- The Washington Times - Friday, August 4, 2006

Strong demand for rental housing in the Washington area is making developers who switched their apartment buildings to condominiums during the red-hot real estate market rethink their business strategies.

About 25 percent to 40 percent of the housing units being built as condominiums instead will be sold as apartments in the next 18 months, according to investment brokerage firm Marcus & Millichap. In addition, some apartments that were converted to condos are likely to be switched back to rentals.

“The for-sale housing market began to cool late in 2005 and converters may respond by curtailing activity as 2006 progresses,” a Marcus & Millichap report on the Washington apartment market said.

The report said Washington’s growing population would quickly fill the new apartments despite “a projected increase in new supply” of the rental units.

“The D.C.-area rental market is strong,” said Roger Winston, a Washington real estate lawyer. “To the extent that condo sales continue to remain sluggish, these condo converters have the ability to rent the unsold units until market conditions improve.”

Marcus & Millichap said apartment rents in some parts of the Washington area, such as Dupont Circle, are likely to increase 3 percent this year amid strong demand.

Condo sales also are cooling in other cities, such as San Diego, Phoenix and Las Vegas, as rising interest rates dampen the eagerness of buyers to assume long-term debt.

Rates on a 30-year fixed mortgage averaged 6.63 percent this week, according to housing finance agency Freddie Mac. One year ago, they averaged 5.82 percent.

The cooling market is creating concerns among Washington-area real estate developers who were betting their investments on condos.

“We have clearly entered a period in which the supply of condominium housing exceeds demand, particularly in certain submarkets where significant development has occurred over the last two to three years,” said David DeSantis, vice president of sales and marketing for developer PN Hoffman. “It is not clear at this point how long the oversupply condition will last.”

PN Hoffman has made its reputation by acquiring underutilized properties and redeveloping them as condominiums, often close to transit stations. Examples include the Lofts at Adams Morgan and Tenley Hill condos in Washington and the Edgemoor in Bethesda.

As the supply of condos has grown, PN Hoffman has become “very selective about the projects we choose to undertake,” Mr. DeSantis said.

Jim Abdo, president of Abdo Development, said he would continue with his plans for a nearly $1 billion condominium and retail development near the intersection of New York Avenue NE and Bladensburg Road but is monitoring the housing market.

“Right now we are underwriting the entire New York Avenue development as condos,” said Jim Abdo, president of Abdo Development. “Should market conditions change enough to make apartments a compelling option, we would consider that.”

Other developers do not want to wait for their condominium markets to improve, preferring instead to auction their projects to the highest bidder.

“We’ve noticed a definite surge in calls from developers in the D.C.-Baltimore area who are looking for a way to sell units they thought would be long gone by now,” said Carl Carter, spokesman of Gadsden, Ala.-based J.P. King Auction Co.

“Some tell us they’re being hurt by ongoing costs like interest, taxes, maintenance and marketing costs they didn’t plan for.”

Some of them built condos thinking they would sell promptly but did not plan for a slumping market.

“Now they want to stop the bleeding, recover their investment and move on to the next opportunity, and an auction lets them do that,” Mr. Carter said.

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