Analysis

3 Ways COVID-19 Is Reshaping The US Residential Market

By Andrew McIntyre
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Law360 (November 12, 2020, 3:06 PM EST) -- Residential property owners are increasingly seeking more space in less dense markets as the COVID-19 pandemic continues on, and that could spell trouble for condo properties in certain dense downtown cores and opportunities in other markets, lawyers say.

Experts say homeowners are increasingly moving out of dense markets like New York and Chicago, seeking more space and lower tax brackets, and that, on the one hand, is creating more demand for residential properties in markets like Florida.

But, on the flip side, experts say there's a growing concern of oversupply of condos in some downtown markets as U.S. buyers look to live elsewhere. Demand from foreign buyers has also slumped amid the pandemic, which has contributed to the oversupply problem.

Here, Law360 looks at three ways the pandemic is reshaping the U.S. residential market.

Buyers Are Seeking Less Dense, Lower Tax Areas

The trend to leave high-tax states like New York has been afoot for several years but has accelerated this year due to the pandemic, said Suzanne Amaducci-Adams, a partner and head of real estate at Bilzin Sumberg Baena Price & Axelrod LLP.

Before COVID-19, many people were still willing to pay higher taxes for, say, the lifestyle in Manhattan, but now fewer people are willing to, given the profound impact on lifestyle the virus has had, lawyers say.

And while part of the move away from Manhattan is to suburban Connecticut and New Jersey, Miami is also "getting a pop," Amaducci-Adams said.

"Anything on the water was gone overnight," Amaducci-Adams said, speaking about a rush to purchase Florida properties this spring and summer, amid the pandemic.

Property owners in high-tax states for several years have been moving to states with lower taxes, in part due to changes in the 2017 tax overhaul. The Tax Cuts and Jobs Act of 2017 made it so owners can no longer deduct state and local taxes from their federal return. Owners in high tax states, as a result, have seen larger tax increases.

And now that owners feel they aren't able to take advantage of what dense cities in high-tax states have to offer, they are moving.

Similar moves are happening out of Chicago, Amaducci-Adams said.

"The expectation is that there will be a big migration of New Yorkers moving here. ... Florida lends itself … to outdoor experiences. If your project doesn't have one to two pools, you're not going to have people jumping."

Owners Are Looking For Single-Family And Less Dense Condos

While one approach among homeowners has been to find less dense markets, COVID-19 is also causing owners to leave condos in favor of single-family homes, which offer more privacy and more outdoor space.

"Consumers are now wanting a lot more space," said David Tabibian, a partner at Jeffer Mangels Butler & Mitchell LLP. "The only way to get that is to go into a single-family residence, unless you can afford an incredibly large condo."

And that flight to more private properties that also come with private outdoor land has resulted in an uptick in demand for single-family homes, particularly in lower-tax states.

"Post-COVID[-19], there is some hesitation on the part of some buyers of being in a building where you have to share things," Amaducci-Adams said. "There's been a trend toward single-family. Single-family went crazy down here" in Florida.

But lawyers say the new-construction condo sector in certain markets, particularly in Florida where there's more space available and taxes are low, remains strong, despite the virus-related concerns associated with condos.

Amaducci-Adams said she's starting to see developers in Florida do smaller, more boutique projects that have less density, with COVID-19 and social distancing in mind.

"With COVID[-19] in mind … private space is going to be more important," Amaducci-Adams said. "In some of the luxury condos you have exclusive elevator access."

But there are still hurdles for condo developers to overcome, both for existing buildings and as they plan for new buildings. Valet parking, a common way parking is done at luxury condo towers, is now a major question mark. And private elevator access is difficult to put into new plans and expensive to change with regard to existing properties.

Developers Are Bullish Despite Condo Oversupply Concerns

Developers in recent years have been bullish about downtown condos as more people seek a work-live-play lifestyle in downtown metro areas, but experts say there are now oversupply concerns as buyers are changing their views on downtown living at properties with shared amenities amid the pandemic.

"In Los Angeles, San Francisco, markets like that, we have absolutely seen a shift in consumer expectations. A lot of that has to with the current pandemic. People now want more space if we're having to be indoors much longer as we endure this pandemic," Tabibian said. "As a result, they want a back yard, and also want a home office."

Tabibian said he's seeing some owners of condos in downtown Los Angeles now converting those properties to rental apartments amid an oversupply of condos in the city, thinking that there's more likelihood of renting the units given the oversupply of for-sale product in that market.

"There's too much construction coming on the market and there's been a drop in foreign buyers," Tabibian said.

Tabibian said unemployment is also driving the trend away from condos, as younger, risk-averse buyers are unwilling to spend $1 million or more on a downtown condo, and many are moving back in with their parents.

Still, despite the pressure on certain downtown markets, developers, particularly in Florida, are bullish about what the market will look like in a year or two.

"We do have clients that are launching condo projects where the delivery date is not for 24 months," Flores said. "We're about to see a new rise in new condo development. My clients are in the process of launching."

Flores said a lot of his clients are now seeking financing for projects they hope to start in early 2021.

"Condo product's here to stay," Amaducci-Adams said. "It's not going anywhere."

--Editing by Alyssa Miller.

For a reprint of this article, please contact reprints@law360.com.

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