To consider the boom of the condominium market three years ago is to admit how effortless it was for developers to get caught up in the moment.
Now, industry experts are cautious in merely choosing words to describe the uptick of condo development this year, and are showing that same wariness before breaking ground.
Make no mistake: Bigger condo companies are actively moving on distressed properties they purchased during the recession. But there’s an air of all-inclusive caution in how they asses demand and go forward with renderings.
“The lesson to learn is, you have to have, let’s call it a fire exit,” says Nat Bosa, president of Vancouver-based Bosa Development. “If it doesn’t work, maybe you can make it work as a rental. That’s the fall back.”
With his most recent high-rise in San Francisco and a new project in Seattle eating up the company’s equity, Bosa showed no fear. Similarly, other companies are slowly but surely moving to build condominiums that can double as luxury rental units until the market fully picks up.
“What you need to make sure of is protection on insurance policies, particularly for defect litigation and claims,” says Malcolm Davies, senior vice president at Los Angeles-based George Smith Partners.
Davies says there’s high insurance costs to cover HOA issues and construction defects, higher than they were before, considering the amount of risk being taken. These are all issues developers must consider before deciding to build. And beyond their control, an added consideration is the need for some Tort law changes.
“It’s so easy to just sue for no reason,” he says. “It creates a cost that’s burdened by everybody.”
This was especially true in The Related Group’s case, after running the South Florida market and becoming bruised by the condo bust. Jorge Perez, Related’s president and chairman, says during the boom time, they took 20 percent deposits. As soon as the market dropped, the requests for refunds increased and attorneys were brought into the picture. At least 50 percent of the funds were returned under Florida law, Perez says.
“We were in a position where a lot of buyers didn’t have much stake and wanted it back,” he says.
Now, they’ve restructured payments and required a bigger deposit from potential buyers, up to 50 percent of the cost, and limiting their own use of big, outside loans.
“We had to make sure attorneys know these buyers are real buyers,” he says. “And the money is substantial. If we want to sell, there’s ample time to sell it without them having a gun over our heads saying we have to return the money.”