Condo Conversions Reverting Back to Rentals

Even back in December, when it became evident that the condo market was slowing down, Ted Charron went ahead and bought a two-bedroom, two-bath condo in Tampa — an area in which experts describe the housing bubble as particularly… bubbly.

He didn’t buy the unit with the intention of flipping it for quick profits, however, but to the tap growing demand for rentals, a by-product of the condo conversion craze that has swept through Florida and other populated, booming areas nationwide.

“It wasn’t a flip, more of a long-term investment,” said Charron, an IT director who works in St. Petersburg. “Because there are so many of these conversions, there’s just not a lot of places to rent, so I think the demand for rentals is actually going to go up.”

Growing demand for rentals stems from many factors. Buyers are finding the market less affordable, leading to fewer sales and more renting. Widespread conversion of condos has taken much rental inventory off the market, and now that demand for condos has cooled, conversions are slowing and in some instances, experts are seeing a reversion back to rentals.

“There was a huge craze Everybody was taking apartment buildings and converting them to condos. A lot of them are reeling them back in and taking the apartments that didn’t sell and converting them back to rentals,” said Larry Leitzman of Grubb & Ellis.

The new owners of the Preserve at Mobbly Bay in Tampa responded to those pressures as well, but in a slightly different way. With Florida mortgages still at historic lows and demand not faltering too much, they had every intention of converting the Mobbly Bay apartments to condos when they bought the 17-building complex in November 2005.

Eight months later, however, the answer to whether the property is going condo is: Absolutely not.

Other markets that have seen reversions include much of South Florida (Palm Beach, Miami-Dade and Broward Counties, to name a few) along with metro Orlando. Las Vegas, San Diego and Phoenix have seen their share as well, analysts report. Between 25-40 percent of the condos being developed or converted in those markets are likely to be offered as rentals instead.

Condo conversions nationwide peaked in September 2005 and by June of this year levels had fallen back to those last seen in early 2004, before the bulk of the conversions happened. Nearly 28,000 units costing more than $4 billion were converted in September, while only 3,354 units were converted in June at a total of $449.4 million, according to Real Capital Analytics.

Further softening is projected in the second half of 2006 and in 2007, as the market will be absorbing the bulk of the excess condo units, experts say. There is a general consensus that the market correction should run its course within 18-24 months.

Greater demand for rentals, meanwhile, should soak up some of the excess inventory — and evidence exists that it is already doing so. There is a so-called “shadow market” in rentals, where condo buyers become landlords and apartment managers, which also acts as a band-aid for the slowing condo market.

“Now what’s happened in the last five to six months, a lot of converters have bought an apartment building, started sales, and it’s died off, so they’re choosing to stop sales,” said Diane Lee, president of DLG Management Services in Tampa.

In this down market, Lee said about 40-60 percent of condos that were planned for conversion there are reverting to rentals, and that many of the condos were bought by investors, making them essentially rentals anyway.

The trend that is prevalent in the Florida housing market appears to be spreading to markets in Washington, D.C., and San Diego, said Michael Cohen of Property & Portfolio Research.

“Florida was on the leading edge of the trend so it would make sense that they would peak first,” said Chris Bates of RealFacts.

In certain markets, though, condos have not succumbed to the reversion trend and solid sales are expected. In North Florida, areas such as Gainesville are still seeing booming sales, having remained steady while the rest of the state boomed throughout the first half of the decade. The lesson learned — smaller Florida home loan amounts and lower prices make condos a better buy for many, until the inventory becomes disproportionately large.