Fuelled by cheap mortgages, the rising prices of both new and existing single-family homes and in many cases, a lack of available vacant land, the condo conversion market has become fertile ground for property investors and real estate speculators over the past few years. Condo converters look to purchase existing apartment complexes and transform them into new condos by updating and improving the foyer and other common areas including yards and gardens and renovating individual apartments by upgrading the kitchens with granite benches and other new appliances and, refitting bathrooms and generally redecorating the apartments?interiors including paint and new flooring. 

Condo conversion developers then look to quickly sell the completed condos to either property speculators or owner occupants. In fact, the existing apartment renters are often targeted as potential buyers of the completed condo conversion developments. This targeting of existing tenants is in part due to convenience and in part due to the fact that many local and state condo conversion laws now require condo conversion developers to provide first option to buy the new condos to existing tenants. 

In the current environment of historically lower interest rates, finding buyers from existing apartment renters is often not a very difficult task at all. This is in part due to the current low interest rate environment; even though interest rates have been steadily rising over the past 12 months or so, they are still historically low. Another factor is often the high prices that must be paid for new and existing single-family homes in the same or surrounding neighborhoods. When renters also understand the longer term capital appreciation potential of owning their own condo, then it is not difficult to see why condo conversion developers can successfully market their completed condos to the existing apartment renters. In fact, many condo conversion projects will look to attract about 15 per cent of the existing apartment renters, sometimes by offering a discount on the price of the converted condo. This can save on marketing and selling expenses, and as the existing apartment renters have already been living in the complex and generally have roots in the local neighborhood, it is often easier selling converted condos to them. 

While the current boom in the condo conversion market is fuelled by the high demand as a result of historically low interest rates and the high cost of single-family housing, when interest rates rise further, the demand that has driven the condo conversion market may subside. And this will be a risk to many condo conversion projects. All across the country, condo conversions have been extremely popular with property investors. This is especially true for the areas of San Diego in California and Miami in Florida, Washington DC and New York City. One of the advantages that condo conversion developers cite when they invest in a new project is the fact that it is much cheaper to refurbish and redevelop an existing complex than what it would otherwise cost to develop a brand new housing development. 

However, if interest rates rise further, the condo conversion market could be set for a softening, or for a more substantial fall. 

One of the risks to real estate investors and property developers in the condo conversion market is that they generally pay a premium for any apartment complexes that they purchase in order to convert to condos. If the market suddenly falls, then many investors will be left with properties they have paid too much for and may find selling condos from their condo conversion projects more difficult as potential investors are turned off by higher interest rates and slower demand. Because there has been good money to be made over the previous few years, there are many players in the condo conversion market, and some commentators are now suggesting that the market is already showing signs of overheating. 

With the national medium price for condominiums now at $219,000, the national medium condo price has risen 54 per cent in the three years to 2005. This growth compares with 38 percent for existing single-family homes and 21 per cent for new single-family homes. Many real estate investors and other commentators believe that over the longer term, this exceptional growth is not sustainable. In fact, many real estate investors and developers are keeping a close watch on the condo market as they believe it will be the first real estate market to show any signs of weakness. If the condo market slows, then single-family new and existing homes will most likely follow quickly. 

Part of the reason as to why condominiums may show earlier signs of weakness is the strong interest in condominiums from real estate investors and the premiums paid by developers for the apartment complexes. If interest rates rise, then these real estate investors will be less likely to pay the high prices that individual condos in condo conversion projects are currently attracting. 

Condo conversions however will likely remain popular over the medium to longer term at least. Condo conversions tend to be concentrated in urban areas where housing, and available space, is at a premium. And with many younger singles and couples with no children living in urban areas, condos will continue to provide an affordable housing option and a desirable lifestyle choice. However, it isn’t just those who are looking for an affordable alternative to single-family homes who are buying condos in new condo conversion developments. Many condo conversions include condos at the higher price end of the market. Often these will be larger condos than others in the development and may include views or receive a higher level of interior refurbishment. Florida and California condo conversions are prime examples of this where water views can add a large premium to the price of a condo. 

Condo conversion laws
What happens to tenants in apartments which are being converted to condominiums? For existing tenants, a condo conversion can mean disruption to their lives for months on end as they have to vacate their apartments while the refurbishment takes place. There are local and state laws that help protect tenants affected by condo conversion developments and developers and existing landlords alike, should ensure that they fully understand the local condo conversion laws and regulations before undertaking a condo conversion development. 

San Diego City Council has introduced condo conversion laws which help protect tenants affected by condo conversion projects. Under the condo conversion laws, tenants living in apartments being converted to condos may be eligible for relocation assistance from the owners of the rental apartments. Owners must also provide sufficient warning to tenants in apartments where a condo conversion is taking place. They must also receive first rights to purchase the property following the completion of the condo conversion project. 

In Florida, condo conversion laws designed to protect existing apartment tenants affected by condo conversions include allowing tenants to renew leases for a limited time and also to provide first option on the completed condo conversion. This typically results in between 10 and 15 per cent of existing tenants purchasing condos following completion of the development. 

Snapshot on Florida
Florida has been one of the hottest areas for condo conversions in the whole country. This growth in condo conversions has been largely fuelled by an increase in younger professional singles and couples American countries. And while real estate commentators suggest that the top end of the market has been reached for condo conversions across most of the country, condo conversion developers in Florida expect the market has further to rise. One reason for this may be that more of these developments are attracting owner-occupant buyers including existing tenants. Less of the completed condo conversions are being sold to property speculators. This results in a higher level of stability in the market. Tampa Bay, Orlando and South Florida have been the most active condo conversion markets in Florida over the past 12 to 18 months. 

Typical condos in Florida are selling for between $150,000 and $250,000. These developments will often include upgraded clubhouses and swimming pools. Refurbished gyms are often fitted out with brand new, state-of-the-art workout equipment. Individual condos will include refurbished kitchens with new appliances, cabinets and countertops and redesigned bathrooms. 

While the condo conversion business may be ready for a slowdown, over the medium to longer term it should continue to provide excellent real estate investment opportunities to developers. This will be due to a continued demand from younger singles and couples looking for an alternative to larger, and more expensive single-family homes, and from those looking for the lifestyle choice that condo living offers. It will also remain an attractive alternative to building brand new housing developments and with a lack of available space in many urban areas; it will remain as one of the few housing options available.

 

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