Landlords Cashing Out as Condo Fever Spreads E-Mail This Printer-Friendly Single-Page Reprints By TERRY PRISTIN Published: May 18, 2005 Apartment building owners faced with dwindling returns are selling their properties to developers willing to pay ever larger premiums so that they can convert rental units into condominiums. Peter Thompson for The New York Times This 452-unit apartment building at 400 North LaSalle in Chicago was sold in April for $126 million to a developer who intends to covert it to condos. The developer, Draper & Kramer, paid about $278,000 a unit and expects an average 900-square-foot condo to sell for about $360,000. But conversion costs will be low because the building, completed just last year, needs little refurbishing. Transactions Shrinking Margin for Condo Converters The trend is driven by low mortgage interest rates that have encouraged renters to become homeowners, leaving landlords in many areas with falling occupancy rates and forcing them to lower rents and make other concessions to keep their buildings full. Instead, many landlords are deciding to sell, and in many cities, condo conversion sales have been increasing at an explosive rate. But some real estate specialists say the condo conversion market has become so overheated, especially in places like South Florida and Las Vegas, that many developers could find themselves unable to sell their condo units -and possibly in default - if interest rates rise and the pool of potential buyers dwindles. "Condo converters are paying above market rates, above what the rental value of the building would be," said Robert M. White Jr., the president of Real Capital Analytics, a New York research firm. If all the units do not sell, leaving the building with an undesirable mixture of tenants and condo owners, he added, "the lenders will have a tough time getting their money back" and developers will have "the headaches of having to manage renters and owners both." Sales of apartment buildings to condo converters reached a record $13.3 billion last year, up from $3 billion in 2003, according to Real Capital Analytics, which tracks sales of at least $5 million. Since January 2004, 103,000 apartments have been sold to converters, the firm said. In metropolitan Washington, buildings intended for conversion sold for an average of 88 percent more than other apartment buildings, according to the research division of Marcus & Millichap, a national real estate investment brokerage company. In Northern New Jersey, condo converters paid about four times as much as buyers of buildings that will remain as rentals. In Northern Virginia, as in South Florida, there is little difference between what converters are paying for apartments and the market price for a condo, leaving little room for profit, Mr. White said. Many condo units are sold to investors looking for an alternative to the stock market. Real estate specialists estimate that speculators and other investors account for as much as 60 percent of condo sales in Florida, and one-quarter or more of the sales in places like Washington and Chicago. "Investors are buying blocks of units, four or five at a time," said John R. Jaeger, a vice president at Appraisal Research Counselors, which focuses on Chicago's housing market. "We see that quite a bit." He said that typically only 15 percent of the tenants in an apartment building wind up buying their units. Developers like the Related Group of Florida are taking steps to curb speculation by, for example, requiring a 20 percent deposit so that the investor will not be likely to walk away from his or her condo unit. "No one can buy more than two units, and we carefully screen and cross-check with our other projects," said Joyce M. Bronson, a senior vice president. Sometimes an apartment building changes hands even before or soon after construction is completed. Last month, Vornado Realty Trust, the New York-based real estate investment trust, agreed to sell a new 452-unit apartment building at 400 North LaSalle in downtown Chicago to a venerable local developer, Draper & Kramer, for $126 million, or about $278,000 a unit. Vornado said its gain would be $30 million. Jim Freko, a Draper & Kramer vice president, said his company planned to install hardwood floors but otherwise does not need to spend much to convert the building, which was completed last year. An average
900-square-foot unit will be priced at about $360,000, he said. These days, he said, condo converters have come to expect lower returns than they have been used to. "You see a lot more converters stepping up to the plate, whether experienced or new, and they are getting more aggressive and pushing up the prices you need to pay," he said. But, he said, as long as interest rates remain low, the conversion trend is likely to continue. 1 2 Next>>Special Offer: Home Delivery of The Times from $2.90/week.