Tuesday, December 27, 2011

Rentals, Yes--Condos, No?!

 Are Rental Apartments the New Condos?

          If you check in regularly with the community association social media—blogs, Twitter, Facebook—you cannot miss the group of correspondents who have a decided bias against community associations. It’s not always possible to separate fact from fiction, or personal bias from social concern, but the message is clear—there are many people who don’t like their homeowners association specifically or the entire concept generally. Claims of over-reaching by boards of directors or managers; vendors who see community associations as a piggy bank; and professionals—attorneys especially—who are blamed for overzealous enforcement of the rules and regulations and foreclosures, are all listed as reasons why community associations are not a good thing, or maybe even unconstitutional!
          Of course, these commentators’ understanding of the legal framework of homeowner associations can be a little thin and hence their opinions often lack practical application, but the passion is clearly there. I have read many times that we should (somehow) restrict or ban this type of housing altogether. I can empathize with some of the frustration that they feel because it is obvious that community associations are often creatures of convenience for developers and municipalities rather than organizations with their eventual owners in mind. They are created under laws enacted by state legislatures that respond more to the notion that we need to build more affordable housing now than to the idea that it has to be practical to maintain and manage in the long run. Regardless, boards, managers, and vendors inherit the real-life responsibility for these projects no matter how flawed they may be in concept. 
          But for now, the pundits' prayers may be answered—at least for a little while. Rental, rather than owned, housing seems to be the real estate concept du jour. And of course, rental housing does not come equipped with a homeowner’s association. That’s not the same as banning them outright as some politically naïve souls might like, but it probably has the same practical effect—you will be able acquire affordable housing without the drawbacks of an association of owners to weigh you down and interfere with your constitutional rights.[i]  
          And many of the same developers will create these apartment projects, but there the landlord will enforce the rules. And there are  rules to be sure, and protesting their enforcement will not be so easy, but at least it will be a straightforward  business proposition that is being enforced, not something that can be decided by, OMG, a vote of the members. Condominiums are apartments with a modicum of democracy. Apartments are, well, apartments. No democracy to fret over, just the lease to govern your relationship with the landlord. Try protesting the enforcement of those rules and see what happens.
          But regardless of your political persuasion about community associations, it will be moot if the new trend toward developers building apartments rather than condos, continues. And it is a real trend. The Wall Street Journal recently carried two articles documenting this trend. The first entitled “Demand for Rentals Drives Big Rise in Home Building” cites an upturn in housing starts in November, 2011 but qualifies that news with the statement: “Much of November’s increase came from the construction of apartments…evidence that rising demand for rental housing has encouraged developers to begin building again.”[ii] This trend is explained further this way: “It’s not as easy to get a home as it used to be…There are credit issues for buyers.” The article goes on to identify the next “boom” in housing as being multi-family (rentals) as opposed to single-family construction by traditional developers of single family homes like Toll Brothers and Lennar Corporation. The article concludes: “With the return to rationality in mortgage lending one can think of this as the beginning of a long overdue reversion to the mean.” 
          What that means of course, is what we have written about before[iii], that many people who could not really afford to buy a home are now being evicted from that owned housing and are turning to rentals—an unhappy, but nevertheless economically inevitable turn of events. The trend has been visible for a while now, especially as new mortgage lending guidelines begin to have a profound effect on the purchase of new homes.[iv]  
          The second article in the WSJ discusses this same building trend by traditional developers of commercial properties: “Some of the leading U.S. developers of malls and office properties are moving into the apartment business, where demand for new projects is stronger than any other commercial real estate sector.”[v] The article cites many of the same factors as the one above: “More Americans have been opting to rent in recent years as the allure of owning a home has diminished, due in part to tight lending restrictions, falling prices, and rising foreclosures.” 
          This trend may not have a permanent effect on the creation of community associations, especially in the condo market, since I suspect that a great number of these new projects will be built with a condominium plan recorded so that when and if the for-sale market recovers, they can be sold as condos, albeit a used building—a problem in and of itself if the conversion occurs too many years down the road. 
          The big impact on community association creation, however, may be from the lack of construction of new single family developments. This is where homeowners associations take the greatest heat from pundits of all sorts since their role is largely confined to enforcement of behavioral and architectural restrictions—the areas of enforcement that create the most friction between associations and their members. 
In any case, if creating fewer community associations answers the prayers of some of the bloggers who write about such things, then this new trend should bring them some joy—at least temporarily.

[i] That assumes, of course, that the Constitution has any legal application to a typical community association based, as it is, on Contract, not Constitutional Law.
[ii] Robbie Whelan, “Demand for Rentals…’ The Wall Street Journal, December 21, 2011.
[v] Pruitt and Wotapka, “Big Developers Dabble in the Apartment Market,” The Wall Street Journal, December 21, 2011.

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