Austin Downtown: Highrise Apartments Vs. Condos

[Solutioneur]

Throughout many of the Forums there is a great deal of speculation and misinformation about Downtown residential, especially pertaining to highrise apartments and condominiums. This effort is intended to shed some light on the economic realities of highrise development, including hard construction costs, land, design, interest, sales costs, and development schedules.

Both apartment projects (based on rental rates) and condominium projects (based on prices) have dramatically reduced the size and quality of their projects, while at the same time raising their rates/prices. During the last 10 years developers have dramatically reduced the size, quality and finishes of most highrise apartments/condos in order to deliver product at prices the market can absorb. Just ten years ago newly constructed 1-bedroom apartments averaged 900 square feet (SF), today most average 750 SF or less. When measuring costs based on “net residential space” (rentable or sellable) the resulting total development cost is about double the construction cost for condos and 1.5X for apartments.

Downtown Austin highrise construction costs are currently $200-$300 per-square-foot (PSF) depending on the quality of construction, interior finishes and amenities (quality and quantity). The new Skyhouse ($200 PSF) is at the lower end and W or Austonian ($300 PSF) are at the higher end. This is very apparent with a simple physical viewing of these projects.

It is helpful to compare condo projects to apartment projects because it helps determine value. Highrise apartments in Austin will have total development costs of $300-$350 PSF and therefore must have rental rates of $3.00 - $3.50 SF/month (Gables, Ashton, Amli). If those same projects wanted to convert to condominiums (for sale) the prices would probably not exceed the same $300-$350 PSF because it is the ability to generate that rental rate that determines their value. Cost of ownership shouldn't be more than the same product available for rent, a rent determined by the market. If developers were to upgrade those rental properties with additional investment, they could likely obtain higher prices.

Historically there has been a significant difference in apartments and condos. Condominiums projects have typically delivered better quality, higher grade finishes, premium appliances/fixtures and more amenities. This is very clear when comparing Skyhouse to the W. Most developers and realtors have not compared different projects and sell more on emotion than actual value. There are Comps, but projects vary so widely, that a 1-bedroom comp means little from project to project. Condo projects would benefit greatly from objective comparison in areas of quality, interior finishes, amenities and other lifestyle factors. Apartments are compared regularly and that transparency helps renters determine if rates are fair or otherwise, condos are not. Highrise condo projects are relatively new and objective comparisons are now becoming necessary. While “the market” greatly influences perceived value, knowing the actual value (based on actual development costs and comparisons) would be very beneficial to potential buyers.

Realtors can be very helpful, but many are tied to specific projects (Listing agreements) and they lose their objectivity - it is endorsement, not factual comparison. Seaholm recently decided to test the waters of converting their apartment project to condominiums and hired a downtown Broker. This broker has promoted the idea that these condominiums are worth (and priced) at $500 SF, but there is apparently no increased investment by the Developer to support those prices. Highrise apartments in downtown Austin have a value of $300-$350 PSF (based on market demand), not $500 PSF. This is a significant difference and will require additional information. If the original apartment design is now upgraded to a new condominium design (more expensive), it will be helpful to see what additional investment the Developer is making to substantiate $500 PSF. The original apartment plans valued those units at $350 PSF ($3.50 SF/Month), not $500 PSF.

Luxury condo units in downtown Austin vary greatly from the low-end Milago ($350 PSF) to the high-end W and Austonian ($600 PSF). Spring and 360 are in the middle ($425 PSF). Those prices are directly related to what the Developer spent to produce them – from quality building materials, to interior finishes to amenities paid for by the Developer – pools, theaters, lobby and other common areas. This does not include any services available, such as a Concierge or valet parking because they are paid by the residents through monthly Home Owner Association fees.

Hopefully, this Forum will help provide additional information to potential renters, buyers and developers in Austin, leading to objective comparisons. I am interested in seeing if others share a similar perspective and can provide additional insights and observations.

[H2O]

Originally Posted by Solutioneur

Throughout many of the Forums there is a great deal of speculation and misinformation about Downtown residential, especially pertaining to highrise apartments and condominiums. This effort is intended to shed some light on the economic realities of highrise development, including hard construction costs, land, design, interest, sales costs, and development schedules.

Both apartment projects (based on rental rates) and condominium projects (based on prices) have dramatically reduced the size and quality of their projects, while at the same time raising their rates/prices. During the last 10 years developers have dramatically reduced the size, quality and finishes of most highrise apartments/condos in order to deliver product at prices the market can absorb. Just ten years ago newly constructed 1-bedroom apartments averaged 900 square feet (SF), today most average 750 SF or less. When measuring costs based on “net residential space” (rentable or sellable) the resulting total development cost is about double the construction cost for condos and 1.5X for apartments.

Downtown Austin highrise construction costs are currently $200-$300 per-square-foot (PSF) depending on the quality of construction, interior finishes and amenities (quality and quantity). The new Skyhouse ($200 PSF) is at the lower end and W or Austonian ($300 PSF) are at the higher end. This is very apparent with a simple physical viewing of these projects.

It is helpful to compare condo projects to apartment projects because it helps determine value. Highrise apartments in Austin will have total development costs of $300-$350 PSF and therefore must have rental rates of $3.00 - $3.50 SF/month (Gables, Ashton, Amli). If those same projects wanted to convert to condominiums (for sale) the prices would probably not exceed the same $300-$350 PSF because it is the ability to generate that rental rate that determines their value. Cost of ownership shouldn't be more than the same product available for rent, a rent determined by the market. If developers were to upgrade those rental properties with additional investment, they could likely obtain higher prices.

Historically there has been a significant difference in apartments and condos. Condominiums projects have typically delivered better quality, higher grade finishes, premium appliances/fixtures and more amenities. This is very clear when comparing Skyhouse to the W. Most developers and realtors have not compared different projects and sell more on emotion than actual value. There are Comps, but projects vary so widely, that a 1-bedroom comp means little from project to project. Condo projects would benefit greatly from objective comparison in areas of quality, interior finishes, amenities and other lifestyle factors. Apartments are compared regularly and that transparency helps renters determine if rates are fair or otherwise, condos are not. Highrise condo projects are relatively new and objective comparisons are now becoming necessary. While “the market” greatly influences perceived value, knowing the actual value (based on actual development costs and comparisons) would be very beneficial to potential buyers.

Realtors can be very helpful, but many are tied to specific projects (Listing agreements) and they lose their objectivity - it is endorsement, not factual comparison. Seaholm recently decided to test the waters of converting their apartment project to condominiums and hired a downtown Broker. This broker has promoted the idea that these condominiums are worth (and priced) at $500 SF, but there is apparently no increased investment by the Developer to support those prices. Highrise apartments in downtown Austin have a value of $300-$350 PSF (based on market demand), not $500 PSF. This is a significant difference and will require additional information. If the original apartment design is now upgraded to a new condominium design (more expensive), it will be helpful to see what additional investment the Developer is making to substantiate $500 PSF. The original apartment plans valued those units at $350 PSF ($3.50 SF/Month), not $500 PSF.

Luxury condo units in downtown Austin vary greatly from the low-end Milago ($350 PSF) to the high-end W and Austonian ($600 PSF). Spring and 360 are in the middle ($425 PSF). Those prices are directly related to what the Developer spent to produce them – from quality building materials, to interior finishes to amenities paid for by the Developer – pools, theaters, lobby and other common areas. This does not include any services available, such as a Concierge or valet parking because they are paid by the residents through monthly Home Owner Association fees.

Hopefully, this Forum will help provide additional information to potential renters, buyers and developers in Austin, leading to objective comparisons. I am interested in seeing if others share a similar perspective and can provide additional insights and observations.

Your math for converting construction cost to monthly rent to sales price per square foot is completely wrong. For one thing, there are 12 months in a year, not 10. Also, you are ignoring the soft costs of construction, marketing, profit, financing, taxes, insurance, etc. You also have to measure returns for rental and condo differently. With condo, the developer has to sell all the original units within a targeted time frame (a year or two) to meet their return objectives, so a simple cash-on-cash analysis is more appropriate. With rental, the returns come over time, by achieving initial lease up within a targeted time frame, and maintaining a good occupancy rate through an extended period of time, usually at least 7 years, so Internal Rate of Return is a more appropriate measure of the return.

[Solutioneur]

Originally Posted by H2O

Your math for converting construction cost to monthly rent to sales price per square foot is completely wrong. For one thing, there are 12 months in a year, not 10. Also, you are ignoring the soft costs of construction, marketing, profit, financing, taxes, insurance, etc. You also have to measure returns for rental and condo differently. With condo, the developer has to sell all the original units within a targeted time frame (a year or two) to meet their return objectives, so a simple cash-on-cash analysis is more appropriate. With rental, the returns come over time, by achieving initial lease up within a targeted time frame, and maintaining a good occupancy rate through an extended period of time, usually at least 7 years, so Internal Rate of Return is a more appropriate measure of the return.

My math is about the monthly costs for a renter or buyer. You seem to be suggesting that people will pay more for a product simply because you call it a Condo instead of an Apartment - that isn't true. As currently designed, the Seaholm Apartment project has a similar value to the apartments next door - The Gables on Town Lake. Those apartments are worth $300-$350 PSF.

Simply changing from rental to sales does not increase the value (fair price) of the SAME product. Monthly costs for the renter or buyer are important in the decision to purchase or rent. If the Seaholm apartments are worth almost twice as much as the apartments right next door - why? The "location" is the same. What else is there? The "elaborate" pool? Gables has one, too.

What makes this product worth almost double that of its twin next door?

[H2O]

Originally Posted by Solutioneur

My math is about the monthly costs for a renter or buyer. You seem to be suggesting that people will pay more for a product simply because you call it a Condo instead of an Apartment - that isn't true. As currently designed, the Seaholm Apartment project has a similar value to the apartments next door - The Gables on Town Lake. Those apartments are worth $300-$350 PSF.

Simply changing from rental to sales does not increase the value (fair price) of the SAME product. Monthly costs for the renter or buyer are important in the decision to purchase or rent. If the Seaholm apartments are worth almost twice as much as the apartments right next door - why? The "location" is the same. What else is there? The "elaborate" pool? Gables has one, too.

What makes this product worth almost double that of its twin next door?

EQUITY (see other post)

[Solutioneur]

Originally Posted by H2O

EQUITY (see other post)

Comparisons to renting versus owning are based on properties of "equivalent value." The value of a property isn't increased because it is for sale instead of for rent. Ownership can lead to building equity, but not if the owner overpays for the property.

Try this calculator from the NYT:

http://www.nytimes.com/interactive/b...ator.html?_r=0

I asked what makes the Seaholm "condos" more valuable than Gables on Townlake apartments? They are (as of now) the same product.

[Solutioneur]

Originally Posted by H2O

EQUITY (see other post)

Equity is included:

Based on the $500 PSF quoted price for Seaholm condos and rents at the similarly designed Gables (next door), it would take 18 years before buying was better than renting. If you purchased the condo and stayed for 6 years and then sold it, renting is much better. It would cost $38,612 less than buying, an average savings of $6,435 each year. This includes everything related to purchasing or renting and is based on a $2,100 rent (increasing 3% a year) and a $350,000 purchase price with 10% down.

If, as Ive suggested, the real value (and price) of the Seaholm Apartments-Condos is $350 PSF, then buying would be better. If you purchased the condo and stayed for 6 years and then sold it, buying is a little better. It would cost $7,165 less than renting, an average savings of $1,194 each year. Buying is actually better than renting after 5 years. That's reasonable, 18 years is not.

You can enter the data here and see the results:

http://www.nytimes.com/interactive/b...ator.html?_r=0

By using this very objective calculator and entering all the relevant data it becomes clear when buying is better than renting - the primary factor is the price. $350 PSF makes sense, $500 PSF does not.

[AusTxDevelopment]

One thing people tend to overlook is that when you convert an apartment to a condo, you don't just scratch out the word "apartment", write in the word "condo" and up the price. There are significant unseen costs. In addition to the obvious finish upgrades, condos are individually taxed units - an apartment building is a single taxable unit. Thanks to the bureaucracy and ridiculous red tape from Travis county and the City of Austin, it is time intensive and very expensive to replat a building into individual units. Also, the termination of interior plumbing, electrical, water, etc. has to be engineered in order to avoid liability issues. Where does the plumbing stop in a purchased unit (the responsibility of the condo owner), and start for the shared services of the condo association? Termination points have to be created so that the condo owners can own their plumbing, electrical, etc. for their unit. That generally creates additional MEP for the building, which is an expensive add-on.

Another factor is that the return on investment to the developer and investors is accelerated for condos. Apartment buildings are held (as an investment) for longer periods so the returns are slower and collected over time. Condos are sold, so the developer/investors only get one shot at a return on each unit. There are different types of investors for each type of product. Investors in condo development tend to be "hot money" investors (build it and sell it immediately), and are taking a bigger risk so they expect better returns on their investments. The truth of the matter is they don't care what the actual cost to build it was, or the value - they care what it's worth to the market and expect that to be a significant mark-up to the cost. Otherwise, why invest? If the market will pay $500 for something that cost $350-$400 psf, they'll take that all day.

Successful condos also have to have a 'pull'- something that makes them unique so people will pay top dollar for them. Seaholm's story is a good pull - historic, redeveloped, mixed use center, Trader Joe's, etc. The true value of a condo is what someone will pay for it, not what it cost to build or what a comparable apartment is valued at. Is that fair? No. Is it a fact? Yes. If you want the price of condos to go down, there needs to be more condos in the market. But investors will only invest in condo development if the price fits their proforma, so if there are a significant number of condos on the market they won't invest to build more. Apartments are a much safer investment vehicle because they pay out over time. That's why so many pension funds invest in apartments. There will always be a demand for apartments. They are cheaper to build and the rental rates they can achieve, even in a glut and especially downtown, still make sense to the developers and investors.

[jngreenlee]

Originally Posted by Solutioneur

http://www.nytimes.com/interactive/b...ator.html?_r=0

By using this very objective calculator and entering all the relevant data ...

That calculator is crap. Try this one instead (from a local Austonian!):
http://michaelbluejay.com/house/rentvsbuy.html

[Solutioneur]

Originally Posted by jngreenlee

That calculator is crap. Try this one instead (from a local Austonian!):
http://michaelbluejay.com/house/rentvsbuy.html

This calculator is very similar. When I entered the data based on the above example, it was basically the same. Seaholm at $500 PSF compared to renting at the Gables (next door) still takes 10 years to beat renting. One could argue some of the assumptions, but it still looks like the price at Seaholm should be closer to $350 PSF.

Ultimately, the market will set the prices and value for this offering. They can determine if it makes sense to pay 2X what it costs to rent.

[Solutioneur]

Originally Posted by AusTxDevelopment

One thing people tend to overlook is that when you convert an apartment to a condo, you don't just scratch out the word "apartment", write in the word "condo" and up the price. There are significant unseen costs. In addition to the obvious finish upgrades, condos are individually taxed units - an apartment building is a single taxable unit. Thanks to the bureaucracy and ridiculous red tape from Travis county and the City of Austin, it is time intensive and very expensive to replat a building into individual units. Also, the termination of interior plumbing, electrical, water, etc. has to be engineered in order to avoid liability issues. Where does the plumbing stop in a purchased unit (the responsibility of the condo owner), and start for the shared services of the condo association? Termination points have to be created so that the condo owners can own their plumbing, electrical, etc. for their unit. That generally creates additional MEP for the building, which is an expensive add-on.

Another factor is that the return on investment to the developer and investors is accelerated for condos. Apartment buildings are held (as an investment) for longer periods so the returns are slower and collected over time. Condos are sold, so the developer/investors only get one shot at a return on each unit. There are different types of investors for each type of product. Investors in condo development tend to be "hot money" investors (build it and sell it immediately), and are taking a bigger risk so they expect better returns on their investments. The truth of the matter is they don't care what the actual cost to build it was, or the value - they care what it's worth to the market and expect that to be a significant mark-up to the cost. Otherwise, why invest? If the market will pay $500 for something that cost $350-$400 psf, they'll take that all day.

Successful condos also have to have a 'pull'- something that makes them unique so people will pay top dollar for them. Seaholm's story is a good pull - historic, redeveloped, mixed use center, Trader Joe's, etc. The true value of a condo is what someone will pay for it, not what it cost to build or what a comparable apartment is valued at. Is that fair? No. Is it a fact? Yes. If you want the price of condos to go down, there needs to be more condos in the market. But investors will only invest in condo development if the price fits their proforma, so if there are a significant number of condos on the market they won't invest to build more. Apartments are a much safer investment vehicle because they pay out over time. That's why so many pension funds invest in apartments. There will always be a demand for apartments. They are cheaper to build and the rental rates they can achieve, even in a glut and especially downtown, still make sense to the developers and investors.

Thank you for this comment. I agree with everything you've suggested and admit that nobody knows what the market will value these units at UNTIL they respond. I'm speaking more about value than price and there are tools for potential buyers to see if there is enough value for them to make a purchase decision.

There is still a great deal of information required from Seaholm before anyone can make a decision. I agree that they will have to increase their investment if this property is now going to be a condo. When the Broker previously tried this tactic with the Monarch there was little to no change in the product and it didn't attract buyers. Seaholm will essentially need to demonstrate they have a better product than the Gables next door. So far we haven't seen that.

[jngreenlee]

Solutioneur, what rates did you use for cost inflation and rent inflation?

[Solutioneur]

Originally Posted by jngreenlee

Solutioneur, what rates did you use for cost inflation and rent inflation?

2% Inflation. 3% Home Price appreciation. 3% Rental Increase.

[GoldenBoot]

Originally Posted by jngreenlee

That calculator is crap. Try this one instead (from a local Austonian!):
http://michaelbluejay.com/house/rentvsbuy.html

We are "Austinites," not Austonians...






This may be too simplistic...but, renting will usually beat out owning the same exact unit. This is because the "investor" gets paid out over time in a lease rather than trying to make his/her margin in one sale.

Please excuse me if this has already been breached...I have not had time to read every single post.

[Solutioneur]

Originally Posted by GoldenBoot

We are "Austinites," not Austonians...


This may be too simplistic...but, renting will usually beat out owning the same exact unit. This is because the "investor" gets paid out over time in a lease rather than trying to make his/her margin in one sale.

Please excuse me if this has already been breached...I have not had time to read every single post.

Exactly. Therefore, buyers should focus on the costs to rent versus own AND the quality of both rentals and for-sale condos. What we've seen in the last 10 years are developers simply calling an apartment a condo, which makes comparisons even more important. Quality has gone down while prices have gone up and this is more than supply and demand, it's the inability of developers to deliver a product that the market can afford. That means $300-$350 PSF, not +$500 PSF.

[atx51278701]

Solutioneur,

A lot of your assumptions are wrong:
- Austonian $/SF: they are selling (not listed) for $800-$1100 per SF
-Gables Park Tower and Gables Park Plaza are two different construction types thus very different costs. I have yet to see the interior of Park Tower but Park Plaza is nicer than The Spring from a finish out stand point. So you're point about apartment finishes being lower end than condo is incorrect.
- Seaholm finishes will be nicer than Shore, 360, Spring. Seaholm will have gas ranges, hardwood floors, just under 10' ceilings, 8' ft solid wood doors. Just to name a few.

[Solutioneur]

Originally Posted by atx51278701

Solutioneur,

A lot of your assumptions are wrong:
- Austonian $/SF: they are selling (not listed) for $800-$1100 per SF
-Gables Park Tower and Gables Park Plaza are two different construction types thus very different costs. I have yet to see the interior of Park Tower but Park Plaza is nicer than The Spring from a finish out stand point. So you're point about apartment finishes being lower end than condo is incorrect.
- Seaholm finishes will be nicer than Shore, 360, Spring. Seaholm will have gas ranges, hardwood floors, just under 10' ceilings, 8' ft solid wood doors. Just to name a few.

We'll see. Seaholm hasn't released any update on design, quality or finishes since they change the name from apartments to condos. Your choice of the word "nicer" is subjective - once Seaholm shares their new design, a comparison will be helpful. Since they seek to sell the units, it will be important to see what the developer invests in the project as apartments or as condos. there is a difference.

[atx51278701]

8' ceilings vs 10' (Spring vs Seaholm) not a subjective version of nicer
electric vs gas range (360 vs Seaholm) not a subjective version of nicer
carpet through out the condo vs hardwood in living areas (360 vs Seaholm) not a subjective version of nicer

Should I keep going....

[Solutioneur]

Originally Posted by atx51278701

8' ceilings vs 10' (Spring vs Seaholm) not a subjective version of nicer
electric vs gas range (360 vs Seaholm) not a subjective version of nicer
carpet through out the condo vs hardwood in living areas (360 vs Seaholm) not a subjective version of nicer

Should I keep going....

You said "Seaholm finishes will be nicer than Shore, 360, Spring."

I think they're going to be rated against each other soon, so please, continue. You might as well include Gables, Skyhouse and Milago, too. We are trying to determine if these apartments are now improved condos and if they are "luxury."

[pato79]

Originally Posted by atx51278701

8' ceilings vs 10' (Spring vs Seaholm) not a subjective version of nicer
electric vs gas range (360 vs Seaholm) not a subjective version of nicer
carpet through out the condo vs hardwood in living areas (360 vs Seaholm) not a subjective version of nicer

Should I keep going....

The 360 gave the owners a choice to upgrade to hardwood floors.

I will agree that the Spring ceiling heights are not as high as I personally would have liked them to be.

What about floor to ceiling windows? What about the quality of the kitchen and bathroom cabinets in the units? I think those will be a bigger factor in determining which condos have better finish outs. I think we got off topic as this was a thread about apartments vs. condos but just curious on your thoughts since you seem to know some about the Seaholm project which I am excited about.

[AusTxDevelopment]

From Saturday's Austin American-Statesman. Since some people can't read the article because of the paywall, I've excerpted some of the interesting bits, below.

Novak: After apartment surge, is tide shifting to condos?

Posted: 12:00 a.m. Saturday, Nov. 16, 2013
http://www.statesman.com/news/busine...-condos/nbrjJ/



Excerpts:

Regarding Seaholm Condos being 100% reserved: “This response has been nothing short of phenomenal,” said John Rosato, principal with Austin-based Southwest Strategies Group and managing partner for Seaholm Power LLC, the team that’s redeveloping Seaholm into a mix of housing, offices, restaurants and stores, which will include downtown’s first Trader Joe’s. “This speaks to the strength of the downtown condo market, and merits of the site itself.”

Rosato said the price points for the units “enables a wide diversity of future owners, and this is further evidenced by the mix of people that have secured reservations. We have attracted everyone from young professionals to empty- nesters.”

Regarding whether the fast market response means the developer underpriced the condos: No, Rosato says. “We attribute the fast market response to three key factors aligning at the same time: tremendous pent-up demand, fantastic location and great marketing. We did a tremendous amount of research to determine competitive rates, and our goal was to come out of the gate right in that sweet spot – and units are priced just below $300,000 up to more than $1 million. We’re pleased with the market response.”

“Seaholm didn’t play any games,” [Kevin] Burns [, Urbanspace] said. “Condos were priced to create excitement and avoid having vacant units for years after completion – which, unfortunately, many other downtown condos have experienced in the past. This approach avoids overhead costs, such as a traditional sales center, and those saving are passed on to buyers. To me, I’d say this strategy means the product was priced just right for serious buyers – and there’s an excess supply of those for well-located downtown condos right now in the market.”

With a smaller average unit size and a slightly lower average price per square foot than the ultra-luxury units that were delivered in the last wave of condo projects downtown — where the entry-level price was $500,000 or above — “it makes it a much more affordable product” and thus draws a larger pool of prospective buyers, [Charles] Heimsath [, Capitol Market Research] said.