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Market reversal: Condos go rental

The craze for converting apartments into condos ran into a problem: Not enough people were buying them.

By ASSOCIATED PRESS
Published August 13, 2006

Even when it was clear in December that the condo market was slowing, Ted Charron went ahead and bought a two-bedroom, two-bathroom condo in Tampa, where some industry experts say the froth is especially frothy.

He did not buy the condo to turn it for a quick profit, however, but to tap the growing demand for rentals, a byproduct of the condo conversions that have swept through metropolitan areas nationwide.

"It wasn't a flip, more of a long-term investment," said Charron, an information technology 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 a greater pool of renters. And conversion of condos took rental inventory off the market. Now that demand for condos has cooled, conversions are slowing and in some instances, condos revert back to rentals.

"There was a huge craze," said Larry Leitzman, a Tampa research and marketing coordinator at Grubb & Ellis, a national real estate agency. "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."

The new owners of the Preserve at Mobbly Bay in Tampa responded to those pressures in a slightly different way. They had every intention of converting the Mobbly Bay apartments to condos when they bought the 17-building complex in November of last year.

Eight months later, however, the answer to whether the property is going condo is: Absolutely not. Mobbly Bay LLC of Atlanta decided that so many condos have been built or converted in the past two years that it will wait another year or two to consider when it can convert the 316 units.

Other markets that have seen reversions include Miami, Fort Lauderdale and Orlando, as well as Las Vegas, San Diego and Phoenix, said Hessam Nadji, managing director of research services at Marcus & Millichap, a national real estate investment brokerage company. Between 25 and 40 percent of the condos being developed or converted in those markets are likely to be offered as rentals instead, he said.

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, at a cost of more than $4-billion, were converted in September, while 3,354 units were converted in June at a cost of $449.4-million, according to a report from Real Capital Analytics, a research and consulting firm.

Nadji sees further softening in the second half of 2006 and in 2007, the market will be absorbing the bulk of the excess condo units. He estimates the market correction should have run its course within 24 months. "We have a ways to go before we bottom out," he said.

Greater demand for rentals, however, should soak up some of the excess capacity. And evidence exists that it is doing so.

The number of condos being turned into rentals is greater than what can be tracked, said real estate consultant Michael Slater of Triad Research & Consulting in Tampa. There is a shadow market in rentals, where condo buyers become landlords and apartment managers, and that can act as a Band-Aid for the slowing condo market, he said.

Diane Lee, president of DLG Management Services in Tampa, said about 40 to 60 percent of condos that were planned for conversion are reverting to rentals, and that many of the condos were bought by investors, so they are essentially rentals anyway.

"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," she said.

One developer of rental apartments in the Washington, D.C., area said the reversions will certainly help meet the burgeoning demand for rental apartments. Tom Buzzuto, chief executive of the Buzzuto Group, anticipates a growing number of such reversions. While his company's development activity is up 25 percent this year, acquisitions of apartment buildings have doubled and one of his projects is a building that had originally been built as condos.

The prevailing trend in southeast Florida appears to be spreading to markets in Washington, D.C., and San Diego, said Michael Cohen, research strategist at 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, a Novato, Calif., research firm.

[Last modified August 12, 2006, 20:48:50]