California has similar advantages, demonstrated in its 63 percent increase in the past three years, to $121,125 per unit, according to Thompson. “You have population and job growth there,” he says. “You can only develop to the east. If you go west, you hit the ocean.”
Washington‘s key advantage: the federal government, which is a stable, long-term employment engine. This has pushed prices up 82 percent since year-end 2001, to $87,121 per unit, according to Thompson. “Washington, D.C., is viewed as the most stable place in the country because of employment trends,” Neely adds.
Still, while the battles for properties in these markets are fierce, they probably aren’t the toughest markets to buy a building. New York is. Not many properties go on the market in the Big Apple, placing a premium on the ones that do come up for grabs. “People just don’t sell their properties in New York very often,” Neely says. “A lot of times, owners will test the market, but it’s at a price that doesn’t make sense.”
If you own a property with these qualities in Southern California, South Florida, Washington, or New York, you probably won’t have to wait long for an offer once you put it on the market. But even in these markets, converters will pass on a property if the hassles are too great. If the building stands on leased ground, the complications of buying, converting, and selling the units increase, according to Neely. Local municipality opposition to condos (because they are often considered unaffordable) and requirements mixing rental and for-sale housing are other factors that could lower interest in properties.
If a product can’t go condo, buyers will still line up. But debates continue over which product type is the most attractive buy for the money right now. John McDermott, national director for mortgage broker Sperry Van Ness in Irvine, Calif., sees Class A properties as the most popular product. He says this is because interest rates, which hit historic lows in the past year, are now creeping back up. As this happens, investors flock to Class A properties first. “Overall, as interest rates climb on residential mortgages, Class A becomes the stronger product type,” McDermott says. “Those tenants in Class A were most likely to step out and buy. They can’t do it when rates go up. “
But anyone buying Class A properties must swallow the concessions plaguing that product around the country. That’s why Thompson thinks Class B properties have become so popular on the auction block. “There are so many people that want to buy the B’s,” Thompson says. “With the A’s, you have some short-term operational issues. When you develop a building and there are a bunch of B buildings nearby, you have vacant units. The A building has to do concessions. You have more vacancies in the A’s than B’s.”
Finally, though no one will argue that C properties can compete with the A’s and B’s, they have been performing unexpectedly well. “They’re hot because buyers perceive they can buy those [C properties] with a better cap rate,” Thompson says. “Secondly, an awful lot of the demand is tailor-made for C properties, with immigration and [the creation of] lower-paying jobs.”
