Delinquency Concerns Shadow Condo Conversion Market

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Delinquency Concerns Shadow Condo Conversion Market

MBA (1/24/2006) Murray, Michael The 2006 National Apartment Report from Marcus & Millichap Research Services, Phoenix, reported that there are some concerns about delinquencies in the condo conversion market as the result of a possible market cooldown. The report forecasts an increase in mortgage rates affecting housing affordability. Marcus & Millichap said in the report that there is some growing concern in the condo conversion market because "a greater-than-expected dropoff in buyer demand may lead to delinquencies." "In any residential product, as we see the short-term interest rates rising, particularly those with adjustable rate mortgages that are going to reset in a three to five year time frame, that some of them are resetting in the near future, is concerning because they will be at newly established levels," said Brian Gordon, principal at Applied Analysis, Las Vegas. "It may leave an imbalance between the mortgage and the rents that are achievable." Apartment prices increased by 19 percent to a national average of $110,000 per unit in 2005, with condo conversion prices up by five percent, the report said. Marcus & Millichap attributed the increase to strong demand based on available and inexpensive capital and few investment options. The report's forecast for this year is for conversion property prices to remain flat as material costs increase, the housing market cools and less buyer demand creates a more cautious environment. "In a few of the most active metros, which include Phoenix, Tampa, Orlando and South Florida , overall buyer and seller expectations may need some time to realign as the conversion market cools, temporarily slowing transaction velocity," the report said. The condo conversion market can help multifamily property fundamentals this year if buyer demand continues. Gordon said his clients are seeing a large amount of condominium conversion activity taking place in the Phoenix area. "They are probably 12 months behind us [Las Vegas] in terms of the amount of investment in real estate activity in the residential market," Gordon said. "I think many investors and developers are turning toward the Phoenix-Tucson area as another viable option for condo conversion. I think we are seeing a significant number of those taking place now."    Some of the same success factors in the Las Vegas apartment market, such as residential housing appreciation, are taking place on a national basis as a disconnect in housing price point and median income brings more demand to the for-rent sector and creates more development in the apartment sector, Gordon said. Marcus & Millichap researchers said nationally, higher mortgage rates will help apartment owners retain tenants this year and cut the flow of renters to the for-sale housing market. "The traditional apartment market remains on solid footing," the report said. Vacancy rates are expected to remain low in southern California, with Orange County, Los Angeles and San Diego forecast as the top three markets for lowest vacancies while Las Vegas was fourth on the list. Las Vegas also ranked third in highest number of completions forecast for this year. Single-family appreciation, the condo conversion market and the potential for increasing mortgage rates are driving greater demand to apartment rentals in Las Vegas. "The apartment market in Las Vegas has probably never been stronger," Gordon said. "We have hit the historically average growth rates in rents at about the rate of inflation for the past decade. During the past 12 to 18 months, we have seen substantially higher gains." Lack of inventory in the rental segment and 18,300 condominium conversions are bringing apartment supply off of the market." Gordon noted that developers are creating more "for sale" apartments in Las Vegas because of rising home prices. "It does provide an entry-level housing opportunity for residents looking to own property rather than rent-the new entry level home in southern Nevada with typically smaller unit sizes bringing the absolute price point down" he said. "It allows consumers to enter the homeownership market."