The condo crowd

When Tarragon Realty Investors bought a $27.5 million Orlando, Florida, apartment complex in March, the company estimated that it would take as long as a year to convert the 231 rental units to condominiums. But within a couple of weeks, buyers had snapped up every apartment.

William Friedman, CEO of the New Yorkbased residential real estate investor and developer, reports that the complex's 195 existing tenants were offered a chance to buy condos and 71 signed up in one week in mid-April. "That was a much higher percentage than we had ever seen in Florida," says Friedman. Nontenants bought the remaining units the next week. "What we expected to be a six- to 12-month sales process looks to be done," he says.

Although commonplace in New York, Chicago and a few other major U.S. cities, condos have been relatively scarce in midsize cities and towns. That's beginning to change.

The surge in condo conversion is driving up the investment values of apartment buildings in many markets. "We typically see about a 20 percent premium when a condo converter buys," says Keith Misner, who heads the apartment brokerage business of New Yorkbased real estate services firm Cushman & Wakefield. "Nobody's really buying above replacement value, unless it's a condo guy."

The past year has seen a surge in condo conversions in Atlanta, Northern Virginia, San Diego and South Florida, according to Real Capital Analytics, a New Yorkbased real estate research firm. More than $1 billion worth of rental properties were acquired for condo conversion in the first three months of this year, compared with $320 million in first-quarter 2003 and $70 million in first-quarter 2002, the firm reports.

In February, a year after opening Turnberry on the Green, a 377-unit, 27-story tower in its hometown of Aventura, Florida, Turnberry Associates decided to convert the rental property to condos. Little more than two months after the conversion began, 169 units worth a combined $61 million had been sold, says Bruce Weiner, president of Turnberry's residential division.

The shift to condos reflects several trends. Historically low interest rates have enabled many more households to take on a mortgage. In addition, the downtown neighborhoods of many second- and third-tier cities are becoming more developed. "Orlando -- there was no city there ten years ago, really; there were just office buildings that emptied out around 5 o'clock," notes Tarragon Realty's Friedman. "There are now 3,000 occupied apartments in downtown."

According to Real Capital Analytics, buildings bought for condo conversion went for an average of $183,489 per unit during the first quarter, compared with a national average of $77,137 per unit for garden-style apartment buildings and $171,312 per unit for mid- and high-rise apartment buildings.

In New York City rental apartment developers are finding it increasingly difficult to compete with condo converters. "In prime locations condo developers can pay top dollar," says one rental property developer.

Of course, if interest rates continue to rise, condo sales in many markets will likely soften. "I don't know when, but I think you'll see the trend reverse itself dramatically," Weiner warns. "Even now, we're looking at it hard and saying, 'Maybe we should slow down.'"