Condo Conversions Lead to Softening of South Florida Housing Market

A condo conversion market gone soft has brought down the rankings of South Florida’s three apartment markets, according to an annual investment report.

Marcus & Millichap’s 2007 National Apartment Report registered declines in Fort Lauderdale, Miami and the West Palm Beach housing market against 42 other markets.

Still, the three cities still scored within the top 15. The firm’s annual National Apartment Index serves as a snapshot analysis based on a series of 12-month, forward-looking supply-and-demand indicators.

West Palm Beach plummeted eight spots, to 15th place from seventh in 2006. Miami dropped five spots to No. 13 from No. 8 and Fort Lauderdale lost its second-place status, falling four spots to No. 6.

“Markets that registered the greatest supply reductions due to conversions are now facing the greatest risk from the return of condos to the rental pool,” the report said. “The condo conversion craze has clearly reached the end of the line, as the once-super-heated [Florida housing market] is now acting as a drag on economic growth.”

But the report noted that Fort Lauderdale, like Las Vegas (ranked No. 4) and Phoenix (No. 10), has some of the strongest forecasts for job and population growth.

About 800 rental units are expected this year in Fort Lauderdale, compared with 300 units in 2006. The number pales in comparison to what was built in 2004: more than 1,700 units. Further, Marcus & Millichap estimated that the market lost 24,000 units to conversion.

Asking rents are increasing 6.1 percent, to $1,163 a month from $1,096.

In Miami, asking rents may advance by nearly 6 percent, to $1,1561 from $1,088. The market lost more than 20,000 units to conversion. Developers are planning about 1,000 new rental apartments this year, a dramatic increase from the 400 apartments delivered in 2006, as Florida mortgage demand wanes.

And the dynamics have nearly returned to normal, according to the report: “[C]ap rates will begin to inch back to levels that reflect property fundamentals and not conversion value.”

In West Palm Beach, the apartment market is expected to enter “a period of adjustment this year,” according to the report, as “conversion-related investment has largely run its course.”

About 800 units are expected to be built in West Palm Beach this year, up from 500 apartments last year, according to the report. In 2005, Marcus & Millichap reported no apartments built, while in 2004, about 2,100 were delivered.