Over the past couple of years, a mass of Valley and outside developers attempted to capitalize on the housing boom by converting thousands of apartments into condominiums. Now, a consequent glut of properties on the market has some investors ditching the condo idea and switching their projects back to rentals.
Chicago-based developer CG Development is doing just that with Haven, a 660-unit apartment complex near Arizona State University in Tempe. The company bought the property a year ago with plans to transform it into a luxury condo complex.
“At the time when we bought in December, (the market) was on fire. Large conversion projects were selling out in weeks,” said Jon Goldman, a principal at CG Development.
Haven began taking reservations for condos in June, but the company soon realized that the market was rapidly chang-ing as more and more developers jumped into the conversion game.
Some 17,000 apartments have been converted into condos across the Valley in the past two years, said Bob Kammrath, owner of Kammrath & Associates, a commercial real estate research firm in Phoenix.
The first investors to enter that market did very well financially, Kammrath said.
“It was a niche, but you can’t do it with every building,” he said. “You can’t do it everywhere. They can’t all be the best deals.”
Conversions in all price ranges are switching back to rentals, local housing analyst RL Brown said. It’s the next logical step, Brown said. When so many apartments converted to condos, it created a shortage of rentals, he said.
“(Investors) found out the buyer pool wasn’t as deep as they thought it was,” said Marc Huisken, senior vice president at commercial real estate brokerage Grubb & Ellis in Phoenix.
Converted complexes are reporting slow sales and “for rent” signs are going back up, Huisken said.
Still, industry observers say they believe the glut in properties is a temporary one.
People are still moving to the Valley and job growth is strong, Huisken said.
Condo conversions are a great affordable housing alternative, said Tyler Anderson, vice chairman at commercial real estate brokerage CB Richard Ellis in Phoenix.
“That need isn’t going away,” Anderson said.
Meanwhile, more condo conversion projects will likely revert back to apartments in 2007, he said.
CG Development recently made the decision to go back to apartments for its Haven project and has plans to begin leasing units in February.
There’s a need for luxury rentals in that area, CG’s Goldman said. Rents could range from $850 for a studio to about $1,400 for a two-bedroom, two-bath with a pool view, he said. The company is renovating the apartments, putting in granite counter tops, stainless steel appliances and new lighting fixtures. Plans also include revamping the complex’s four pools, putting in a new fitness center and reroofing the buildings.
Goldman said the company will likely spend more than $30 million overhauling the place, which could take about two years to fully complete. “We’re not cutting corners because we’re going rentals,” he said.