After 3 Months, Monarch Converts Back to Apartments

In an embarrassing reversal, the Monarch Condominiums has decided to convert from a 100% condo project to a 100% rental project. This follows the projects switch from rental to condo just 3 months ago.

At the time of the switch, the condo market was very strong and and the downtown rental market appeared unable to support a 305 unit high-end downtown project. As construction costs continued to escalate, the Monarch sought greener pastures in the condo market. With construction costs rising and rents determined by the market, the Monarch likely had no good options. With the building only months away from completion, they made a big bet that they could sell enough condo units quickly enough to make the bet pay off. With experience in the crazy Florida condo market where projects would sell out in days, they were optimistic that the Austin market could support quick sales.

It didn’t work out the way they expected. The Monarch was likely hurt by three factors:

– It takes a long time to sell 305 condo units in Austin, even in good times. With just 150 single family sales in central Austin each month, the strongest projects sell 5-10 units per week. With limited time before completion, the Monarch didn’t have enough time to sell enough units before completion. When the competition has beautiful sales centers and expensive virtual reality presentations, it can be hard for new projects to quickly catch-up.

– Projects designed for the rental market do not fare well in the condo market. Condo owners expect perfection — buyers are always pickier than renters. Even with a discount, buyers tend to hold out for the perfect project.

– The project was a victim of bad timing. The credit markets imploded just weeks after they announced their intention to convert from rental to condo. While condo sales continue, the rate of sales was certainly much slower than they expected.

Together, these factors likely forced the developers of the Monarch into a very difficult position. With reports of strong pre-leasing at the new AMLI project on second street at rates of as much as $2.75 per square foot per month — that’s $2,750 / month for 1,000 SF — Monarch must have concluded that the best shot of success was back in the rental market.

While converting to rental is probably the best strategy given the market and their short time horizon, it was likely a very difficult decision. With approximately 60 units sold, they must now walk away from all of those contracts. While the rental market may be stronger by comparison, the project is likely looking for rents ranging from $1,650 to $7,000 or more per month. It will be hard to rent the high-end units as very few people are willing to pay those kind of dollars for downtown rental units.

While we’ve talked about overcapacity in the Austin condo market, the removal of 305 units in the Monarch from the market will have a dramatic effect. With the Monarch out of the picture, there will be very few new units hitting the market in the next year. With less competition, we should see strong sales at the remaining projects whose delivery will be staggered over the next three years — at least they have plenty of time to sell out before their projects are completed.