Lurking In the Shadows
Many condominiums are poised to reappear as rentals. When investment rating agency Moody’s studies how the condo craze affects REITs and other apartment operators, it isn’t interested in how much money these apartment firms made on the properties they sold to converters. Instead, Moody’s wants to know how many of these converted units will eventually reemerge as rentals.
“If the music stops and all of this condo product gets started and there’s no one at the end to buy it, the fear is the condo converters will have 2,000 to 5,000 units coming on-line that you didn’t think [were] going to compete with rental product,” says Christopher A. Wimmer, a chartered financial analyst and assistant vice president for real estate finance at Moody’s. “When that happens, you end with someone who is desperately trying to fill their building and leasing them at any rate. If you’re a REIT, you have to compete with that.”
But many people think the shadow rental market already exists. With the high number of investors buying properties, many units pop up on the multiple listing service as rentals. “In markets that are overheating, the condos will end up as rentals,” says Gleb Nechayev, vice president and senior economist with Torto Wheaton Research and Investment Strategy Services in Boston. “But there is a debate over how it can undermine the rental market.”
Tom Bartelmo, president and CEO of J.I. Kislak, an apartment owner and operator in Miami Lakes, Fla., isn’t worried about the shadow market because he thinks his rentals will be better managed. “If you bought a condo and want to rent it out, it’s probably more difficult for you to put it in the paper, show it, and fix things that are broken than someone with an apartment office,” he says.
Bartelmo wouldn’t be surprised to see a cottage industry of small, local third party managers develop to fill this need. “I think there’s a nice market for small managers,” he says. “I doubt it will be a big market where someone will have thousands of units.”
