For Carl Dranoff, founder and CEO of Philadelphia-based Dranoff Properties, the original plans to develop One Riverside as a luxury, for-rent apartment building made perfect sense. With rents doing nothing but going up since 2009, building a 147-unit, for-rent high-rise in a bull’s-eye location along the Schuylkill River seemed a no-brainer.

Courtesy Dranoff Properties
Originally planned as a luxury rental, One Riverside in Philadelphia has been recast as condos to position the high-rise at what its developer, Dranoff Properties, envisions as the forefront of a condo-market comeback.

But then, 10 Rittenhouse Square happened.

You remember 10 Rittenhouse Square. That was the $300 million Philadelphia condo story that couldn’t stop getting worse.

First, there was the nearly two-and-a-half-year delay as ARCWheeler, the project’s original developer, battled legal hurdles, adding $100 million to its costs. That pushed 10 Rittenhouse’s opening from early 2007, when the project might have had a selling chance, to November 2009. By that time, the climate for condos in Philadelphia had become chillier than the night Washington crossed the Delaware. Initial sales were tepid.

Then, just as the development was getting out of bed in 2010, ARCWheeler partner Harold Wheeler died. By June of that year, the venture’s mezzanine lender, Delaware Valley Real Estate Investment Fund, took over as the developer. Soon after, 10 Rittenhouse’s senior lender, iStar Financial, started foreclosure proceedings. By the end of the year, the new developer filed for bankruptcy protection, just another casualty of the global economic meltdown.

“It had become a very stigmatized project,” Dranoff says. “People were shying away from the building. Brokers wouldn’t bring their clients there.”

But that began to change when Dranoff, who started his career in 1974 developing townhomes and has weathered five major downturns in the real estate market, was appointed receiver of the property in June 2011. With a careful marketing makeover headed by vice president Marianne Harris, and some rethinking of pricing and design (lower units had been priced higher than the ones above them, and views had been squandered in bedrooms instead of opened up in living areas), 10 Rittenhouse Square began to show life again.

In 2011, 16 units sold at an average price of $721 per square foot. By 2012, momentum had tripled, with 49 units moving at $755 a square foot. As 2013 unfolded, and the larger units were brought to market, 27 more sales came in, at $841 a square foot.

Dranoff ticks off the rising sales figures with the familiarity of a grandparent reciting the grandkids’ birthdays. Then he beams over his story’s kicker.

“In 2014, we had just 14 remaining units to sell,” he says. “And for those, we got $1,082 per square foot.”

That translates into a 50 percent per-foot price increase in three years.

Suddenly, the decision to build another luxury for-rent community—One Riverside—in one of Philadelphia’s premier locations didn’t seem like a no-brainer anymore. “We could have sold 10 Rittenhouse twice over if we had had more product to sell,” Dranoff says.

Which is why Dranoff made an about-face and announced in September 2014 that One Riverside would go up as condos instead. Now, the $100 million development will debut as 88 for-sale condos, with prices ranging from $700,000 to $4 million. Ground-breaking is slated for early 2015.

“We would not have been the only luxury apartment building in the marketplace,” says Dranoff. “But by switching One Riverside to a condominium, we could really be the first mover and be at the very front of a trend, instead of being a follower.”

Gauging the Threat
Dranoff’s Philadelphia story belies murmurings in the multifamily market that have been whispered in recent months. Namely, after being shot in the head during the credit crunch and left for dead after the mortgage meltdown, condos seem to be making a comeback. While nobody’s ready to condo like it’s 2005, in markets across the country, for-sale multifamily has a new appeal.

Aside from the so-called gateway cities of New York and Miami, where condo markets are almost always bolstered by foreign investors, markets such as Boston; Philadelphia; Washington, D.C.; Atlanta; Austin, Texas; Chicago; and Northern and Southern California are also starting to see a reawakening of condo sales and starts.

Indeed, according to the National Association of Realtors, the supply of existing condos dropped from 9.7 months in 2011 to 4.7 months in 2013 and this year averaged 5.2 months through October. Meanwhile, the for-sale starts component of the National Association of Home Builders’ Multifamily Production Index rose from just 9 in the third quarter of 2008 to 50 in the third quarter of 2014 (see Chart 1, below). (The index for all unit types rose to 54 during the same period.)

“Condos are back, at least in selected markets,” says Jordan Ray, managing director of the debt and equity financing group at New York City–based Mission Capital Advisors. “You’re seeing it in markets with strong job growth and increasing home prices, so I wouldn’t be surprised if you started seeing condominiums in Los Angeles or similar markets. But we’re not jumping at the opportunity to raise capital for ground-up condo deals in Dubuque, Iowa.”

The reasons for the trend are obvious: As rents continue to rise, owning makes more sense on a relative basis; and, less apparent: Baby Boomers who have finally shooed away their boomerang kids want to own without the hassle of maintenance. That’s the case with One Riverside in Philadelphia. But views on how this emerging trend will affect for-rent apartment operators, and what they should do about it, vary almost as much as the markets themselves. Here’s a market-by-market breakdown of what’s happening where.

New York and Miami Rule
When it comes to condos, no two markets dominate more than New York and Miami. Many factors contribute to their stature, but the two metros could also serve as harbingers for what’s to come elsewhere as the cycle matures.

For instance, both cities have always attracted a disparate amount of foreign capital from overseas investors looking for a safe place to park their cash. That trend continues today, with many of those buyers coming in at 100 percent cash, especially as one climbs the luxury ladder, say $2 million or more. And those units could offer competition for high-end rental properties, especially since foreign buyers often rent out their units while they’re away.

But for the rest of the resident pool—those buyers or renters who need a place to live—the algebra of the rental boom has changed the equation. Namely, especially in New York, rents have gotten so high that buying might be the only logical option left.

“If you’re talking about a two-bedroom in a doorman building in Manhattan, you’re going to be paying $6,000 to $7,000 a month in rent,” says Harold J. Valestin of brokerage firm Nest Seekers International in New York. “When you apply, they want to see you’re making 40 times the rent, so at least $240,000 a year. But when you’re making that much money, you need all the write-offs you can get. In that case, renting just doesn’t make sense anymore.”

Valestin says the same resident could qualify for a $1 million to $2.5 million mortgage—in which case, buying becomes the obvious choice, as long as they can come up with a 10 percent down payment, or 5 percent in the outer boroughs, which are also picking up steam.

“Locations are moving farther out from the core of the city,” says John Cetra, founding principal of architectural firm CetraRuddy in Manhattan. “We’re seeing activity bubble up in Queens and Brooklyn as well as in New Jersey’s Hudson County, mainly in Jersey City, Hoboken, and others. In Manhattan, the Upper East Side and Midtown, two previous sleeper locations, are filled now with activity.”

If lending terms continue to ease, buying could make more and more sense in this market. But renting will still be a mandatory choice for those who can’t qualify or who remain cash poor.

In Miami, the story’s the same, but different. The differential between for-sale and rental units at the moment comes down to land prices, which have gone through the roof.

“The land market in Miami is on fire,” says Anthony M. Graziano, senior managing director at locally based Integra Realty Resources. “Land prices have doubled and, on prime sites, tripled or quadrupled. It makes new apartment development in the urban core and on the beaches completely infeasible.”

In Miami, much of the financing for condo sales has moved toward the so-called Latin American model, where buyers put in 30 percent or more up front and ante up more at various intervals during construction. By the time they close, they’ve already put down 50, 60, or 70 percent. This model has allowed many of these projects to get built, even if traditional financing has still been gun-shy to jump back into the condo game.

“Lending is a lot different [today],” says Kevin Grossfeld, a partner in the commercial and real estate finance transactions practice at law firm Arnstein & Lehr in Miami. “The down payment is a lot different. The amount of equity is a lot different. It’s a lot tougher now than it was back then, so buyers are more committed.”

Peggy Fucci, president and CEO of Fort Lauderdale, Fla.–based brokerage firm OneWorld Properties, says those factors translate into a fundamentally healthier market today than in years past. “Our market is healthy mainly because of the amount of cash buyers,” Fucci says. “They’ve absorbed our standing inventory and are now taking down our pre-construction inventory. I think we have several years of a healthy condo market with steady appreciation ahead of us.”

But parking all that cash also means those buyers will be looking to recoup their investment upon completion.

“A large majority of the units under construction now will likely be rented upon completion,” Graziano says. “That’s going to put additional shadow inventory on the market in 2015 through 2017. That means the 8 to 12 percent rent growth we’ve been seeing will likely normalize back to 4 to 6 percent, which will ultimately benefit tenants.”

Condos for the Rest of Us
For the rest of the country, the forces fueling today’s condo comeuppance are derived from the new and emerging supply of for-rent apartments, which has been spurred by a flood of capital into the sector, coupled with a dearth of for-sale options.

That certainly was the motivating factor behind his decision in Philadelphia for Dranoff, who sees his city as more of a leading indicator than many others might.

“In Philadelphia, I’d say you’ve got all homegrown buyers,” Dranoff says. “I think we’re actually more of a barometer of things to come. If I were a multifamily operator right now in some of the other markets you mentioned, I think I would have a decision to make.”

For instance, in Washington, D.C., where a glut of for-rent apartments has led to concessions and talk of oversupply for the first time in five years, a robust condo pipeline is starting to emerge to fill the gap between high Class A rental options and even higher single-family home prices. That makes sense, since 14,840 newly built apartments came on line in the D.C. area in 2014, an increase of 86 percent from 2013, according to apartment-market research firm Axiometrics.

Looped In
The numbers are more subdued, but follow the same trend line, in downtown Chicago, where Appraisal Research Counselors projects 3,119 new for-rent apartments coming on line in 2015, with as many as 6,400 following in 2016. Meanwhile, for-sale condo inventory is the lowest it’s been since the Chicago-based firm started tracking it, in 1997: Just 133 units were added from 2010 through mid-2014. 

That means people who want to buy have less to choose from.

“Time is running out for existing inventory. The current sales pace and number of existing unsold condos suggest there is less than one year of inventory remaining in the market,” says David Wolf, president of Chicago-based Related Realty. He points to resurgent demand and dwindling supply at the firm’s South Loop Luxury development, a collection of 500 condos across three towers next to Chicago’s Museum Campus. While the development had experienced stalls in the past, it is now 80 percent sold.

Jeff Elowe, CEO of Chicago-based Laramar Group, owner and operator of more than 30,000 apartments, says the market’s for-sale offerings have experienced a perfect, positive storm. “The condo sector in Chicago is benefitting from a positive trifecta of low rates, increased incomes, and a current lack of supply,” Elowe says. “The trend [of increased sales] removes supply from the inventory, which is generally positive.”

But Chicago is still two to three years out from any large-scale new-construction projects delivering, with an influx of small, three- and six-flat projects driving any new supply today. That means, for residents in this market, a lack of choice may make renting a necessity, and rents should stay high.

In Atlanta, demand for and a lack of supply of for-sale units are finally coming together. “We’ve really had no new-construction supply in the last seven years, and that’s a key driver,” says Dillon Baynes, managing partner of locally based developer Columbia Ventures. “The buyers are appearing at numerous price points—first-home, move-up, and luxury. Some have just healed from the dark days.”

Baynes says the Atlanta condo market is just “sitting up in bed” from those dark days, and one-off, small developments are the norm, especially in the midtown corridor. But while there’s demand at all price points, he doubts whether supply will target the lower end of that range. The reason? Again, it comes down to land.

“In contrast to earlier cycles, new construction is highly unlikely to target a midmarket, first-time home buyer, due to the cost of land and the cost of construction, which are, ironically, both a result of new-construction apartments,” Baynes says. “The target markets are upper middle and upper income. Banks and finance companies are interested in the jumbo market.”

The Talk of Texas
In Austin, Texas, the first signs of converters are starting to pop up. “I wouldn’t say it’s widespread, but you’re starting to hear talk of conversions in Texas,” says Mission Capital’s Ray. “There are a lot of Class A multis there and a lot of demand in places like Austin and the capital corridor. So that’s something to keep in mind.”

And yet, when it comes to conversions to meet the new for-sale demand that’s cropping up today, many of this generation’s apartment communities won’t be as readily convertible as those of years past. With the advent of micro units, for example, many new rental buildings have been packed as densely as possible—not a big selling point for condo shoppers.

However the condo trend shakes out in each of these markets, operators within them say it’s real and worth keeping an eye on. Especially from the perspective of what’s happening with for-rent supply at the moment.

“The tap on apartment financing is wide open right now. If you’re a developer who wants to develop for-rent apartments, you can certainly do that—the cash is available,” Dranoff says. “But, whenever you have an overexuberance of capital in a particular sector, that usually leads to a correction.

“I don’t think I’d necessarily use the term ‘bubble,’ but we might be headed for a soft landing at some point.”