Condo Conversions Decimate Rental Inventories

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MIAMI-Buyers of multifamily properties are flooding into the South Florida apartment market, primarily for condo conversion. More than 10,700 residential rental units were removed from South Florida’s multifamily stock last year, primarily for condo conversion, according to Gene A. Berman, a managing director of Marcus & Millichap and regional manager of the company’s Fort Lauderdale office. The strength of the condo conversion market is especially evident when the number of repeat sales is examined, according to Berman.

His firm’s data shows that approximately 200 of the 1,700 (multifamily property sale) deals that occurred from 2002 to mid-2005 involved properties that sold at least one other time during the period. “Average turnaround time for repeat sales is 13 months,” he says, “and assets are resold at an average premium of 28% to their initial per-unit price. In the instances of repeat sales, owners have been able to realize a substantial profit after holding an asset for a little more than a year,” he explains, “because buyers continue to stream into the market.”

The August 2005 apartment research report from Berman’s office says transaction velocity was up 31% in 2004, versus 2003, “and sales activity to date has remained active,” he tells GlobeSt.com. While much of the discussion regarding the condo conversion trend focuses on the prices conversion buyers are paying for properties, Berman contends, “what is often overlooked is how property fundamentals are affected. It’s a good time to buy and a good time to sell,” he says.

As condo conversions deplete the number of available rental residential units in South Florida, owners may raise rental rates, thereby not only supplementing property income, but also, ultimately increasing property value, according to Berman. More than $2.8 billion in multifamily sales transaction either closed or are under contract this year to date. Of that, approximately $2 billion involved assets acquired for condo conversion. At the beginning of this quarter, the median price per unit reached $100,000, up from $75,000 a unit at year-end 2004.

More than 10,700 rental apartment units were removed from the South Florida stock last year at a time when households are expanding by 2.7% in the metropolitan areas of Miami, Fort Lauderdale and West Palm Beach, further tightening the supply of rentals. At present, the overall vacancy is running at 5.2%, and Berman forecasts a decline to 4.9%. He also predicts that apartment owners will raise asking rates 2.4% to an average of $1,017 a month by the end of this year.

Renters displaced by condo conversions will account for a significant proportion of net absorption “for as long as conversions persist,” he suggests. Last year, displaced renters accounted for 73% of net absorption in the entire market, based on the Marcus & Millichap assumption that 65% of renters in properties converted from rentals did not purchase a unit.