New condo builds fall to lowest level in decades

While new home construction has soared over the past 12 months, condos are being left behind, says a new report from the Urban Institute.

It found that the share of condo units being built for sale in the last year declined to less than 5.4% of the overall construction market, its lowest level in almost 50 years.

Urban Institute researchers Michael Neal and Laurie Goodman said the trend persisted even though demographic patterns suggest a greater need for condos.

“The shortage [of new condos] is adding to concerns about the lack of affordability in the home buying market,” the researchers said.

Market analysts have long associated condos with a path to homeownership for first-time homebuyers. Buying a condo is usually more affordable, meaning it’s an excellent way to build a credit rating and acquire equity that can be helpful when trying to buy a home for the first time

Condos are also usually more cost-effective for those who don’t want to rent.

The Urban Institute’s report noted that multifamily condo construction has been declining ever since the Great Recession of the 2000s. It said production has been low partly due to financing constraints for sponsors and builders. In addition, the rise of defect litigation has led to an increase in the cost of insurance for condo buildings. It also increases the level of risk with such developments, Neal and Goodman said.

The researchers explained that condo developments generally need a sponsor to be able to sell units quickly to buyers with cash, so they can fund their builds. However, Neal and Goodman say that few owner-occupants these days are able to purchase units with cash, leading to uncertainty for sponsors.

In addition, the report notes that builders have to pay higher rates to finance condo construction than is the case with homes, or condos for rent. That’s because lenders want a higher return for the added risk that comes with condo for sale projects, the researchers said.

“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,” the researchers said.