What's the net effect of the conversion craze on the apartment industry? While the impact will differ from city to city, conversions likely will hurt most rental markets, concludes Herb Chase, a managing director in the multifamily investment sales group with Los Angeles-based Colliers Seeley International.

While condo conversions benefit multifamily owners by shrinking the supply of apartments, condo buyers are typically renters, so conversions won't necessarily lead to a jump in occupancy rates. As Chase says, “It's a two-edged sword.”

In fact, some conversions ultimately end up as rentals and compete with apartments, say both Chase and Linwood Thompson, managing director of Marcus & Millichap's national multifamily group. Speculators may buy condo units, intending to sell them at a higher price a short time later, for example.

But if the condo price fails to rise, the investor will try to find renters for the unit. “Depending on the market, 30%, 40% or 50% of condo buyers are speculators,” Thompson says. “So that could be a problem down the road.”

The propensity for condos to revert to rentals grows as the condo conversion trend matures, and residential experts have good reason to believe the latest condo boom is peaking. The interest on a 30-year, fixed-rate mortgage hovered between 5% and 6% over the last several years, helping to propel homeownership and the condo craze.

The more recent trend has been for mortgage rates to climb slowly but steadily. As of May 13, 30-year mortgage rates were 6.34%, or nearly 100 basis points higher than the 2004 low of 5.38% on March 18, according to Freddie Mac. Once interest rates hit 7.5% or 8%, experts say, condo conversions will cool.

“We've been busier than ever, and I think people realize that it's the last chance to buy at low interest rates,” says Russell Galbut, a principal of Miami-based Crescent Heights, a condo developer and converter that has sold some 20,000 units valued at $3 billion in major markets across the country. “[Rising interest rates] are not something that's going to have a chilling effect on the conversion business in the next few months, but eventually the activity is going to slow down.”

Want to use this article? Click here for options!
© 2007 Penton Media, Inc.