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While the multifamily construction market has surged over the past year, the condo market has not been part of it. The share of condo units being built for sale over the last year was less than 5.4%—nearly the lowest level in half a century, according to a new report from the Urban Institute.
“This trend has persisted even though demographic patterns are boosting the need for condos, and the shortage is adding to concerns about the lack of affordability in the homebuying market,” writes Urban Institute researchers Michael Neal and Laurie Goodman.
Condos have long been associated as a path to homeownership for first-time home buyers. Also, they tend to be a more cost-effective option for single households. Condos tend to be less expensive than single-family homes.
The construction of multifamily condo construction for sale has been declining since the Great Recession. Production has been low due to financing constraints for the sponsor and builder as well as defect litigation that is substantially increasing the cost of insurance and the riskiness of condo projects, Neal and Goodman write. The researchers say that condo development requires a sponsor to be able to sell the units quickly to a buyer with cash or who obtains financing. However, few owner-occupants, particularly in affordable buildings, are able to purchase the unit with cash. The uncertainty poses a concern for sponsors.
Further, “because of the higher risk associated with condo development, the builder pays a higher rate to finance the condo construction than would be the case on a rental unit, and the lender demands a higher return for the higher risk,” the researchers say. “These federal financing constraints and local defect laws make it far riskier for multifamily developers to build rental housing than for-sale construction and have limited the construction of condos and co-ops.”