By Tomoeh Murakami Tse
Washington Post Staff Writer
Saturday, July 15, 2006; F01
It's no secret: After a dizzying five years during which buyers threw ever-larger sums of money at condominium projects, units are languishing on the market and prices have stalled.
"I don't see a whole lot of good reason for buying a place right now," John Delmore, 37, a telecommunications lawyer from Arlington, said last week after a year of on-and-off condo shopping in the District. "I think it's worthwhile to see if prices do come down or if there are more incentives."
It is a sentiment shared these days by more than a few would-be buyers. So why, then, are so many developers still building condos by the thousands? Do they know something that buyers don't? Is the market about to jump again?
The resounding answer from developers large and small is that the economy is strong; the region is adding jobs; and that, basically, their condo projects are so special, so uniquely designed, strategically located or attractively priced that buyers will continue to choose them over the competition.
"It doesn't concern us greatly," said Richard W. Hausler, president of Vienna-based KSI Services Inc., which is advertising about 900 units. "The fundamentals of the market are solid and consistent with what they have been. That's the most important point."
In the Washington area, more than 25,000 new condos are on the market, up from 18,000 a year ago, according to Delta Associates, a real estate information firm in Alexandria. Developers are planning to introduce an additional 26,000 units over the next 36 months. Furthermore, about 9,000 more condos are competing for buyers' attention in the resale market, according to Metropolitan Regional Information Systems Inc., the region's multiple listing service.
With buyers enjoying the luxury of time and choice, developers are offering growing incentives -- condo fee waivers, free kitchen upgrades, help with closing costs -- that average 5.5 percent of the purchase price, according to Delta. That's up from 2.7 percent in the first quarter of this year. When such concessions are taken into consideration, condo prices have actually declined, albeit less than 1 percent, said William Rich, who researches the condo market for Delta.
Most economists agree that the double-digit annual price appreciation for housing of the past five years is over and predict modest increase or flattening of values for the months to come. Delta figures show sales are down from last year's record highs, although they have picked up recently to match the pace seen in 2004. Although the number of unsold units on the market is down slightly from earlier this year, Delta said it does not expect values to increase much for 18 months or so, until even more inventory is burned off.
Dean Baker, co-director of the Center for Economic and Policy Research and a longtime bear about the housing market, said the market could drop by up to 25 percent and disputed the notion that some well-planned condos would escape unscathed.
"Whatever makes the place desirable, it's presumably already reflected in the price," Baker said. "There's always going to be a few that escape relatively unharmed. But virtually everyone is going to be affected to some extent."
Developers typically are dismissing signs of a cooling market as a temporary adjustment period after double-digit price gains prompted a building rush. Several developers on both the high and low ends of the condo market cited their asking price as a key factor that separates their units from all the rest.
District-based Tenacity Group, which focuses on $150,000 to $300,000 condo units, said business has picked up even as some other developers have abandoned projects in the face of paltry sales. In recent weeks, developers of at least 1,700 units in the region have switched plans from condo to rental apartments, said their buildings would remain as rentals or canceled plans altogether.
Erik Bolog, managing partner of Tenacity, said his company has been selling 30 units per month, or 30 percent ahead of its own projections, and is planning to bring 1,500 units to market over the next two years.
"We are only getting busier. We are growing; we're not downsizing," he said. Tenacity is "different from the mainstream developers that are building the more expensive units in the city."
But Jim Abdo, a District-based developer of luxury condos, said his sales remain brisk as well, in part because his projects never attracted many nonresident investors and therefore were less affected as those buyers largely withdrew from the market this year.
"We build units at a significantly higher price point," Abdo said. "It just doesn't lend itself for the investor purchaser . . . who wants to buy it, stick a renter in it and sell it in a year or two."
Five thousand people have signed up to preview 87 units at Abdo's Wooster and Mercer lofts under construction in Arlington, priced at $500,000 to $2.5 million, Abdo said. Only six of the units have been released for sale, and they sold in a few days, he said.
But Abdo, who is also embarking on a $1 billion, 3,000-unit project in Northeast Washington, said he is confident that the Arlington condos would sell once buyers saw their 22-foot ceilings, large windows and other features he described as unique. "Quality sells through any change in the market place. Period," he said.
Simple math on building costs and land supply also makes moving forward with condo projects make sense from a business perspective, some developers said.
Ross Development & Investment, an owner and operator of 13,000 rental apartment units around the region, entered the condo market three years ago.
"Unless you want to commute long distances . . . prices just have to continue to increase because costs continue to go up," said Scott Ross, president of the Bethesda company.
Ross is introducing hundreds of condos in the area, including conversions of some apartment buildings it owns. Its mixed-use project with Bethesda-based Danac Corp., which features 644 condos, is under construction near the Rockville Metro station and being sold in phases. About 400 units remain.
"We're obviously bullish on it, but for all the right reasons," Ross said, citing the high price of homes, appeal of urban living and scarcity of land near inner-suburb train stations. "I actually think it's foolish" for buyers not to participate in the real estate market.
But many developers say they are closely watching the market and adjusting plans.
LaZerrick Howard, a concrete contractor who owns about 25 apartment units in several District buildings, converted four of his units on the eastern edge of Capitol Hill and began selling them as the Courtney Condominiums in March. After two months, he dropped the asking price from $290,000 to $275,000. In June, he lowered it to $260,000 and sold two of the four units.
"The market slowed down on me," said Howard, who also offered to pay for a year's worth of condo fees and increased incentives offered to real estate agents. In the beginning, "I thought they would sell themselves. I was thinking, 'Do I even need an agent?' But the market changed so quickly. I had no choice but to regroup and figure out what you need to do to sell."
So is Howard done with condo market?
Not quite. He said that the units are now priced appropriately and that he can afford to wait a while; he bought the building back in 1990 and owes little to the bank.
In fact, Howard is considering a 12-unit condo conversion in Northeast Washington, perhaps in a year.
"I'm a risk taker, but it depends on the market," he said. "If people are still buying condos, I'll try it."
Some in the industry point to developers like Howard as an example of how even smaller, less capitalized developers will be able to weather the slowdown because market fundamentals mean it will not last long.
Christopher Clemente, chief executive of Comstock Homebuilding Cos. in Reston, thinks there will be pent-up demand next year. In the meantime, he is tweaking his own plans.
Two months ago, Comstock launched a rent-to-buy program in two apartment buildings it bought to convert to condos. Under the program, renters can lock in today's prices and use 50 percent of rent paid toward the purchase of a unit in the building if they decide to buy. Because renters do not have to go through with the purchase, the program could be appealing to those who fear values will fall.
The program represents Comstock's first foray into the rental business. Clemente said the program is proving to be a good way to generate revenue while the buildings are being converted. At the Penderbrook Square Condominiums in Fairfax, where half of the 424 units were sold last year, about 150 units have been leased through the program, he said. Aside from the program, Comstock said it is also offering breaks on financing, condo fees and closing costs and even lowering prices on some units. Although buyers are not signing up at the pace they were a year ago, the incentives have helped keep the pace of sales reasonably stable, Clemente said.
"Buyers are out there," he said. "It seems that they're waiting to make sure their buying decision is a wise one."