Joe Urban | Sam Newberg, Urbanist

Twin Cities Condo Market

Dateline: 1:03 pm July 2, 2008 Filed under:

The last time I surveyed the Twin Cities condo market was first quarter 2006. I updated the data for first Quarter 2008, and as one would expect, the market has worsened considerably since then. Sales have, of course, slowed. Numerous projects have been cancelled, stalled or converted to rental or senior housing. Unsold units on the market are mostly in completed buildings, which is bad news for developers. The good news is the market has self-corrected considerably, and some projects in the best locations continue modest sales.

The condo boom began in the Twin Cities in 2002-2003, when the number of new units per year rose from an average of fewer than 100 to over 500. The market peaked the following three years, with 2,136 new units in 2004, 3,377 in 2005 and 3,038 in 2006. Demand declined considerably since, with 1,912 units in 2007 and just 592 forecast for 2008. No doubt even less will come on line in 2009.

Interestingly, new condo units, as a proportion of all housing units permitted in the Twin Cities annually, has increased and remained high. Even as the condo boom began, condo units as an overall precentage of all housing was no more then 3 percent. In 2004 that figure jumped to 10 percent, and even as construction declined in 2006 and 2007, condos rose to nearly 20 percent of all new housing units built. It remains to be seen whether condos will continue to remain in (relatively) high demand as a percentage of all new housing. If they do, it is likely because of sheer lack of demand for single-family housing, which is driven by demographic changes and even rising gas prices.

The market is correcting itself, albeit painfully. In 1st Quarter 2006, the entire market had over 6,200 unsold units actively marketing. In 1st Quarter 2008, that figure had fallen to 4,000, still a considerable number of units. However, it is likely that a large proportion of those units are in projects that are either in unbuilt projects that will simply be cancelled, or in existing buildings that will be converted or repositioned as rental or senior units (indeed, this has already occurred at numerous projects since the tally was completed in early 2008). By 1st Quarter 2009, there will be considerably fewer unsold units on the market.

Sales also vary greatly depending on geogrpahy. Condos are essentially an urban product, as buyers are giving up both indoor square footage and a yard for nearby amenities and conveniences, often within walking distance. Indeed, sales figures have supported this notion since I have begun tracking them. Minneapolis leads the market, primarily due to condo activity in the downtown area, which is full of nearby amenities. Of all condo projects marketing in downtown Minneapolis as of 1st Quarter 2008, two-thirds of the units have sold, although nearly 1,000 remain on the market.

Inner suburbs, particularly those in the Southwest metro (mostly St. Louis Park and Edina), also perform well, both in terms of sheer number of units built and percentage sold (65% in both cases). Outer ring suburbs have fewer condo units overall, but also a lower success rate. Fewer than 50 percent of units currently marketing in the outer ring suburbs have sold, so the theory holds.

Despite current market conditions, the long term prospects for condos and urban housing in general are strong. Arthur C. Nelson, a professor at Virginia Tech, has conducted housing research that indicates long term demand for attached housing, including condos. Nelson’s research compares existing US housing stock in 2003 with forecast demand in 2025. The results indicate that, whereas there will be no more net demand for single-family homes on large lots, we will need 18.5 million more homes on small lots and 17 million more attached housing units, and a large share of them will indeed be condos.

My predictions for the Twin Cities condo market are tough in the short term and improving later. The remainder or 2008 will see additional project cancellations and continued flagging sales as buyers are unable to sell existing homes. New projects marketing will be nonexistent, with just the buildings already under construction coming on line. A trickle of sales and closings will continue at the condos already open, particularly those in the best locations.

I encourage questions, comments and insight from anybody in the Twin Cities housing market. Feel free to contact me.

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