Condos Slow to Bounce Back, Developers Point to Increased Exposure to Construction-Defects Lawsuits

Chris Kirkham reported in yesterday’s Wall Street Journal that, “Condos have been the slowest to bounce back of any segment of the U.S. housing market. Over the past five years, construction of apartments has nearly tripled, while that of for-sale multifamily units has increased only about 53%.

“The slow comeback stems partly from developers’ increasing confidence in rental-apartment buildings as young adults and middle-aged families stung by the housing crash have turned to renting. But developers also point to increased exposure to construction-defects lawsuits, which they say have made insuring large projects much more expensive.

Some lawmakers say the legal landscape is limiting the supply of entry-level housing. Although the term ‘condo’ often conjures images of luxury penthouses in New York and Miami, such housing, usually consisting of individually owned units in a building or a complex, has historically provided a moderately priced transition into homeownership from the rental market.”

The Journal article explained that, “In Denver, the lack of condo construction has become a central part of a debate about the local housing market. A coalition of Democratic and Republican mayors, real estate developers and affordable-housing activists have pushed for changes to state construction-defects laws to encourage more condo building.

Condo developers are particularly susceptible to litigation because homeowners’ associations govern the common property of the building, making it possible for boards to file suit on behalf of potentially hundreds of individual owners.

“The issue goes beyond Colorado. Lawmakers in Texas and Nevada have approved legislation in recent years meant to curtail litigation, while a housing affordability study in Seattle last year suggested the city and state explore changes to its condo laws.”

Yesterday’s article added that, “No one tracks such litigation in a comprehensive way, but studies of the market for general contractors’ liability insurance for residential construction have shown that costs are much greater for condos than rental-apartment projects of the same size. One study of Denver’s market by land use consultant Economic & Planning Systems Inc. in 2013 found that a developer’s insurance costs per condo unit are more than three times that of similarly sized apartments. The risk of construction defects liability added an additional $15,000 in costs per unit, the report found.”

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