When the housing bubble burst in 2008, and took the air out of the local condominium market, few imagined that developers would resume building such projects anytime soon.
Financing, both for developers seeking to build such projects and for buyers looking to buy a condo, largely dried up in the years after the crash and remains difficult to obtain.
But the few developers who have waded back into the market are finding success with modestly sized projects in good locations.
At 1300 St. Mary’s, a new condo project at the corner of Wade Avenue and St. Mary’s Street in Raleigh, 32 of the 39 units are under contract. White Oak Properties, the developer behind the project, which opens in June and involved converting a 47,000-square-foot office building, hopes to have the remaining units sold in the next few months. Units range in price from $199,900 to $750,900.
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Raleigh-based White Oak has been among the most active condo developers over the past two years. The developer earlier completed Church + Main, a nine-unit project in downtown Durham where the units sold for about $350 per square foot.
White Oak is also finding strong demand for units at North Shore, a long-delayed project on N.C. State’s Centennial Campus. While those units are townhouses, White Oak doesn’t own the land underneath them, so the transactions resemble condo sales.
White Oak just recently began taking reservations for Mangum Flats, a 22-unit project in downtown Durham.
Roland Gammon, White Oak’s owner, said nine of the units have already been reserved since the project’s website launched about three weeks ago. Those units, which range in price from $184,900 to $709,900 are also pricing at about $350 a square foot.
Gammon believes the condo market is benefiting from several factors.
“New apartment rents are going up fast, mortgage rates are staying low,” he said. “I think the affordability of a modestly priced condo is looking very good, particularly when you throw in the tax advantages of ownership versus a rental.”
Triangle rents have been rising both at new and older apartment complexes, according to MPF Research, which analyzes apartment data in 100 U.S. metropolitan markets. The average rent, including concessions, in the region was $1,011 in the first quarter, up 4.7 percent from the same period a year ago.
New condos, like single-family homes, are also benefiting from a lack of inventory.
There were 50 condos listed for sale inside Raleigh’s Beltline in March, a two-month supply at the current pace of sales, Triangle Multiple Listing Services data show. But the 70 condos that have sold so far this year date, on average, to 1993 – a sign of the lack of new construction. In Durham, there were just 37 condos for sale, and the 11 that have sold this year dated – on average – from 1977.
Financing a challenge
Still, while demand is rising, the market is very different today than it was in the years leading up to the crash. Most of the projects being proposed now are much smaller, or are being built out in multiple phases.
That’s largely a reflection of the financing environment.
Banks now require condo developers to put up between 25 and 30 percent of the equity for a project, whereas in the past they were much more flexible.
“Post-recession it’s much more rigorous,” Gammon said.
Fannie Mae, the government-owned mortgage giant, also now requires condo projects to have at least 50 percent of their units pre-sold to owners who will live in the building before it will accept such mortgages.
Fannie Mae typically adjusts that requirement depending on market conditions, and in the past it’s been as low as 30 percent and as high as 70 percent. As long as the 50 percent requirement remains in place, it will represent a serious hurdle for the sort of large condo projects that were built before the crash.
Gammon said buyer financing is an issue even for his smaller projects.
“I spend as much time working on the back-end financing as I do on my construction financing,” he said. “I need my buyers to be able to get a Fannie Mae-type loan, 30-year fixed and at a low rate.”
Unlike during the bubble, condo buyers must meet higher standards to secure a unit. Buyers in White Oak’s properties typically must put down a 10 percent deposit, Gammon said.
Demand for condos is also likely to be muted by would-be buyers who still remember what happened to local condo prices in 2009 and 2010.
Two projects in downtown Raleigh, West and the Quorum Center, were forced to auction off units to reduce inventory, while a third, Bloomsbury Estates, was sold on the cheap to a Florida company that promptly slashed prices so low that the remaining units sold out in a matter of months. A fourth, Hue, was turned into rentals, after being unable to sell a single unit.
Acquiring land for such projects also remains a challenge, as condo developers today must compete with aggressive apartment developers.
But the success of projects such as 1300 St. Mary’s is already causing more developers to enter the market.
A Raleigh developer, Kimberly Development Group, filed plans in February for a 24-unit condo project at 904 Oberlin Road, just a few blocks north of Cameron Village in Raleigh.
The true test of the market’s recovery may come later this summer, when Chapel Hill-based Blue Heron Asset Management expects to break ground on what would be the largest new condo project built in the Triangle since the bust. The project, 539 Foster, will include 84 units and will overlook Durham’s Central Park and the farmer’s market.
Blue Heron hopes to begin entering into purchase agreements later this spring, with construction completed by the end of next year. If the project is successful, it could lead to more ambitious developments being proposed.