Preaching to the Converters

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Printed from www.theslatinreport.com on
Wednesday Dec 7, 2005
All material �2004, The Slatin Report 
 
USA 11 30 05
PREACHING TO THE CONVERTERS
Peter Slatin     
 
For condo converters, bubble talk is just so much dirty bathwater. But the prospects for a cold shower have heated up.

According to data from New York-based Real Capital Analytics, sales to converters have already more than doubled in 2005 over all of 2004, rising from $11.6 billion, for 75,000 units, to $23.9 billion for 152,000 units. For apartment sales, the growth figures are not nearly so steroidal - in fact, they are just plain healthy. Apartment sales rose from $38.7 billion for 488,000 units to $47.9 billion for 544,000 units.

We asked Real Capital Analytics to show us condo-conversion sales data and apartment sales data over the past four years (2005 data is as of Nov. 15). RCA also compared sales to condo converters and to income buyers in the 20 top markets for conversion sales. The numbers account for sales valued at $5 million or above.

Click here for Real Capital Analytics' breakdown of which markets are soaring and which are settling down.

The richest conversion market: Manhattan, where investors have plunked down $3 billion for 5,700 units this year. Price per unit? It's a 501% increase over 2004, when converters paid $500 million for 1,460 units - roughly one-fifth as much for one third the number of apartments as this year.

Sure the action is hot in Manhattan. But for sheer hyperinflation, nothing comes close to Phoenix. The desert city lured condo converters to the tune of $1.3 billion, for 11,862 units - up an astonishing 1,384% from the mere $91.9 million spent in 2004 for a paltry 961 conversion units.

Clearly, it's not just the desert air that's overheated.

Things are cooling off in some markets. Last year's busiest city, Miami, which saw $1.7 billion in condo-conversion sales (11,524 units), dropped 29% to 8th place with $1.2 billion for 8,693 units. The rest of Florida is making up for it, though: Broward County, Orlando and Tampa are second, third and fourth this year, with Tampa activity rising a dramatic 483%. Adding Jacksonville, Palm Beach and Southwest Florida gives the state seven of the top 20 markets nationwide. Phoenix rounds out the top five.

Chicago, in ninth place, saw an eye-popping 405% gain in activity, despite much talk about a condo glut. Not surprisingly, California accounts for 20% of the top 20. Its most active city is San Diego at number 11, followed immediately by L.A. and the East Bay of San Francisco, with Orange County in 15th place. The O.C. had the second-biggest boost in activity for any area, as spending grew a whopping 892%, from $41 million in 2004 to $407 million so far this year. In San Diego, where buying rocketed from $333 million in 2003 to $1.5 billion last year, dealmaking has fallen by a third to $990 million to date in 2005. The 32% drop is the largest of any market in RCA's list.

Washington's Virginia and Maryland suburbs account for another pair of high-flying markets, up 81% and 55%, respectively. Seattle saw the third-biggest surge, up 598%, from $59 million last year to $406 million. Boston, on the other hand, saw sales drop 24%, from $427 million to $324 million so far this year.

The flattest market? Las Vegas. Sales to converters fell an inconsequential 2%. But the $591 million that bought 6,823 units last year was down to $578 million, which has netted 4,847 conversion prospects this year.

"What folks don't understand is that over the next six months we'll see sales slow down," says Dan Fasulo, director of market research at RCA. The increasing purchase volume has not been driven by demand, he says, but of supply. In any marketplace, he notes, "there are only a finite number of apartments suitable for conversion." Fasulo recalls that in 2003, malls were the hot property, and "a significant percentage of malls were sold. Miami conversion sales may have slowed down because new development has exploded."

Key to the buying frenzy is the ravenous capital markets. "A couple of years ago, private money was footing the bill" for most such deals, explains Fasulo. "Now there are more and more banks in the game willing to lend, and you're seeing 90% and 100% financing." Institutional partners have also become more common. It's a situation, says Faluso,"that gives" - or should give - "a condo converter pause."

Don't hold your breath, though - unless you're under water.

  
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