Experts say lack of condo-building comes down to risk, returns

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Developers aren’t building condos in Utah because of design constraints, equity investment issues and the promise of a lower return for a much higher risk, according to a panel of industry experts and interviews with lenders. 

The answers come after the share of condos fell to a record low in recent years in Utah and nationwide as investors and developers increasingly turned toward building apartments instead.

A recent panel on condos, put together by numerous groups, including the Congress for New Urbanism (CNU) and Urban Land Institute (ULI) Utah chapters, hoped to bring local professionals together to discuss the lack of new condo construction. While many ideas were shared, the truth is a lower return for a much higher risk. 

Condos are defined as stacked units for sale, not townhomes or other attached single-family properties. 

Local experts on the panel point to condos as great options for starter homes. However, the current risk-to-reward ratio is not enough to sway developers and investors to build condos with rental multifamily units. 

Dejan Eskic | Senior Research Fellow
Kem C. Gardner Policy Institute

Dejan Eskic presented many numbers to demonstrate that while Utah housing is becoming more unaffordable, condo construction has reached record lows despite more housing units being built now than ever before.

Condominiums made up around 20 percent of all attached housing stock built in the US until 2005. in 2005, this share rose to 53 percent before dropping to an all-time low of 5 percent in 2022, National Association of Home Builders

“90.5 percent of renters in Utah are priced out of buying a home of any type without assistance,” Eskic said. There is also a lack of new condos being built nationwide.”

While construction and land prices are high, and interest rates are still high, the construction has not stopped completely. Even though there has been a slowdown in new multifamily starts, rentals are still being built, and condos are not. 

Courtesy of Dejan Eskic

Derek Allen, president of LandForge Development focused on supply and demand for condo development versus an equivalent multifamily rental product. 

“Condos have higher initial custom, less appreciation, and include more possible expenses that you don’t see with rentals. Overall, you get higher cost to builders or developers and higher cost to purchases,” Allen said. 

This means that there is a “deadweight loss.” This loss is the value that disappears in the market because of an inefficiency that is away from the ideal equilibrium. 

Derek Allen, president of LandForge Development

“There are markets where condos are thriving, but they have unique circumstances,” Allen said. “These include higher wealth concentrations, the people buying tend to be those moving from condos to condos and not starting out, and general market unaffordability, something we could capitalize on.”

Allen spoke on how regulation, from a developer’s perspective, is not so much the issue but rather financing the project and getting presales. 

“Condo projects require a bigger share of equity at the beginning and also require a specific number of units sold before construction even starts,” Allen said. 

Lenders often require a certain number of units to be sold prior to starting construction on the project. This presale limitation is often high, around 50 percent or more of the planned units. Presale requirements became an industry standard following the 2008 housing crisis. 

Jarod Hall, owner and architect at di’velept design, a Building Sale Lake advertiser, spoke on design guidelines and presale requirements as a reason you do not see as many large condo projects. 

“I have worked on a few small condo projects, and they tend to have fewer design regulations,” Hall said. “However, the presales make anything over 10 or so units nearly impossible to build in this market.” 

Courtesy of Jarod Hall

Other speakers shared many of the same concerns, pointing to the issues around long-term returns for the project. However, many did point out that Utah is one of the better states for regulation. 

“Utah does it much better than surrounding states for rights and protections for all, including developers, builders, financiers, and new condo unit owners,” said Peter Harrison, a partner with the law firm Miller Harrison. 

Peter Harrison, a partner with the law firm Miller Harrison. 

Harrison said the problems with older condos and the failures of their systems have led to a negative view of condos overall. 

“Many HOAs did not have proper reserved funding or were not structured to be sustainable,” Harrison said. “This may also have to do with offering lower fees to encourage sales, another issue with condo development.”

Condos also take longer to sell, and can add to the level of risk on the project for all involved. American Towers in Salt Lake City took almost 10 years to sell all the units. Time to sell, presales, and overall higher liability for all involved make the project less attractive than rental units. However, those have mitigations planned or in place, while overall return and cost do not. 

Steve Waldrip, the senior advisor for housing strategy and innovation at the State of Utah, spoke on the Governor’s 35,000 starter home plan but did indicate the focus is not on condos. 

“This plan could involve condos, but the main goal is on single-family detached homes,” Waldrip said. 

What are lenders saying?

Building Salt Lake reached out to a few lenders, who agreed that rate of returns are a primary reason developers and investors shy away from building condos. 

Steve Waldrip | State of Utah

Simply put: developers can make more money on a rental project than on condos, the lenders said.

“I think the biggest issue is the financing hurdle with the presales limitations, but a close second is that in the long-term, rental units are such low-risk options that bring significantly higher returns to them regardless,” said Tim Raccuia, a senior vice president at Zions Bank.

Many projects and lenders require a certain number of units to be sold and contracted prior to building, which is why many townhome projects are more successful. They can be built cluster by cluster as they are sold, rather than an entire stacked condo project being built at once. 

Other lenders see it as a similar hurdle but do not see the same risk associated with condos as an outright reason to dismiss them. Bennion Gardner, vice president of business services at Cyprus Credit Union, a Building Salt Lake advertiser, expressed hope for future condo development in Utah. 

“The risks certainly vary between for-rent and for-sale multifamily projects, but we look for ways to mitigate those risks with each product type,” Gardner said. “We would love to help increase the amount of affordable homes in Utah, so financing condo construction is something we are always looking to do more of.” 

Both lenders see condo developments as a great option for future growth, especially in Utah, and hope to see more projects. Still, the risks can be enough that some projects have changed their initial goals due to financial restrictions with condo development. 

Courtesy of Dejan Eskic, via Urban Institute

“Downtown 360 [360 S. 400 W.] in Salt Lake was originally pitched as a for-sale condo project back in 2016, but the developer could not make it work with presales and eventually went for rental multi-family,” Raccuia said. 

Overall, condo development has unique complications that make them less likely to be built over multifamily rentals. Despite fewer regulations for design and permitting, there are more limitations on funding, lending, and equity requirements. 

What about other perspectives not on the panel?

Brenda Scheer, a local architect and planning commissioner for Salt Lake City who was previously the Dean of the School of Architecture and Co-Chair of the Masters of Real Estate at Development at the University of Utah, pointed out a problem she saw with the panel. 

“Is it not more alarming that we are talking about condos and first-time home buyers with a panel of all white male homeowners? Was there no one else?” Scheer asked during a question and answer session.

The list of speakers included: 

  • Dejan Eskic, Senior Research Fellow at Kem C Gardner Policy Institute
  • Derek Allen, President at LandForge
  • Peter Harrison, Partner at Miller Harrison Attorney
  • Michael Vela, Principal at HKS
  • Jarod Hall, Owner and Architect at di’velept design
  • Steve Waldrip, Senior Advisor for Housing Strategy and Innovation at State of Utah
  • Utah Representative Raymond Ward
  • Utah Senator Nate Blouin

The entire event is available to stream here

Building Salt Lake is the leading source of commercial real estate news in Utah. Sign up to get our free emails in your inbox. Get access to the site’s paid features by becoming a Member today.

Posted by Zeke Peters

Zeke Peters is a dual-masters student at the University of Utah studying Urban Planning and Public Administration. He works as a planner and designer in Salt Lake City. He currently resides in downtown Salt Lake and is from Austin, Minnesota, the birthplace of SPAM.