Developers pulling out - the beginning of the end, or more of the same?
Last week I received the message below.
I also heard of two other projects that were well under way to break ground soon, but were cancelled by the developer. Is it a sign that the tide is shifting in the real estate market? Quite the opposite in my opinion.
The River grand residence project and failure to move forward is symptomatic of the market we’re in, and is quite the case study for someone who desires to understand the local dynamics.
When it first started, it generated an uproar amongst the Glenwood Springs residents. Another development creating real estate that’s far out of reach for locals, and tearing down a restaurant (“River’s”) that used to be a favorite for many of us. The outrage was widespread in Glenwood, and when the listings were published for the future riverfront townhomes, priced between $1.5m and $2.5m, the project became the perfect punching bag on the internet for a while.
The pricing of these units was going to be a milestone in the Glenwood Springs market. If somebody was going to buy a townhome for $2,5m, what would a house be worth then? In a town where the median price of single family home is around $900k, this development was going to be a game changer. Within a few weeks of their publications, most of homes listed there were under contract.
With such low inventory, the deciding factor for buyers, apart from the desirability of the real estate itself, is the lack of alternatives. In fact, if you are in the market for a new construction luxury townhome, you can be in one of the River grand residence townhomes overlooking the Roaring Fork river, between $1.5m and $2.5m, or you can be in El Jebel for almost $3m, or in Willits for almost $4m. When you look at it this way, it seems like despite the fact that this price range didn’t really seem to find comparable sales in Glenwood, it could actually make sense for a buyer.
That’s why it was surprising to some of us to see the developer pulling out. If buyers were getting under contract to buy them, things seem to be going well and the demand was there. What changed? In his email, the developer mentioned the building costs. But building costs don’t seem to be much higher today than the were last year. Is the market turning, did the developer lose confidence in their ability to sell those homes once built?
First of all, it’s worth noting that this location is expensive to build on. I’ve heard of a need for reinforced foundations because of the poor quality of the soil, and the topography is severe. But the other factor is the price of money. With interest rates at nearly 10% for an investment project, the profit needs to be significant in order to generate a return for the developer and the investors. It was the reason privately quoted by the other developers who have pulled out of projects last week. At today’s interest rate, the numbers don’t add up anymore.
Based on this observation, these are my conclusions:
The demand is still here for higher price point real estate across the valley
The Federal reserve high interest rates policy is actually taking a bite in the economic activity. If not now, in the near future: less projects being started means less employment and economic activity for the next few years.
What does this mean for the next few years on the local real estate market?
Well to me, that’s more of the same. We have all the signs of a high demand, and a supply that keep shrinking with new construction not even worth it for luxury homes. A recipe for higher prices. The fact that these listings for the future townhomes got under contract makes me think that the demand is still here despite the obvious unaffordable character of the townhouses offered on the market. The demand is not local, people from outside of the area are the ones scooping up that inventory. In this way, I don’t see the developers pulling out as a sign of a market slowdown, quite the opposite.
In the meantime, we’ve battled with a lack of inventory for a while now. Typically, new construction is the solution to low inventory. The issue we’ve had for a while is that the price new construction is too high to build affordable housing. The only new construction that would make any sense is the construction of luxury homes. And now, it seems like even for luxury homes pushing the prices quite dramatically, the numbers still don’t add up. Even wealthy buyers aren’t enough for numbers to make sense.
This being said, another question now comes to mind. This developer was able to pull out of the project before breaking ground. Is there going to be distressed inventory coming from developers who are already committed to projects? Unfortunately, it might happen, but I don't see it bringing significant oxygen to this market that’s in desperate need for more inventory. But because the current inventory under construction is made of either luxury spec homes, for the most part in the golf communities, and built to be listed north of $3m, or multi family buildings built to rent (not metered or permitted to be sold separately). None of this is going to bring significant inventory and to put downward pressure on price for regular local folks to be able to buy a home. There also seems to be a fairly deep pool of buyers still for luxury spec homes. I’d be very surprised if we see distressed sale of this type of real estate.
As a conclusion, I’d say that what we are seeing is more of the same: no new inventory, affordability getting worse… And now even luxury buyers willing to spend money on a townhome in Glenwood are priced out by the current market conditions dictated by the cost of construction and the cost of money.
