In the annals of real estate transaction history, condo conversions are a relatively new machination by developers looking to bridge the price gap between rental apartments and their often times more expensive siblings, single family homes. Condo Conversions, unlike new condominium developments, take existing apartment building stock and re-plat the property to allow for individual unit sale. The first big push for condo conversions began, at least in Arizona, in the mid to late 1990s with companies like Right Place Properties leading the charge. As single family home prices surged to unprecedented levels due, in large part, to historically low interest rates in the early to mid-2000s; condo conversions alleviated two major problems in that, one, they became a more viable, and less expensive, option for first time home buyers and, secondly, became a source of untapped value for apartment sellers looking to increase their per unit sales price.
As is the case when private developers respond quickly to changing market dynamics, cities, along with national building codes, were lagging in response to the growing condo conversion trend. Before new building codes could be adopted by the various municipalities, the true condo conversion boom era had ended. Despite the demise of the market and many of the condo converter developers with it; building codes and municipal development guidelines continued to morph and place greater development restrictions.
Great Expectations
Now that condo converters have made their tepid reappearance, they are now impacted by a host of new issues. The most pressing of which are the 2009, and newer, building codes, as well as, increased apartment seller and unit buyer awareness and expectation.
"When I first began converting apartments in the early 2000's, it was the wild west of real estate," states Mark Tomecak, a veteran condo converter and principal architect at his eponymous design firm. "Cities, and the building code, were continuously playing catchup to the trends. Ultimately, as the market softened, planners were finally able to 'catch the market' and begin crafting development rules and guidelines for how they wanted to treat this particular type of housing stock. Now that these changes have been made, it is imperative for potential condo converters to understand the rules and work diligently with their respective cities."
Municipalities, who want to see older, existing housing stock upgraded, aided by new building codes have altered the rules regarding 'change of use' permits and, more importantly, what structural changes need to be made when a change of use application is submitted, i.e. the change of use which occurs when former rental housing turns into attached single family dwellings. Whereas before developers were able to upgrade existing interior/exterior systems, such as unit window replacements and exterior roofing upgrades, at their own discretion, now developers, who want to make similar upgrades, can be mandated to add fire sprinklers or interior fire walls especially with older housing stock. These costs, alone, have the power to make a condo conversion project infeasible.
Additionally, apartment sellers, in their quest to receive maximum sales value, have begun to place premiums on apartments marketed to potential condo converters. When combined with increasing unit buyer demand for high-end finishes and amenities, the costs for today's condo converters have soared. These costs will continue to increase as older building stock compromises the bulk of available units for conversion. Conversely, the higher-end, newly built apartment communities, with amenities and styles unit buyers demand, are more likely to be deed restricted, i.e. not allowing condo conversion for up to 10 years after construction due to construction defect warranty liability.
Conclusion
As apartment sellers and condo converters reevaluate the new market and building code dynamics, especially their impact upon new condo conversion development, it is extremely important that both parties of the transaction manage expectations. For apartment sellers, the days of premium pricing on units set for conversion have significantly contracted as building codes and municipal legislation have caught up with market trends. Additionally, for condo converters, the product expectations of both unit buyers, and city planners, has and will continue to place higher costs on overall development.
As is the case when private developers respond quickly to changing market dynamics, cities, along with national building codes, were lagging in response to the growing condo conversion trend. Before new building codes could be adopted by the various municipalities, the true condo conversion boom era had ended. Despite the demise of the market and many of the condo converter developers with it; building codes and municipal development guidelines continued to morph and place greater development restrictions.
Great Expectations
Now that condo converters have made their tepid reappearance, they are now impacted by a host of new issues. The most pressing of which are the 2009, and newer, building codes, as well as, increased apartment seller and unit buyer awareness and expectation.
"When I first began converting apartments in the early 2000's, it was the wild west of real estate," states Mark Tomecak, a veteran condo converter and principal architect at his eponymous design firm. "Cities, and the building code, were continuously playing catchup to the trends. Ultimately, as the market softened, planners were finally able to 'catch the market' and begin crafting development rules and guidelines for how they wanted to treat this particular type of housing stock. Now that these changes have been made, it is imperative for potential condo converters to understand the rules and work diligently with their respective cities."
Municipalities, who want to see older, existing housing stock upgraded, aided by new building codes have altered the rules regarding 'change of use' permits and, more importantly, what structural changes need to be made when a change of use application is submitted, i.e. the change of use which occurs when former rental housing turns into attached single family dwellings. Whereas before developers were able to upgrade existing interior/exterior systems, such as unit window replacements and exterior roofing upgrades, at their own discretion, now developers, who want to make similar upgrades, can be mandated to add fire sprinklers or interior fire walls especially with older housing stock. These costs, alone, have the power to make a condo conversion project infeasible.
Additionally, apartment sellers, in their quest to receive maximum sales value, have begun to place premiums on apartments marketed to potential condo converters. When combined with increasing unit buyer demand for high-end finishes and amenities, the costs for today's condo converters have soared. These costs will continue to increase as older building stock compromises the bulk of available units for conversion. Conversely, the higher-end, newly built apartment communities, with amenities and styles unit buyers demand, are more likely to be deed restricted, i.e. not allowing condo conversion for up to 10 years after construction due to construction defect warranty liability.
Conclusion
As apartment sellers and condo converters reevaluate the new market and building code dynamics, especially their impact upon new condo conversion development, it is extremely important that both parties of the transaction manage expectations. For apartment sellers, the days of premium pricing on units set for conversion have significantly contracted as building codes and municipal legislation have caught up with market trends. Additionally, for condo converters, the product expectations of both unit buyers, and city planners, has and will continue to place higher costs on overall development.
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