Orlando, Fla.—In August 2008, 40 people who had signed pre-sale contracts at the Paramount on Lake Eola, a new high-rise condo tower here, unsuccessfully sued to try to get their deposits back, according to local news reports.
With lawsuits, auctions, and foreclosures now commonplace, chaos in the condominium market here is sowing confusion throughout the local real estate business.
The shadow market
Apartment owners are forced to compete with what they call a shadow market of unsold or speculator-owned luxury condominiums offered for rent or for sale at cut-rate prices.
At least 11 condo conversion projects totaling more than 1,300 unsold condos switched back to rental apartments over the six-month period that ended in October, according to local research firm Charles Wayne Consulting.
Brokers at CB Richard Ellis also have completed at least six sales of groups of units at fractured condominium projects, many of which will be put out to rent.
These condos put out to rent are in addition to the thousands of conventional apartments that opened in 2008. Developers were expected to create 2,980 new conventional rental apartments in Orlando last year, an increase of 2.6 percent to the local apartment inventory. That's up from 1,417 apartments that came online in 2007, and it's the largest number of new units to come online since 2003, according to Reis, Inc., a New York City-based apartment research firm.
This volume of new rental apartments, both conventional and shadow, would not normally be high for Orlando, where developers opened an average of more than 4,100 new apartments per year over the last 10 years.
But in order to fill those apartments, Orlando has relied on its strong job and population growth. Both are typically more than twice the national average.
However, both job and population growth fell close to zero in 2008 as the housing crash and a national recession battered the local economy, according to Moody's Economy.com.
The rental market was only expected to absorb 620 apartments in 2008. That's a pittance compared to the years before the condo boom and bust, when the rental market regularly absorbed more than 3,000 apartments a year, according to Reis.
Because of slow absorption and growing competition, the percentage of vacant apartments was expected to shoot up to 9 percent by the end of 2008, up from 4.9 percent at the end of 2006.
As vacancies rise, Orlando's typically speedy rent growth is expected to slam to a halt. Average asking rents were expected to move upward by just 1.4 percent for 2008, compared with 5.6 percent rent growth in 2006.
Landlords also are being forced to offer concessions of one to three months of free rent to lure new tenants and keep old ones, pushing the expected growth in effective rents, including the cost of concessions, to less than 1 percent for 2008, compared with 6 percent in 2006.
“It's a concession-heavy market,” says Chip Tatum, director of government affairs for the Orlando Apartment Association.
Future construction
The market will be stressed further as developers are expected to finish 2,568 new rental apartments in 2009 and 1,939 apartments in 2010.
Reis also reports approximately 2,100 condominium and townhouse units still under construction as of early October 2008, excluding the massive Westgate Town Center timeshare project in Kissimmee. Another 5,600 units were moving through the planning and proposal stages, although it's uncertain how many of these will receive financing.
As work progresses on these units, vacancies are expected to rise to 9.7 percent in 2009, falling slightly to 9.5 percent in 2010, according to Reis.
In the long term, experts expect Orlando's economy to revive and absorb the flood of empty condominiums and apartments.
“There has always been a signifi- cant number of people that are drawn to the Orlando area,” says Tatum. “Traditionally, Orlando has always rebounded.”
Developers battle speculators
In the meantime, local multifamily developers continue to battle with the speculators that inflated the market.
Local real estate experts call the Paramount on Lake Eola “a gorgeous building” with excellent amenities. The biggest and newest grocery store downtown, a 30,000-square-foot Publix, just opened on the first floor.
However, despite the building's many attractions, it's a safe bet that many of the 40 unhappy home buyers who sued to regain their deposits never intended to live there.
The 313-unit Paramount opened in the summer of 2008, and by December, it was already easy to find 40 listings with local Realtors by private owners advertising condos at the Paramount for sale or rent.
It's no wonder these speculators wanted their deposits back. Buyers had to put up 15 percent deposits to sign a contract at the Paramount when the building first sold out back in 2005.
Back then, near the height of Orlando's real estate boom, condos regularly sold for much more than the average single-family home price of nearly $300,000. In contrast, 60 of the 107 condos that sold in the area in November 2008 went for less than $80,000, according to the Orlando Regional Realtor Association.
ZOM Development, Paramount's developer, has done well, considering. Unlike downtown condominium developments like 55 West, which was seized by its lender, and the Solaire, which offered 34 condos for auction this summer, ZOM has just five condos left to sell at its building, according to the company's Web site.
VACANCY RATES
Year - Percentage
2002 - 8.9%
2003 - 8.0
2004 - 6.7
2005 - 4.9
2006 - 4.9
2007 - 7.1
2008* - 9.0
2009* - 9.7
2010* - 9.5
* Projected
Source: Reis, Inc.
CONDOMINIUM CONVERSIONS
Year - Number
2003 - 514
2004 - 3,235
2005 - 18,220
2006 - 11,027
Total - 32,996
Source: Reis, Inc.
