Phoenix Condo Converters Seek Buyers
Developers are delaying or dumping plans to convert some Phoenix-area apartment complexes into condominiums.
A year after they pulled more than 7,000 apartments off the market, condo converters are finding that buyers in many areas are not interested in paying top dollar for a refurbished rental unit, particularly now that the Valley's housing market is slowing and prices for single-family homes are beginning to drop.
"The condo-conversion market is not the frenzy it was a year ago," said Pete TeKampe, an apartment specialist at Marcus & Millichap, a commercial real estate brokerage. "It is rapidly decelerating."
Apartment experts say some developers got carried away in conversion mania, overpaid for buildings and now must run them as rentals rather than selling fast and getting out.
Some of the projects were hits, particularly those in pricier areas of the Valley, where affordable housing is at a premium. But, in other cases, developers are having problems persuading anyone to buy. Some market professionals say vulnerable complexes include those in central Phoenix, where buyers can pay just a little more for a new unit that was built as a condominium.
"The viable deals in great locations like Scottsdale still have good sales velocity," said Tyler Anderson, an apartment broker at CB Richard Ellis, a commercial real estate firm. "The deals that will be challenged are those buildings that didn't look like a condo to start. You just had people trying to cash in."
Condo converters descended on the Valley in the wake of the wave of investor speculation that pushed up prices for single-family homes. They saw a chance to market for-sale housing to first-time buyers who couldn't afford a house or to people who wanted the no-yardwork lifestyle.
The condo-reversion trend has hit in other areas where too many condos were built too quickly. Southern Florida is one example. The turn in the Phoenix market demonstrates how quickly trends come and go in the area's volatile housing business and the inherent hazards for investors.
Developers count on selling some of the conversions to people who already lease the apartments. Yet some of these residents find the prices too high and look for other places to live.
A woman moving out of the Hawthorne Condominiums, on Third Avenue near Indian School Road in Phoenix, said Thursday that she had been leasing a two-bedroom, 1,040-square-foot apartment. When the complex went condo, she rejected the proposed sales price of $230,000.
She said she was a former real estate agent in California and was leery of condo conversions. "I've been on the downside of a market before," she said.
Consumers were caught in the condo-conversion craze and often forced out of their apartments. Now, they may be caught in a situation where their condo complex is being turned back into for-rent housing. But they have protections.
"To turn a condo conversion back into an apartment complex, you need the approval of every buyer," real estate attorney Christopher Combs said.
He said some condo-conversion developers may be giving cash incentives to buyers to get them to turn back the units.
The Valley's apartment market has been squeezed as condo conversions remove inventory. Grubb & Ellis-BRE Commercial estimates that more than 7,000 apartments were taken off the rental market by converters last year. The combination of fewer apartments and higher prices for single-family homes pushed apartment rents higher. Marcus & Millichap said asking rents would rise 3.2 percent to $735 per month in the Valley this year while vacancies declined. Vacancy was projected to decline fractionally to 7.4 percent in 2006.
But there is a twist to how conversions are affecting the rental market. Experts say a lot of the buyers were investors who now have dumped them back on the market as rentals. TeKampe said that 27,000 apartments have been announced as conversions since 2004 and estimated that half went to investors, with 70 percent in some projects.
"The condo-conversion market has not been driven by the end user, Joe and Betty Home Buyer," he said.
Reid Butler, a Valley apartment and condo developer, said a lot of the investor units aren't reselling.
"Many investors bought five to 10 units in a condo-conversion project and need to hold them for a year so they don't have to pay capital gains," he said. "So now, they are hiring management firms and renting them."
Terry Feinberg, president of the Arizona Multihousing Association, said his trade group is trying to assess the impact of the flood of investor rentals hitting the market. He said some couldn't rent them for as much as they need to cover the monthly mortgage payments. He wonders if those condos are headed for foreclosure.
Feinberg believes there were too many unsophisticated investors snapping up condos. He compared their behavior to tech investors in the 2000 stock market.
"Why did so many people lose money in 2000 when the dot-coms crashed?" he asked. "The investor behavior is the same. Some people get in at the end of a trend. They have bad timing."
Developers are delaying or dumping plans to convert some Phoenix-area apartment complexes into condominiums.
A year after they pulled more than 7,000 apartments off the market, condo converters are finding that buyers in many areas are not interested in paying top dollar for a refurbished rental unit, particularly now that the Valley's housing market is slowing and prices for single-family homes are beginning to drop.
"The condo-conversion market is not the frenzy it was a year ago," said Pete TeKampe, an apartment specialist at Marcus & Millichap, a commercial real estate brokerage. "It is rapidly decelerating."
Apartment experts say some developers got carried away in conversion mania, overpaid for buildings and now must run them as rentals rather than selling fast and getting out.
Some of the projects were hits, particularly those in pricier areas of the Valley, where affordable housing is at a premium. But, in other cases, developers are having problems persuading anyone to buy. Some market professionals say vulnerable complexes include those in central Phoenix, where buyers can pay just a little more for a new unit that was built as a condominium.
"The viable deals in great locations like Scottsdale still have good sales velocity," said Tyler Anderson, an apartment broker at CB Richard Ellis, a commercial real estate firm. "The deals that will be challenged are those buildings that didn't look like a condo to start. You just had people trying to cash in."
Condo converters descended on the Valley in the wake of the wave of investor speculation that pushed up prices for single-family homes. They saw a chance to market for-sale housing to first-time buyers who couldn't afford a house or to people who wanted the no-yardwork lifestyle.
The condo-reversion trend has hit in other areas where too many condos were built too quickly. Southern Florida is one example. The turn in the Phoenix market demonstrates how quickly trends come and go in the area's volatile housing business and the inherent hazards for investors.
Developers count on selling some of the conversions to people who already lease the apartments. Yet some of these residents find the prices too high and look for other places to live.
A woman moving out of the Hawthorne Condominiums, on Third Avenue near Indian School Road in Phoenix, said Thursday that she had been leasing a two-bedroom, 1,040-square-foot apartment. When the complex went condo, she rejected the proposed sales price of $230,000.
She said she was a former real estate agent in California and was leery of condo conversions. "I've been on the downside of a market before," she said.
Consumers were caught in the condo-conversion craze and often forced out of their apartments. Now, they may be caught in a situation where their condo complex is being turned back into for-rent housing. But they have protections.
"To turn a condo conversion back into an apartment complex, you need the approval of every buyer," real estate attorney Christopher Combs said.
He said some condo-conversion developers may be giving cash incentives to buyers to get them to turn back the units.
The Valley's apartment market has been squeezed as condo conversions remove inventory. Grubb & Ellis-BRE Commercial estimates that more than 7,000 apartments were taken off the rental market by converters last year. The combination of fewer apartments and higher prices for single-family homes pushed apartment rents higher. Marcus & Millichap said asking rents would rise 3.2 percent to $735 per month in the Valley this year while vacancies declined. Vacancy was projected to decline fractionally to 7.4 percent in 2006.
But there is a twist to how conversions are affecting the rental market. Experts say a lot of the buyers were investors who now have dumped them back on the market as rentals. TeKampe said that 27,000 apartments have been announced as conversions since 2004 and estimated that half went to investors, with 70 percent in some projects.
"The condo-conversion market has not been driven by the end user, Joe and Betty Home Buyer," he said.
Reid Butler, a Valley apartment and condo developer, said a lot of the investor units aren't reselling.
"Many investors bought five to 10 units in a condo-conversion project and need to hold them for a year so they don't have to pay capital gains," he said. "So now, they are hiring management firms and renting them."
Terry Feinberg, president of the Arizona Multihousing Association, said his trade group is trying to assess the impact of the flood of investor rentals hitting the market. He said some couldn't rent them for as much as they need to cover the monthly mortgage payments. He wonders if those condos are headed for foreclosure.
Feinberg believes there were too many unsophisticated investors snapping up condos. He compared their behavior to tech investors in the 2000 stock market.
"Why did so many people lose money in 2000 when the dot-coms crashed?" he asked. "The investor behavior is the same. Some people get in at the end of a trend. They have bad timing."
Developers are delaying or dumping plans to convert some Phoenix-area apartment complexes into condominiums.
A year after they pulled more than 7,000 apartments off the market, condo converters are finding that buyers in many areas are not interested in paying top dollar for a refurbished rental unit, particularly now that the Valley's housing market is slowing and prices for single-family homes are beginning to drop.
"The condo-conversion market is not the frenzy it was a year ago," said Pete TeKampe, an apartment specialist at Marcus & Millichap, a commercial real estate brokerage. "It is rapidly decelerating."
Apartment experts say some developers got carried away in conversion mania, overpaid for buildings and now must run them as rentals rather than selling fast and getting out.
Some of the projects were hits, particularly those in pricier areas of the Valley, where affordable housing is at a premium. But, in other cases, developers are having problems persuading anyone to buy. Some market professionals say vulnerable complexes include those in central Phoenix, where buyers can pay just a little more for a new unit that was built as a condominium.
"The viable deals in great locations like Scottsdale still have good sales velocity," said Tyler Anderson, an apartment broker at CB Richard Ellis, a commercial real estate firm. "The deals that will be challenged are those buildings that didn't look like a condo to start. You just had people trying to cash in."
Condo converters descended on the Valley in the wake of the wave of investor speculation that pushed up prices for single-family homes. They saw a chance to market for-sale housing to first-time buyers who couldn't afford a house or to people who wanted the no-yardwork lifestyle.
The condo-reversion trend has hit in other areas where too many condos were built too quickly. Southern Florida is one example. The turn in the Phoenix market demonstrates how quickly trends come and go in the area's volatile housing business and the inherent hazards for investors.
Developers count on selling some of the conversions to people who already lease the apartments. Yet some of these residents find the prices too high and look for other places to live.
A woman moving out of the Hawthorne Condominiums, on Third Avenue near Indian School Road in Phoenix, said Thursday that she had been leasing a two-bedroom, 1,040-square-foot apartment. When the complex went condo, she rejected the proposed sales price of $230,000.
She said she was a former real estate agent in California and was leery of condo conversions. "I've been on the downside of a market before," she said.
Consumers were caught in the condo-conversion craze and often forced out of their apartments. Now, they may be caught in a situation where their condo complex is being turned back into for-rent housing. But they have protections.
"To turn a condo conversion back into an apartment complex, you need the approval of every buyer," real estate attorney Christopher Combs said.
He said some condo-conversion developers may be giving cash incentives to buyers to get them to turn back the units.
The Valley's apartment market has been squeezed as condo conversions remove inventory. Grubb & Ellis-BRE Commercial estimates that more than 7,000 apartments were taken off the rental market by converters last year. The combination of fewer apartments and higher prices for single-family homes pushed apartment rents higher. Marcus & Millichap said asking rents would rise 3.2 percent to $735 per month in the Valley this year while vacancies declined. Vacancy was projected to decline fractionally to 7.4 percent in 2006.
But there is a twist to how conversions are affecting the rental market. Experts say a lot of the buyers were investors who now have dumped them back on the market as rentals. TeKampe said that 27,000 apartments have been announced as conversions since 2004 and estimated that half went to investors, with 70 percent in some projects.
"The condo-conversion market has not been driven by the end user, Joe and Betty Home Buyer," he said.
Reid Butler, a Valley apartment and condo developer, said a lot of the investor units aren't reselling.
"Many investors bought five to 10 units in a condo-conversion project and need to hold them for a year so they don't have to pay capital gains," he said. "So now, they are hiring management firms and renting them."
Terry Feinberg, president of the Arizona Multihousing Association, said his trade group is trying to assess the impact of the flood of investor rentals hitting the market. He said some couldn't rent them for as much as they need to cover the monthly mortgage payments. He wonders if those condos are headed for foreclosure.
Feinberg believes there were too many unsophisticated investors snapping up condos. He compared their behavior to tech investors in the 2000 stock market.
"Why did so many people lose money in 2000 when the dot-coms crashed?" he asked. "The investor behavior is the same. Some people get in at the end of a trend. They have bad timing."
A year after they pulled more than 7,000 apartments off the market, condo converters are finding that buyers in many areas are not interested in paying top dollar for a refurbished rental unit, particularly now that the Valley's housing market is slowing and prices for single-family homes are beginning to drop.
"The condo-conversion market is not the frenzy it was a year ago," said Pete TeKampe, an apartment specialist at Marcus & Millichap, a commercial real estate brokerage. "It is rapidly decelerating."
Apartment experts say some developers got carried away in conversion mania, overpaid for buildings and now must run them as rentals rather than selling fast and getting out.
Some of the projects were hits, particularly those in pricier areas of the Valley, where affordable housing is at a premium. But, in other cases, developers are having problems persuading anyone to buy. Some market professionals say vulnerable complexes include those in central Phoenix, where buyers can pay just a little more for a new unit that was built as a condominium.
"The viable deals in great locations like Scottsdale still have good sales velocity," said Tyler Anderson, an apartment broker at CB Richard Ellis, a commercial real estate firm. "The deals that will be challenged are those buildings that didn't look like a condo to start. You just had people trying to cash in."
Condo converters descended on the Valley in the wake of the wave of investor speculation that pushed up prices for single-family homes. They saw a chance to market for-sale housing to first-time buyers who couldn't afford a house or to people who wanted the no-yardwork lifestyle.
The condo-reversion trend has hit in other areas where too many condos were built too quickly. Southern Florida is one example. The turn in the Phoenix market demonstrates how quickly trends come and go in the area's volatile housing business and the inherent hazards for investors.
Developers count on selling some of the conversions to people who already lease the apartments. Yet some of these residents find the prices too high and look for other places to live.
A woman moving out of the Hawthorne Condominiums, on Third Avenue near Indian School Road in Phoenix, said Thursday that she had been leasing a two-bedroom, 1,040-square-foot apartment. When the complex went condo, she rejected the proposed sales price of $230,000.
She said she was a former real estate agent in California and was leery of condo conversions. "I've been on the downside of a market before," she said.
Consumers were caught in the condo-conversion craze and often forced out of their apartments. Now, they may be caught in a situation where their condo complex is being turned back into for-rent housing. But they have protections.
"To turn a condo conversion back into an apartment complex, you need the approval of every buyer," real estate attorney Christopher Combs said.
He said some condo-conversion developers may be giving cash incentives to buyers to get them to turn back the units.
The Valley's apartment market has been squeezed as condo conversions remove inventory. Grubb & Ellis-BRE Commercial estimates that more than 7,000 apartments were taken off the rental market by converters last year. The combination of fewer apartments and higher prices for single-family homes pushed apartment rents higher. Marcus & Millichap said asking rents would rise 3.2 percent to $735 per month in the Valley this year while vacancies declined. Vacancy was projected to decline fractionally to 7.4 percent in 2006.
But there is a twist to how conversions are affecting the rental market. Experts say a lot of the buyers were investors who now have dumped them back on the market as rentals. TeKampe said that 27,000 apartments have been announced as conversions since 2004 and estimated that half went to investors, with 70 percent in some projects.
"The condo-conversion market has not been driven by the end user, Joe and Betty Home Buyer," he said.
Reid Butler, a Valley apartment and condo developer, said a lot of the investor units aren't reselling.
"Many investors bought five to 10 units in a condo-conversion project and need to hold them for a year so they don't have to pay capital gains," he said. "So now, they are hiring management firms and renting them."
Terry Feinberg, president of the Arizona Multihousing Association, said his trade group is trying to assess the impact of the flood of investor rentals hitting the market. He said some couldn't rent them for as much as they need to cover the monthly mortgage payments. He wonders if those condos are headed for foreclosure.
Feinberg believes there were too many unsophisticated investors snapping up condos. He compared their behavior to tech investors in the 2000 stock market.
"Why did so many people lose money in 2000 when the dot-coms crashed?" he asked. "The investor behavior is the same. Some people get in at the end of a trend. They have bad timing."
Developers are delaying or dumping plans to convert some Phoenix-area apartment complexes into condominiums.
A year after they pulled more than 7,000 apartments off the market, condo converters are finding that buyers in many areas are not interested in paying top dollar for a refurbished rental unit, particularly now that the Valley's housing market is slowing and prices for single-family homes are beginning to drop.
"The condo-conversion market is not the frenzy it was a year ago," said Pete TeKampe, an apartment specialist at Marcus & Millichap, a commercial real estate brokerage. "It is rapidly decelerating."
Apartment experts say some developers got carried away in conversion mania, overpaid for buildings and now must run them as rentals rather than selling fast and getting out.
Some of the projects were hits, particularly those in pricier areas of the Valley, where affordable housing is at a premium. But, in other cases, developers are having problems persuading anyone to buy. Some market professionals say vulnerable complexes include those in central Phoenix, where buyers can pay just a little more for a new unit that was built as a condominium.
"The viable deals in great locations like Scottsdale still have good sales velocity," said Tyler Anderson, an apartment broker at CB Richard Ellis, a commercial real estate firm. "The deals that will be challenged are those buildings that didn't look like a condo to start. You just had people trying to cash in."
Condo converters descended on the Valley in the wake of the wave of investor speculation that pushed up prices for single-family homes. They saw a chance to market for-sale housing to first-time buyers who couldn't afford a house or to people who wanted the no-yardwork lifestyle.
The condo-reversion trend has hit in other areas where too many condos were built too quickly. Southern Florida is one example. The turn in the Phoenix market demonstrates how quickly trends come and go in the area's volatile housing business and the inherent hazards for investors.
Developers count on selling some of the conversions to people who already lease the apartments. Yet some of these residents find the prices too high and look for other places to live.
A woman moving out of the Hawthorne Condominiums, on Third Avenue near Indian School Road in Phoenix, said Thursday that she had been leasing a two-bedroom, 1,040-square-foot apartment. When the complex went condo, she rejected the proposed sales price of $230,000.
She said she was a former real estate agent in California and was leery of condo conversions. "I've been on the downside of a market before," she said.
Consumers were caught in the condo-conversion craze and often forced out of their apartments. Now, they may be caught in a situation where their condo complex is being turned back into for-rent housing. But they have protections.
"To turn a condo conversion back into an apartment complex, you need the approval of every buyer," real estate attorney Christopher Combs said.
He said some condo-conversion developers may be giving cash incentives to buyers to get them to turn back the units.
The Valley's apartment market has been squeezed as condo conversions remove inventory. Grubb & Ellis-BRE Commercial estimates that more than 7,000 apartments were taken off the rental market by converters last year. The combination of fewer apartments and higher prices for single-family homes pushed apartment rents higher. Marcus & Millichap said asking rents would rise 3.2 percent to $735 per month in the Valley this year while vacancies declined. Vacancy was projected to decline fractionally to 7.4 percent in 2006.
But there is a twist to how conversions are affecting the rental market. Experts say a lot of the buyers were investors who now have dumped them back on the market as rentals. TeKampe said that 27,000 apartments have been announced as conversions since 2004 and estimated that half went to investors, with 70 percent in some projects.
"The condo-conversion market has not been driven by the end user, Joe and Betty Home Buyer," he said.
Reid Butler, a Valley apartment and condo developer, said a lot of the investor units aren't reselling.
"Many investors bought five to 10 units in a condo-conversion project and need to hold them for a year so they don't have to pay capital gains," he said. "So now, they are hiring management firms and renting them."
Terry Feinberg, president of the Arizona Multihousing Association, said his trade group is trying to assess the impact of the flood of investor rentals hitting the market. He said some couldn't rent them for as much as they need to cover the monthly mortgage payments. He wonders if those condos are headed for foreclosure.
Feinberg believes there were too many unsophisticated investors snapping up condos. He compared their behavior to tech investors in the 2000 stock market.
"Why did so many people lose money in 2000 when the dot-coms crashed?" he asked. "The investor behavior is the same. Some people get in at the end of a trend. They have bad timing."
Developers are delaying or dumping plans to convert some Phoenix-area apartment complexes into condominiums.
A year after they pulled more than 7,000 apartments off the market, condo converters are finding that buyers in many areas are not interested in paying top dollar for a refurbished rental unit, particularly now that the Valley's housing market is slowing and prices for single-family homes are beginning to drop.
"The condo-conversion market is not the frenzy it was a year ago," said Pete TeKampe, an apartment specialist at Marcus & Millichap, a commercial real estate brokerage. "It is rapidly decelerating."
Apartment experts say some developers got carried away in conversion mania, overpaid for buildings and now must run them as rentals rather than selling fast and getting out.
Some of the projects were hits, particularly those in pricier areas of the Valley, where affordable housing is at a premium. But, in other cases, developers are having problems persuading anyone to buy. Some market professionals say vulnerable complexes include those in central Phoenix, where buyers can pay just a little more for a new unit that was built as a condominium.
"The viable deals in great locations like Scottsdale still have good sales velocity," said Tyler Anderson, an apartment broker at CB Richard Ellis, a commercial real estate firm. "The deals that will be challenged are those buildings that didn't look like a condo to start. You just had people trying to cash in."
Condo converters descended on the Valley in the wake of the wave of investor speculation that pushed up prices for single-family homes. They saw a chance to market for-sale housing to first-time buyers who couldn't afford a house or to people who wanted the no-yardwork lifestyle.
The condo-reversion trend has hit in other areas where too many condos were built too quickly. Southern Florida is one example. The turn in the Phoenix market demonstrates how quickly trends come and go in the area's volatile housing business and the inherent hazards for investors.
Developers count on selling some of the conversions to people who already lease the apartments. Yet some of these residents find the prices too high and look for other places to live.
A woman moving out of the Hawthorne Condominiums, on Third Avenue near Indian School Road in Phoenix, said Thursday that she had been leasing a two-bedroom, 1,040-square-foot apartment. When the complex went condo, she rejected the proposed sales price of $230,000.
She said she was a former real estate agent in California and was leery of condo conversions. "I've been on the downside of a market before," she said.
Consumers were caught in the condo-conversion craze and often forced out of their apartments. Now, they may be caught in a situation where their condo complex is being turned back into for-rent housing. But they have protections.
"To turn a condo conversion back into an apartment complex, you need the approval of every buyer," real estate attorney Christopher Combs said.
He said some condo-conversion developers may be giving cash incentives to buyers to get them to turn back the units.
The Valley's apartment market has been squeezed as condo conversions remove inventory. Grubb & Ellis-BRE Commercial estimates that more than 7,000 apartments were taken off the rental market by converters last year. The combination of fewer apartments and higher prices for single-family homes pushed apartment rents higher. Marcus & Millichap said asking rents would rise 3.2 percent to $735 per month in the Valley this year while vacancies declined. Vacancy was projected to decline fractionally to 7.4 percent in 2006.
But there is a twist to how conversions are affecting the rental market. Experts say a lot of the buyers were investors who now have dumped them back on the market as rentals. TeKampe said that 27,000 apartments have been announced as conversions since 2004 and estimated that half went to investors, with 70 percent in some projects.
"The condo-conversion market has not been driven by the end user, Joe and Betty Home Buyer," he said.
Reid Butler, a Valley apartment and condo developer, said a lot of the investor units aren't reselling.
"Many investors bought five to 10 units in a condo-conversion project and need to hold them for a year so they don't have to pay capital gains," he said. "So now, they are hiring management firms and renting them."
Terry Feinberg, president of the Arizona Multihousing Association, said his trade group is trying to assess the impact of the flood of investor rentals hitting the market. He said some couldn't rent them for as much as they need to cover the monthly mortgage payments. He wonders if those condos are headed for foreclosure.
Feinberg believes there were too many unsophisticated investors snapping up condos. He compared their behavior to tech investors in the 2000 stock market.
"Why did so many people lose money in 2000 when the dot-coms crashed?" he asked. "The investor behavior is the same. Some people get in at the end of a trend. They have bad timing."
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