strong balance with the population growth that were experiencing, says Brian Gordon, principal of Applied Analysis, a Las Vegas economic and real estate research firm. We are the fastest-growing metro area in the country, and that bodes well for the residential markets.

Investors will need to be savvy about their purchases, however. Some 50,500 luxury condo units are either under construction or in the planning stages in Las Vegas, and Gordon expects about 35 to 40 percent to survive. The winners will be the developers who have an excellent location (on or near the Strip), experience in marketing condo projects such as these, and a strong brand identity. The Palms, the Hard Rocks, and the MGMs of the world will be the clear-cut winners, he says.

Investors can take a lesson from the Las Vegas market. If youre thinking about flipping, analysts say, look for a region with sizable growth potential. Were continuing to see 40 million visitors to southern Nevada, and nearly 100,000 people moving to Las Vegas, every year, Gordon says. So theres a relatively strong demand. As long as that continues, there should be a demand for the condominium product.