Market fundamentals for both apartments and condos have strengthened and will stay positive through next year. This while the single-family market has peaked with starts expected to decline about 10% in the next 18 months.
Apartment absorption has exceeded new supply since last fall. Apartment rents are rising, although they remain very low. As a result, apartment buildings are becoming a more attractive market for investors. Apartment demand will expand at a near average pace with monthly job growth steady at 180,000–200,000 and monthly payments rising quickly for first-time homebuyers.
On the supply side, a sharp increase in condo conversion projects is limiting the growth of available apartments. The current boom in conversions and the huge numbers of apartments bought for conversion, especially in southeast Florida and Nevada, will spur apartment construction.
Condo starts, not including conversions, are expected to be steady to slightly higher into 2007. However, entry-level condo starts will decline as healthy appreciation (7–8% annually) and favor-able mortgage rates keep inexpensive single-family starts rising at a 7% clip.
Starts will increase slightly for condos located in regions of rapid job and income growth. Non-cyclical trends are also boosting condo construction. These include home downsizing by ageing Baby Boomers, the use of condos in lieu of hotel or motel rooms, and the reduction of acreage needs by building vertically in overcrowded urban areas.