Thursday, November 5, 2009

The $440,000 Condo

We certainly are no real estate experts. But we were intrigued by one of assumptions used in the county's recent report on the revenues that might be generated by new downtown Columbia development.

General Growth Properties estimated that the average market value for the condo units in their proposed plan to be $440,000. The fiscal impact committee reviewed this value along with some comparables and concluded it was acceptable. It may be a conservative estimate based on the recently constructed comparables shown below, although location plays a big part in values.

Note that $440,000 is an average. And the average might be conservative, planners say.

It turns out the numbers are based on average sales prices recorded from 2005 through 2009, with 2005 arguably being close to peak of the housing boom. So we took a look at one of the projects cited -- the Carleton House in Reston Town Center, built in 2005 so you would assume lots of sales occurred when the place first opened. For the period, sales prices there averaged $402,750 for a unit based on the average size envisioned by GGP.

A random, totally unscientific Google search produced this listing for the Carleton now: $244,900 for a one-bedroom one-bath condo.

OK, so we looked at another, more recent project: The Palladium in Rockville Town Center, built in 2007. The planners said the average price for a GGP-comparable unit was $510,960.

Our random search: $359,000 for a one-bedroom, one-bath beauty, which is under contract.

On the other hand, there is this listing for a two-bedroom, two-bath condo that's been on the market for more than a month: $599,500.

The bottom line is that trying to figure what anything will fetch over the 30-year life of a project like this, given where we are now, is fraught with difficulty. If the world knew how to accurately price real estate, we probably wouldn't be in the fix we're in.

One thing is for sure: GGP is basing its economics on those numbers. And the county, for now, is going along.


hecker said...

I haven't read the "Downtown Columbia Fiscal Impact Analysis" document thoroughly, but there were a couple of things I noted in a quick read:

First, the estimated mix of condos includes 29% one-bedroom units, 45% two-bedroom units, and 26% three-bedroom units (see p.50 in the appendix "Market Value and Rental Estimates"). Thus looking at comparables for just one-bedroom units, or even just one- and two-bedroom units, is somewhat misleading.

Taking your Palladium examples and extrapolating: If we assume all one-bedroom units are at $360K (based on the example contract price), all two two-bedroom units at $510K (estimated 15% discount from the example $599K listing price), and all three-bedroom units are at $650K (just guessing here), then given the GGP-estimated mix of units the average price would be just over $500K (0.29 * $360K + 0.45 * $510K + 0.26 * $650K), well above the $440K estimate.

Second, since the $440K estimate is an average (not median) price it could be further increased by the presence of expensive high-end units.

Finally, the $440K estimate is part of the "high market value" scenario. There's a separate "low market value" scenario in which the estimated average price is $352K (20% below the high market value scenario).

So the bottom line is that the estimates used in the analysis seem pretty reasonable to me, and still somewhat conservative even allowing for recent real estate market reverses.

A final note in case someone else comments "But they aren't allowing for marketing appreciation over the next 30 years!": All estimates in the analysis document are in fixed 2009 dollars, so using current price estimates for comparables is in fact the correct thing to do.

jessiex said...

don't you just love, @hecker? i do. so smart, sane and reasonable. ;-)