We recently reached out to a few of our peers in the real estate industry for their insight into this topic. And according to our peers, there are 5 big reasons why the market favors apartment buildings over condo developments.
#1) Construction liability. Current construction liability laws require developers to take on more legal and financial risk when building a condominium development. In addition, many architects are hesitant to design condo communities due to a rise in HOA lawsuits.
#2) Financing. From an underwriting and lending perspective, condos are considered to be the more speculative investment, which limits the options for financing. For the developer, it's easier to finance an apartment building than it is to finance a condominium development.
#3) Economies of scale. As a general rule of thumb, apartments cost less to build on a per-unit basis than condos.
#4) Short-term return on investment. New construction apartments typically rent out more quickly than new construction condos sell.
#5) Long-term return on investment. Apartment buildings are appreciating assets that allow the developer to continue to own the building and collect rents over time. On the other hand, a condominium is a "one and done" investment that ends when the condo is sold.
The bottom line
There are many systemic factors at play which will continue to limit the supply of condominiums in the Dane County area. Increasing our condo supply will require public/private partnerships where local municipalities incentivize developers to build more condos.
Of course these types of partnerships will take time to develop and implement, and in the meantime our local population will continue to grow. For these and many other reasons, we fully expect Madison area condo values will continue to appreciate for a long, long time.
