Commercial Brokers Spotting a Condo Conversion Trend

Investors of all types spent a lot of money on apartments in 2002, but area commercial real estate brokers noted that many did not intend to continue collecting rents at the properties.

Companies specializing in condominium conversions redeveloping apartment properties into condo complexes -

According to brokerage Colliers International's local research department, 1,164 apartment properties were sold in 2002, ranging in size from 16 units to more than 400 units.

Jon Busse, senior vice president at Colliers' Carlsbad office, is representing a property in Bonsall that was originally mapped out in a way that it could be converted to condos.

"The owner and I agreed the target market would be seven to 10 condo converters. I took the deal directly to them," Busse said.

Traditionally, when an apartment property is listed for sale, it would be marketed to a wider array of investors. But lately, Busse noted, condo converters are looking at any property that could be turned into for-sale units.

"Twenty-four months ago, this was a very quiet, almost a dormant, industry," Busse said.

Supply And Demand

The condominiums that result from apartment conversions are not likely to flood the market. While development of new condos in Downtown San Diego is very active, the opposite is true outside of the city's center.

Busse said suburban condo conversions typically provide forsale units at a much lower price point than most condos being sold in Downtown. Converters usually cater to first-time buyers rather than the luxury market.

"You can buy these buildings for significantly less than you can build them," Busse said.

In the spring of 2002, San Francisco-based institutional investor Hearthstone announced plans to spend $50 million on the conversion of the 300-unit River Colony complex along with Regis Homes of Irvine and locally based American Property Enterprises.

"We have had a very successful sales campaign," said Anthony Botte, senior vice president of Hearthstone's western region.

The partners are selling seven to 10 condos each month. As of mid-February, 173 units had been sold, at an average price of $263,284.

River Colony was Hearthstone's first investment in a conversion, but the company has since invested in a complex in Mountain View, near Stanford University, said Botte. The company usually invests in homebuilders working on detached single-family developments.

"We will target markets in which you have a supply and demand imbalance for affordable homes," Botte said.

Kevin Mulhern, a broker at CB Richard Ellis in San Diego who specializes in apartment investment for properties with 100 units or more, said the window for condo converters does not occur very often.

"There have to be certain things in place for conversions to make sense," Mulhern noted.

Prices for entry-level housing have to be very high. The median sales price of a San Diego County home in January was about $340,000.

Also, interest rates have to be very low. Rates are currently at historical lows, hovering around 6 percent for 30-year loans. Mulhern said that allows renters to buy the units they five in and end up with a monthly payment close to what they are paying in rent.

In November, San Diego-based homebuilder ColRich Communities purchased the 200-unit Bernardo Point apartment complex in Rancho Bernardo for $33.4 million. Mulhern was one of the CB Richard Ellis brokers who represented ColRich in its acquisition.

ColRich's principals developed condos and apartments in the past, and converted apartments to condos. In the past 10 years, however, the company's focus has been on single-family housing development, according to Graeme Gabriel.

Gabriel is ColRich's project consultant for the newly named Bernardo Pines project. He works for GDR Investments, an affiliate of ColRich.

Bernardo Pines was originally built as a condominium development in 1984. Before units were sold and occupied, an apartment investor bought the property from the developer to market it as apartments, Gabriel said.

ColRich is in the process of identifying renovations and scheduling construction, and Gabriel was not able to release prices for the condos.

While this is ColRich's only conversion project right now, Gabriel said, "We are looking for many more opportunities. We have a very hungry appetite."

The company will took at opportunities throughout San Diego County.

"There's a pent up demand that's been identified by the city of San Diego ... for entry-level affordable housing," Gabriel said.

With the high costs of land, condominium construction, and insurance, builders can't afford to construct new condos and price them at a level that is affordable for first-time homebuyers, he noted.

"From our numbers and our analysis, the only way to meet that demand is to convert apartments to condominiums," Gabriel said.

While Mulhern deals in properties with 100 units or more, he said there are a lot of smaller properties that are being converted to condos, with units selling for $150,000 to $250,000.

He recently sold a complex in La Jolla where units will sell for $400,000 to $500,000 - an entry-level range for that highpriced market.

"New construction wouldn't make sense at that price, but a conversion would," Mulhern said.