Volume 42, Issue 4 - April 2007
|The Condominium Market:
Proceed with Caution
You can’t blame Kurt LeVan, president of Chicago Heights Glass Inc. in South Holland, Ill., if he’s getting that déjà vu feeling. He does a bid for a project. Then six months later, he does another one for the same development.
“We are seeing requests for bid from a customer who claims a specific project has been awarded to them, when, six months ago, we received the same request on the same project from a different customer,” LeVan says.
Why’s LeVan seeing this? Easy. It’s the crazy condo market of the past year. “Obviously, some general contractors are walking away from projects where current costs have risen out of line with previous budgets, and owners are quickly searching for others to try to complete the buildings at outdated price structures,” he says.
Unfortunately, not all developers pick up a failed project and try to make it work. Others just bail as the market collapses. That’s why condo starts have fallen dramatically in most cities across the country.
“Many of these condo communities are large, urban projects or high-rise communities in resort locations, and as such, they take a long time to plan and build compared to single-family homes,” says David Seiders, NAHB’s chief economist. “As a result, multi-family developers cannot simply turn off the supply overnight, so it is going to take a little while before we work through the large overhang of inventory.”
Those people out in the field are seeing this as well. One contract glazier working in Washington D.C., who asked to remain anonymous, says there is no doubt the market has slowed down. “There have been some condo projects in this market—big, high-end jobs—that have been in the pipeline in one sense or another, but have stalled,” he says.
Others see the same thing. “We are still seeing high-rise projects out for bid … but the market is weakening,” LeVan says.
LeVan says he’s seen some owners attempt to offset the decline in demand for condominiums by constructing high-rise residential structures as rental apartments. “Many existing apartment structures were previously converted to condominiums during the boom, so there is a demand for high-quality rental units in our area.”
Though LeVan has seen a drop-off in condo business, glaziers in Chicago (who didn’t experience the same astronomical jumps in condo pricing as the East and West Coasts over the past few years) seem to be enjoying steady condo work.
“There’s still a lot going on in downtown Chicago,” says Robert Martin, president of Arcadia Products Inc. in Northbrook, Ill. “There may be somewhat of a slowdown in the middle market condo range, but as far as the high-end that’s still very strong.”
Dave Dziedzic, president of IFD Inc. located in Bellwood, Ill., says he, too, has seen a great deal of work in the condo market. “The market has been significant. It was strong through the second quarter of 2006, then it tapered off a bit, but we were still doing a lot of bids during that time,” he says. “So, I don’t really think it declined all that much.”
The market in the northeast, namely New York, also continues to see a strong slate of condo work, though it did experience somewhat of a pause, according to Mike Haber of W&W Glass Systems LLC in Nanuet, N.Y. Haber is the managing partner with the company focusing on the construction side of the business. “New York is still very strong and we expect it to continue into 2008. After that, we expect a change from [all] condo buildings to hybrids, those that combine condos with offices, rental units and retail space.”
In Southern California, business is still busy, too. With the notorious housing crunch in the Golden State, that’s no surprise. Consultant Jon Weir with J.A. Weir Associates in Redondo Beach, Calif., says he’s not yet seen the market begin to taper and that he’s aware of multiple condo jobs scheduled for the downtown Los Angeles area.
Scott Toler with Alumiglass Inc. based in Boca Raton, Fla., focuses on commercial work and residential reconstruction. Those segments provide lots of opportunities. “The reconstruction work we do is driven by necessity [i.e. hurricanes],” Toler says. “There are people living in old buildings that now need to be upgraded to meet the new codes.”
Other contract glaziers saw the condo market slowing and adjusted appropriately. Count LeVan among that group. “We felt that this market segment was unprecedented and not sustainable or worthy of a long-term infrastructure change within our company. Our recent efforts have been geared toward the resurgence of our long-time core markets, like office building construction,” he says.
The D.C. glazier says those who got into the condo market business did so when, a few years ago, the office market was slow. Now, they’ve gradually moved back into it as it’s improved.
Marc Rosenberg, chief operating officer with APG International in Glassboro, N.J., only picks condo jobs that he thinks are great fits. “We get requests for bids regularly, but we’re only interested in those jobs that have a curtainwall element and we see that mostly on the high end,” Rosenberg says. “There’s still a demand, but not like a year ago.”
The NAHB’s Multifamily Condo Market Index showed an index value of 29.6 in the first quarter of this year. Though it was down considerably compared to 2005’s fourth-quarter 47.1 score, it was up compared to the 2006 third-quarter score of 19.7. Builders also gave market conditions for the next six months a score of 49.1, the highest since 2005’s fourth quarter.
“The condo market is coming back toward balance following the previous four quarters when the pendulum swung from red-hot to seriously cold,” Seiders says. “What we are looking for—and likely to find in 2007—is a healthy and sustainable level of condo production that will fall short of the unsustainable levels registered during the early boom period, but that will meet the current market demand.”
Jeff Taylor, chief economist for the Associated Builders and Contractors, says these changes in the condo market are a result of supply and demand—by 2006, he says, it was over-bought and over-speculated.
“Builders got out when they started to see the market declining,” Taylor says. “The condo market is not dead now, it’s just coming down from increased highs to more normal conditions; it’s not a collapse and I think this will allow for a fairly soft landing.”
Over the long term, condo and apartment demand is likely to grow. With empty nesters and echo boomers craving an urban lifestyle and America’s traffic arteries growing more congested, many experts expect high-rise living to grow in popularity. “The fact is we’re adding 3 million a year to our population and they want to live in areas close to where they work,” says J. Ronald Terwilliger, chairman and chief executive officer of Atlanta-based Trammell Crow Residential, one of the biggest condo and apartment developers in the country.If Terwilliger’s right and urban housing demand will be growing over the long term, LeVan and his colleagues can expect to see many bids for high-rise residential projects cross their desks over the next ten years.
1 The MMI is a quarterly, nationwide survey of multi-family builders and property owners who are asked a series of questions about current market conditions, as well as their expectations for the next six months. Calculations are presented on a scale 0-100; a score of 50 generally indicates the number of positive responses is about the same as the number of negative responses.
“We made the decision to not do condo work because of the great amount of risk involved. Each condo owner could sue you,” Rosenberg says. “The same is true today, but we have taken on a few select projects with owners we trust.”
One contract glazier, speaking anonymously, agrees.
“Once the condo is complete you’ve got a building full of owners [in high-end, expensive units], and they are looking for construction flaws,” he says. “It’s a high-end clientele searching for litigation; they want to find ways to recoup some of the cost [of the unit].”
The litigious nature of condo construction has, in some cases, made gaining insurance on these jobs difficult; though the contract glaziers interviewed for this article say this has never been an issue for them.
“Insurance companies have been careful about this, as condo owners often file suits against construction team members,” the anonymous contract glazier says.
Consultant Jon Weir with J.A. Weir Associates in Redondo Beach, Calif., says the state of California poses its own challenges for companies working there.
“There’s a law that says [if there are issues, such as a leak] you’re responsible for that residential building for ten years,” he says, explaining that that’s not the case with commercial work. “There’s extreme liability.”
Considering the litigious nature of condo work, Weir says one of the trends he’s starting to see is a group insurance policy.
“The client (owner/developer) takes out a blanket insurance policy that covers everyone [the whole design team] on the job, which really helps get by litigation,” Weir says. “Everyone is protected.”
What’s in Store?
2. Daunting Design: Robert Martin, president of Arcadia Products Inc. in Northbrook, Ill., sees certain design elements and criteria as one of the challenges with condos.
“In office construction, for example, you don’t really have the same thermal and humidity factors that you have with condos,” he says. “With condos you have to be more concerned about thermal transmittance. Offices don’t usually have operable windows, so with condos [protecting against] air and water infiltration is crucial.”
the author: Ellen Giard is the editor of USGlass magazine.