Condo conversion market collapses under own weight - East Valley Tribune: Business

Condo conversion market collapses under own weight

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Posted: Saturday, November 3, 2007 2:12 am | Updated: 8:09 pm, Fri Oct 7, 2011.

In the past couple of years, some Valley developers tried to capitalize on the housing craze by converting thousands of apartments into condominiums — rapidly creating a glut of units in the process.

Investors who jumped into the market early and converted higher-end properties in areas like north Scottsdale found success. Many latecomers to the trend didn’t.

Now, that market has nearly disappeared.

“The people who really got hurt were the people who thought, since it worked initially, it’s going to work on every project,” real estate analyst Bob Kammrath said.

But every apartment complex isn’t well-suited to become an owner-occupied property, Kammrath said.

Some 326 condo conversions were sold across the Valley in September, a 42.1 percent drop from the same month last year, according to analyst RL Brown’s latest Phoenix Housing Market Letter.

In the first nine months of 2007, 3,791 conversions were sold, down 33.4 percent from a year ago.

Experts estimate that more than 10,000 apartment units were bought for conversion in the last couple of years, though it’s unclear how many were actually modified.

There were too many units coming online, and it was a fairly narrow market to begin with, said Jay Butler, director of Arizona State University’s Realty Studies department.

The credit crunch has also made it more difficult to get financing for developers to do the conversions and for potential home buyers to purchase them, Butler said.

Some developers are turning the complexes back to apartments. Others are still marketing units to sell, even though the market has slowed, and are renting units in the meantime.

Renting units while still hoping to sell can increase costs because those units must be rehabilitated again after renters leave, Kammrath said.

Developers of conversion projects also face stiff competition from builders who turned to constructing new condos when the single-family home market took a downturn, he said.

“I think the thing sort of collapsed of its own weight,” Kammrath said.

The people really hurt are the regular home buyers who bought conversions, said Marc Huisken, senior vice president at commercial brokerage Grubb & Ellis.

Many individual investors bought units for rental properties, which may hurt values for regular owners and make it tough for them to resell their homes, Huisken said.

“Who’s going to want to buy an apartment where you’ve got potentially renters living next to you?” he said.

Huisken added that this time of year is typically slow for sales anyway, but the condo conversion market wasn’t as deep as many investors thought. When development slows in one area, another picks up and people tend to gravitate toward it, he said.

People from out of state who didn’t own a single piece of property came in, tried to convert one project and failed, he said. Some out-of-town developers have removed their managers who were overseeing projects in the region, Huisken said.

“These development companies have a machine that they need to keep working,”

he said.

Developers hoping to switch units back to apartments are also facing a slower, more competitive rental market.

The reversion of some of these units back to rentals has contributed to the rise in Valley apartment vacancies along with single-family homes that are being rented out by frustrated home sellers, Huisken said.

“We had a little more vacancy than everybody had anticipated,” he said.

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