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Washington DC

The Converted

April 5, 2007 | 9:42 am | nytlogo |

Lisa Chamberlain wrote a particularly good article yesterday in the New York Times’ Square Feet column called Condo Conversions Switch Gears to Go Commercial. The story has applications to most metro markets, not just New York.

A few years ago in New York, a common quip was “sooner or later every building is going to be a condo.”

And it seemed like it. Famous hotels, rental buildings, not so famous hotels, office buildings, affordable and middle class housing projects, old lofts and government buildings found a potential new use: luxury condos.

But building permits reached 27,000 and a residential condo glut was forecast. However, the widely cited permit figure is the combination of many forms of housing such as rental and hotel, not withstanding, many of these deals never get done. Still its a big number and no one (self included) maintains a publicized list of what is coming online.

With herd mentality firmly in control two years ago, everyone was talking about how bad the glut was in Miami and that New York was next. Sellers looking to cash out, threw their apartments on the market to see what they could get. Buyers became renters or could not get deep discounts in their negotiations.

The slow down in demand caused the residential apartment inventory to nearly double from 2004 to 2006.

Then a funny thing happened in New York last year, that didn’t seem to happen in the same scale as in markets like Washington DC, San Diego, Miami, Las Vegas, Pheonix and others. Developers of new conversions adapted to new uses in mid-renovation from condo to hotel, extended stay, offices and rentals. Our commercial advisory firm Miller Cicero began to see the tide turn in development sites and condo was not always the obvious choice anymore. Developers were seeing the market and were able to adapt.

Still, the number of condo units coming online remains a concern. The law of supply and demand seems to be working here so far, but why?

It’s the economy.

The office market has exploded in New York. For example, I fought for a 10 year deal with my office lease when vacancies were high and rents were depressed. My broker tells me the market rate on my office rent is up about 75% in 3 years since I signed the deal. In the past two years tourism has continued to rise causing virtually 100% occupancy during holidays and conventions, drawing concerns from the city government of damaging tourism. Rising employment has created demand for office space, and kept the demand up for housing while the weak dollar has kept tourism at record levels.

And most importantly, individual speculators (aka flippers) never became a force here so residential development was not based on musical chairs (aka proverbial ponzi schemes).

Everyone seems to be scratching their heads these days, wondering why the demand for owner occupied housing is rising right now, in contrast to the national market.

Yet the core footing of the real estate market, in fact, seems to be real. I think that buyers in this market, as evidenced by the record jump in activity in the first quarter, have been converted.


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Northern Virginia Is For Lovers (And Real Estate?): January 2007

February 21, 2007 | 9:26 am |

[This market recap on the Northern Virginia from MLS data is compiled by Butch Hicks, a former president of RAC (Relocation Appraisers and Consultants) (that I am a member of), a friend and an experienced appraiser in Northern Virginia. The results of his efforts are published on his web site as a series of charts, each with a brief summary. (As a kid growing up in the Washington DC area, I was bombarded by "Virginia is for Lovers" tourism ads, and of course "DC is for US, by George")] -Jonathan Miller


View the charts [BHicks.com]

Here’s a sample of the charts available online.




  • The median price paid at the end of January, 2007, 2006 was $433,153, a decrease of 1.6% from the same time period 12 months earlier.
  • At the end of January, 2007, inventory was 5.02 months, an increase of 175% from one year earlier.


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Condo Data Used To Forecast The Entire Housing Market Analyze Condos

January 26, 2007 | 1:34 pm |

Yesterday I found myself on CNBC Morning Call debating with Adam Koval, former stock analyst and founder of the San Francisco real estate site Socketsite whether analyzing the condo market as representative of the overall housing market was a better indicator. There was no real time to make our points because Natural Gas Inventories numbers were being released.

Adam is a sharp guy who came up with this theory that got coverage in CNN/Money and was picked up by CNBC.

His stock market background probably explains his reason for taking the investor/condo approach to analyzing the real estate market. He believes that it is all about the investors because they are not emotional and condos are more homogeneous so they can be more readily compared.

So investors and condos lead the way because its easier to measure appreciation?

I think there is a great need by investors, consumers, real estate professionals, the media and others to strip away all information on real estate markets until you get to the:

Magic Real Estate Market Indicator

You know, that one indicator that makes us feel warm and fuzzy inside knowing that we have the inside answer. Well, guess what? It doesn’t exist.

Investor Angle

The argument goes that investors research and interpret at the market clinically, without the emotional reactions that consumers and are simply looking for the return on investment (that makes so such sense or we would have never experienced market corrections in stock markets). Now imagine using the stock market indexes to estimate the value of your specific stock. i.e. the Dow Jones Industrial Average to price your Microsoft shares. It would make no sense.

Since I analyze a real estate market based in an international financial market hub (NYC) there is a great deal of efficiency because that is the orientation of many.

Here’s a few reasons why the stock market/investor activity doesn’t correlate to the real estate market:

  • Stocks operate in highly efficient markets, trading in thousands of shares per day
  • Transaction costs are low
  • Investors can move in and out of a position in seconds
  • Investors in the housing boom were carpenters and nurses rather than institutions.

Condo Angle

That being said, lets now look at investors and condos.

Individual real estate investors are more likely to purchase condos rather than single family houses. They are usually looking at cash flow after rental or appreciation. This is how publications like The Economist do it. They look at the relationship of rents to housing prices, assuming that investors are a major force in the market. But what if they are not?

Here are some basic problems with condos as an indicator:

  • Condos are not only purchased by investors. They are purchased as a primary residences as well so they have the same irrational influences the single family housing market.
  • Investor buying patterns and motivations are different than someone purchasing for owner occupancy.
  • Investors represent a minority of home purchases (In the investor peak year of 2005, NAR reports 28% of purchases were by investors). How can 28% speak for 72%?
  • Condos are a different price point than houses in most markets and they are usually less. That is a different demographic with different motivations for purchases.
  • Condo developments generally have different locations than single family houses. They are often in urban settings or other higher density areas where individual houses would not be viable. They enable to maximize the value of sites that are in locations less marketable to single family houses such as adjacent to commuter train stations.
  • Data for condos shouldn’t be any more difficult to get than houses are if they are both considered real property.
  • Condos are not necessarily homogenous and easy to compare. I think argument also sees condos as mainly newly developed but they have been around for a long time. True, the value differences between units in the same line are less likely to vary much in value within a few years after development. But what about older condos? Do we exclude them as well? If we exclude them we have more narrowly defined the market and therefore, less usable for other markets.
  • Condo markets in the major metro areas that reported highly unusual investor activity such as Washington DC, Miami, Las Vegas and San Diego are not representative of the overall markets in their areas. For example, an investor that can’t make their payments because they can’t rent out their unit for as much as the mortgage payment are going to work harder to protect their primary residence.

In Adam’s defense, I think he was trying isolate appreciation in order to see how the market is doing.

In other words, a new condo will like not be upgraded within a few years after purchase. So the change in value over this period would be attributable to appreciation, not some sort of improvement made to the property.

  • Passive appreciation – appreciation that comes from changes in market conditions
  • Active appreciation – appreciation that comes from improvements to the property

Also it is unlikely that the size of the unit would change (unless combined with an adjacent unit), unlike a new addition added to a house. This is a valid concept, but as an indicator, it can only apply to the market being measured, because any other similarities are merely coincidence.


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Northern Virginia Is For Lovers (And Real Estate?): December 2006

January 15, 2007 | 12:03 am |

[This market recap on the Northern Virginia from MLS data is compiled by Butch Hicks, a former president of RAC (Relocation Appraisers and Consultants) (that I am a member of), a friend and an experienced appraiser in Northern Virginia. The results of his efforts are published on his web site as a series of charts, each with a brief summary. (As a kid growing up in the Washington DC area, I was bombarded by "Virginia is for Lovers" tourism ads, and of course "DC is for US, by George")] -Jonathan Miller


View the charts [BHicks.com]

Here’s a sample of the charts available online.




  • The median price paid at the end of December 2006 was $433,939, a decrease of 6.6% from the same time period 12 months earlier.
  • At the end of December 2006, inventory was 5.3 months, an increase of 78% from one year earlier.


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Housing Cycles Everywhere You Look

May 30, 2006 | 12:01 am |

In Kenneth R. Harney’s always insightful column, The Nation’s Housing, he discusses the types of housing markets in Market Action Slips Away From Coasts [WaPo].

First American Real Estate Solutions [note: I have had terrible experiences with their customer service, but their research is pretty good.] has completed an extensive analysis of 100 major metro areas to understand more about housing price cycles. There are 3 major categories:

  • Linear markets where booms and busts almost never occur.[Columbus, Ohio; Indianapolis; Houston; San Antonio; Memphis; Atlanta; Cincinnati; Des Moines; and Louisville.]

  • Cyclic markets are the shooting stars of housing booms. Generally they are along the East and West coasts, where household incomes are higher and land for new construction is in short supply. [California south of the San Francisco Bay, Florida, Washington DC, Baltimore, New York and much of New England.]

  • Hybrid markets have linear, slow-growth characteristics for periods, followed by periods of moderate cyclic-style appreciation. [Chicago, Seattle, Minneapolis-St. Paul, Detroit and Phoenix.]

By understanding the type of housing market a property owner is currently in, they may be able to make better choices when it comes to housing. For market-timer wannabes, it sure seems like you don’t want to be in the midwest because there are no cycles, however, thats where there has been much discussion about the location of the next housing boom as the coasts cool off.

However, housing is a lagging indicator, not a leading indicator, and rising mortgage rates have eliminated much of the flexibility for real estate investment. If the midwest is currently attractive to investors who want to make returns on housing, then lets be clear what type of investors we are speaking about: institutional investors with deep pockets, not individual investors, who days are numbered.



[In The Media] CNBC Squawk Box Clip for 5-2-06

May 3, 2006 | 12:01 am | Public |

Here is the clip of my appearance on Tuesday’s morning edition of Squawk Box on CNBC.

I spoke of market conditions in the northeast (ok – I know Washington DC is mid-Atlantic, but they asked for it).

Fun stuff.


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Late For The Party

April 27, 2006 | 7:20 am | wsjlogo |

James Hagerty in his article Housing Strength Shifts to New Markets [WSJ] notes:

As home sales cool on the East and West coasts, some cities that missed out on the real-estate boom are becoming the strongest markets.

Metropolitan areas whose housing markets look less healthy, at least in the short term, include Boston, Los Angeles, Miami, Minneapolis, New York, Philadelphia and San Francisco. All of them have growing inventories of homes and relatively weak job growth. As a result, houses that a year or two ago might have sold in hours now are languishing on the market for months, and some sellers are cutting prices.

Houston, Dallas and Atlanta appear to be postioned for future appreciation because of strong employment prospects and relatively tight inventory. These markets have been largely dormant while other metro areas are cooling, especially on the east and west coasts. New Jersey is expected to remain flat, per a NJ appraiser that I respect, but at the upper end, there is a 3-year supply.

The WSJ study says that Boston is among the worst right now. Another study I posted a few days ago indicated that Washington DC was also marginal because of the rampant speculation. On a trip to San Diego a few months ago, I was struck by how many condo sales offices there were downtown, yet their employment situation is strong which may mitigate some of the problems.

I thought it was especially interesting that a realtor in Miami indicated that the surge in inventory (up 236% over the past year) would be absorbed by population growth within 12-18 months. Thats gotta be something in the order of 10,000 to 15,000 condo sales sold over this period. I find that very hard to believe.

Actually, now that I think of it, this study seemed to single out a few cities as being promising, but most of the cities on the list seem to have problems and the premise of the story isn’t really proved.


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Washington DC Real Estate Speculators: 26 Square Miles Surrounded By Reality

April 24, 2006 | 12:01 am |

The title of this post was previously reserved for politicians but now it seems more appropriate to real estate investors. Apparently investor speculation in DC [WaPo] was more rampant than we gave fair credit for. [This was a front page WaPo story on Saturday]

Not just condominiums, but also townhouses and single-family houses, were snapped up by investors using no-money-down financing and non-traditional loans. They helped send prices soaring at unprecedented rates.

The investor element of the housing boom [cnbc] appears to be the segment that is suffering right now.

In Florida, the oversupply of rental to condo conversions are causing the landlords to have second thoughts [SoFl Bus]. Known as the “condo conversion reversion,” many condos are reverting back to rentals.

Is this unexpected? Not really. You can’t pile on thousands and thousand of units in a market and expect prices to rise indefinitely.

Ever made Hollandaise sauce? You can keep adding butter but risk having the emulsion break and being forced to start over. [sorry, will try to keep the cooking analogies to a minimum -ed]

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Watergate Hotel Conversion To Condo, But No Break-in Necessary

February 3, 2006 | 12:01 am |

One of the casualties of the housing boom has been hotel capacity in major metropolitan areas as hotel owners compare the returns of hotel uses versus condominium conversion. In the article, Putting out The Ritz: When hotels go condo Hoteliers in New York are converting grand old inns to condos. Now Washington has joined the trend, and more will follow suit [CNN/Money]. this phenomenon is discussed.

The trend has, so far, been mostly confined to New York City, where the world famous Plaza, the recently remodeled Drake, the Mark and the Stanhope will soon undergo a condo conversion.

For cities like New York, the loss of rooms can translate into lost revenue for the city. About 1,100 rooms per year are currently being constructed in Manhattan yet more than that are being converted to condo for a net loss in inventory. Tourists bring needed revenue to the city and need to be adequate to attract large conventions. Its a problem with no obvious solution unless the housing market cools, thereby slowing these conversions.

There is already a glut of condos on the market in Washington DC [CNN/Money]. Washington is starting to see this activity on the relative scale that New York has been seeing this for several years. A renowned landmark in DC is catching a lot of attention for this very reason.

_Conversion or “Break-in” [sorry] of Watergate_

“Watergate” is a general term used to describe a complex web of political scandals between 1972 and 1974. The word specifically refers to the Watergate Hotel in Washington D.C.

The phrase eventually morphed into a suffix for scandal “####-gate.”

“On June 17, 1972, police apprehended five men attempting to break into and wiretap Democratic party offices. With two other accomplices they were tried and convicted in Jan., 1973. All seven men were either directly or indirectly employees of President Nixon’s reelection committee, and many persons, including the trial judge, John J. Sirica, suspected a conspiracy involving higher-echelon government officials. In March, James McCord, one of the convicted burglars, wrote a letter to Sirica charging a massive coverup of the burglary. His letter transformed the affair into a political scandal of unprecedented magnitude”[InfoPlease].

But did you know that a portion of the Watergate complex was comprised of co-op residences? Now the hotel portion is being converted to condominium because it is up to 3x more valuable to its owners.

In 2003 the co-op portion of the complex wanted the hotel owners to convert the hotel to co-op [WE Guide] instead of condos. Now in 2005 [WW], the conversion to condo is actually taking place. Actually, I always thought that the complex was on leased land but that would make condo conversion difficult or unlikely since the condos could not be owned in fee simple …but this is to be saved for a rainy day discussion.



Whole Foods Becomes A Must Have For Emerging Neighborhoods To Be On The Map

January 17, 2006 | 12:01 am | curbed |

Lisa Chamberlain, in her article A Destination for Serious Eating [NYT] expounds “Although it has always had a few well-known specialty stores, downtown Manhattan has seemingly overnight become a mecca for food shopping.” There are a variety of specialty food stores, a niche seemingly ignored by the chain supermarkets, that have been moving into metropolitan markets, namely the emerging downtown areas.

Four years after entering Manhattan, Whole Foods, the Austin based specialty food chain, has become the stamp of authenticity, a happening, a sign that a residential neighborhood or new development “has arrived” [REJ]. Stores in Chelsea and Union Square made that statement. The new Time Warner development at Columbus Circle gave credibility to one of the few “malls” in the borough as an anchor tenant. Rumors of new locations provoke speculation [Curbed].

The same sort of public interest is seen in Miami, Seattle, San Francisco, Los Angeles, Chicago, Washington DC [DC Bubble] and others. In fact, its become part of the grocer vocabulary [Centerstage] implying a category or type of foods.

Why?

Over the past 7 years, the housing boom and aging baby boomers have helped revitalize many downtown urban areas [Matrix] throughout the US. Many US retailers have stayed away from these markets because the required space was large and not especially cost effective. However, now that the demographics and economics are changing, grocery chains are starting to get the importance of this phenomenon and are following suit.

[Webmaster's note: No, I don't own stock in Whole Foods, but I have purchased dried figs on occasion.]