Condos: The Greatest Show in Real Estate
- This month: Condos, formerly a tiny slice of the real estate market, dominate the discussion everywhere from the party circuit to the front page.
- September: Everyone wants a condo. Or do they? MFE looks at the high-wire act of condo investing and how it’s really affecting demand.
- October: Still want to jump into the condo ring? Here’s what you need to know to tame the lions and get out without losing your shirt–or worse.
Under The Big Top
Do you view condo conversions as a threat or an opportunity for your company?
A:“Near-term, condo conversion investment activity has made it difficult to acquire apartments on ‘apartment economics.’ Additionally, conversions adversely impact demand as the most qualified apartment renters become owners. These circumstances challenge operations and corresponding apartment valuations. Nonetheless, Pacific has prospered by processing condo maps and selling mapped properties to converters. From a mid-term fundamentals perspective, condo conversions reduce for-rent inventory. In time, I believe conversions will contribute to higher apartment occupancies as demand outpaces the ability of supply constrained markets to deliver rental units. Some coastal and urban markets possess the prerequisite development constraints necessary for this scenario to play out. Supply-constrained markets, coupled with sustained economic growth will, in time, point to improved economics and improved valuations.” –Al Pace, president and CEO, Pacific Property Co.
A:“Condo conversions are an opportunity for our company. Growth and opportunity are where you find them, and right now strong growth comes in the condo segment of the industry. We are converting one of our apartment properties to condos right now, and we profit from that transition. Plus, as conversions remove apartments from the market, it creates more demand for those that remain, which means higher rents and more occupancy. It’s a win-win for everyone.” –Bob Murray, president, KSI
A:“At Equity Residential, the condominium conversion business continues to be a terrific opportunity for us to sell our assets at premium prices to capture additional value for our shareholders. Our target markets have been strong conversion markets in the past and should be in the future, and we think we can sell a lot of product at the $150,000- to $200,000-per-unit level.”
–David Neithercut, executive vice president of corporate strategy, Equity Residential
A:“Condo conversions have been a market factor for more than 12 months and represent a source of competition relative to acquisitions. On the other hand, we have used the conversion environment as a vehicle to sell non-core properties in Phoenix at cap rates below 5 percent. We’ll take the gains and recycle the funds into California investments, acquisitions, and/or development.”
–Edward F. Lange Jr., executive vice president and CFO, BRE Properties
A:“I consider condo conversions an opportunity for Waterton. Significant conversions in some markets (i.e., Las Vegas) have reduced the rental inventory dramatically and have caused rapid occupancy tightening and asset appreciation. This has made it an excellent selling environment.”
–David Schwartz, managing member, Waterton Associates
