Condo Conversions Surge Across U.S.

A recently completed deal for $625 million - a new national record - for a single residential building’s conversion to a condominium is perhaps the greatest example yet of a real estate trend that continues to gain traction.

The Manhattan House, a 583-unit structure taking up a full city block and long one of New York’s most famous apartment buildings is officially going condo. It is just one of many pieces of commercial real estate (namely older apartment and office buildings) nationwide that have been caught up in a frenzied wave of condo conversions. The reason? Soaring housing prices offer investors in urban properties a viable alternative to traditioanl “buy-and-hold” rental investments.

From January through September, 2005, over 140,000 rental units have given way to condo conversions, according to Real Capital Analytics, or RCA. Compare that to the 75,400 such conversions throughout 2006. As one might expect, the most intense conversion rates are found in markets where housing prices have soared most, such as Las Vegas, New York, San Diego and Chicago. These same markets are where skeptics believe the biggest market declines will soon be seen as demand lessens.

RCA also says that of the top five conversion markets in terms of overall units, four are right here in the state of Florida.

Even recent increases in commercial rents have not dampened conversions of office buildings and other commercial property. In fact, conversions might be themselves contributing to lower vacancy rates and higher rents, observers say. Conversions first became popular in the late ’70s and ’80s, but reemerged in 2001 in once desolate industrial zones near downtowns. The real surge in conversions happened in late 2004, with investors / condo converters willing to pay more than rental-property investors because they expect higher, more immediate returns.

Other telling facts:

• The key factor fueling the trend is the recent rapid appreciation in property values, which are up 25 percent from a year ago and 50 percent from two years ago in many high-growth markets.
• So far in 2005, 60 apartment properties have sold for more than $100 million.
• Overall, it’s common for condo converters to reap 30 percent profit on their investments, while rental properties typically offer conservative returns of about 5 percent annually.
• In spite of increasing mortgage rates, experts say demand for urban condos will remain strong because of baby boomer and their demographics / lifestyle preferences.

From a financial standpoint, private entrepreneurial capital is primarily fueling this trend, but a number of big-time commercial investors are beginning to enter the fray. So great is the effort to convert property that political backlash has broken out in some areas, with critics charging that conversions are eliminating affordable rents while driving up prices. In Las Vegas, where 7,000 rentals were converted to condos the last few years, a moratorium on apartment conversions was proposed and later voted down after developers argued that condos are more affordable options to single-family homes.