Results Of Irrational Exhuberance

The period between 2005 - 2008 were the height of sales and optimism in the condo developers community in Downtown Charlotte.  It seemed like all you had to do was announce a new project, apply some pricing, and people would line up to buy.

As we all know, the financial crisis has thrown cold water on any new developments, and has slowed down the closings at properties like The VUE.  Financially distressed properties have taken about a third of all sales in the downtown market in the past 12 months.  The developments hit hardest are Fifth and Poplar, The Avenue, 230 South Tryon, Courtside, and Trademark. 

 As this chart indicates, there have been 60 sales in these five complexes over the past trailing 12 months, and of those, 90% have been financially distressed.  Fifth and Poplar has the most loss from the LMS (Last Market Sale) at 53%, while TradeMark has had a stronger retention of value, though the number of unit sales is not the same.

This reaction in the market place highlights the influence of investors buying as the market was turning, not giving them the opportunity to flip their investment to make a profit.  Additionally, mortgages during the initial sales cycle of these developments were easy to get, and the amount of downpayment necessary to secure a loan provided the banks with most of the risk in these transactions.  As we know, many of these mortgages were bundled and sold off.

An ironic twist to this scenario is that a property such as Fifth and Poplar has forced many of the current owners to rent their units as they scale back, and perhaps move in with friends.  Couple this with an ongoing assessment which is pushing the HOA dues in that building higher than most and things become difficult.  When a property does sell, an underwriter will look at not only the percentage of units not owner occupied, but also the percentage of owners past due on their HOA Dues.  This often will lead to an underwriter turning down an otherwise capable buyer due to the inherent risk of the property.

All of these properties remain attractive, and as the sale of distressed properties continues, these five developments will provide the best return for those able to obtain loans.  The attractiveness of the prices available coupled with historically low interest rates makes this the ideal time to buy.