Condo Saturation Soaks Developers
By SHANNON BEHNKEN The Tampa Tribune
Published: May 1, 2007
TAMPA - Condos For Sale. The loud signs flaunted from street corners across the Bay area are meant to grab the attention of potential buyers.
Developers advertise slashed prices and promise flat-screen TVs and computers. They put up inflatable gorillas and even pay people to dress as superheroes at busy intersections.
All the hype hasn't worked.
The white-hot trend to change apartments into condominiums has long passed, and developers that overestimated the demand have found themselves with half-empty complexes. Some that tried converting them back into apartments aregrappling with foreclosure. Others are turning in their keys, leaving the lenders with unwanted residential properties they're trying to sell themselves.
For individual buyers who purchased condominium units, they now must deal with uncertain property values and a less-than-promised quality of life: living in the middle of a sparsely filled complex where the majority of their neighbors rent.
Eddie Flom, who has worked with developers on conversion projects in the Tampa Bay area, sums up the situation in one word: greed.
"It's the oldest thing in the American economy," said Flom, of Flom Equities LLC. "Greed, greed, greed overcomes wisdom."
Apartment-to-condominium conversions started locally in the late 1990s and heated up in late 2004 as some developers saw a way to get around high land costs and offer more affordable homes. Units at some apartment complexes, particularly the higher-end ones, sold out quickly.
A handful of developers made so much money, Flom said, that others took notice and jumped onboard. Some of the less experienced developers paid too much for the land and couldn't sell condos for enough to make a profit. "People were trying to make a quick buck off the boom," he said. "Now Tampa is in complete saturation mode."
By 2005, the conversions led to a shortage of apartments as 18,000 rental units were turned into condos, and the occupancy rate at the remaining apartment complexes swelled to 98 percent, according to commercial real estate firm Cushman & Wakefield.
During the same year, 68 apartment complexes were purchased for conversion in the Bay area, up from 11 in 2004, according to New York-based Real Capitol Analytics, which tracks real estate trends. The conversion craze dropped off just as quickly as it heated up. In 2006, 25 complexes were sold for conversion. So far this year, there have been zero.
"It's going to take at least a couple of years to burn off all the supply we have," said Dan Fasulo, a company spokesman.
Some Lenders In A Jam
Developers aren't the only ones feeling the pain. In some cases, lenders are on the hook for loans on complexes where sales have been slim.
At CrossWynde Condominiums, an apartment conversion on U.S. 301 near Brandon, 60 percent of the 453 units are owned by the lender, Mountain Funding LLC of Charlotte, N.C., according to county property records.
The developer, Boca Raton-based Bay Communities, bought the complex and one other in Tampa, The Hamptons at Tampa Palms. Sales were slow, and the developer tried to lease the unsold units. In December, as both complexes headed toward foreclosure, Bay Communities sold them back to the lender for the mortgage amount.
Arthur Nevid, managing director for Mountain Funding, said the lender plans to hold the complex until the real estate market turns around. In the meantime, he said, it has hired a marketing and sales team to sell what it can and lease the rest.
"The market was real hot, and then it hit a wall very quickly," Nevid said. "Two years ago you'd sell 10 units in a day. Now if you sell 10 in a month you've had a good month."
Sales are picking up some, though, he said, citing 13 purchases at CrossWynde in the past three weeks. Nevid said his company, a private lender, is in a good position to hang on to the properties because it has real estate experience. Traditional banks, he said, are more likely to auction off failed conversions.
In Pinellas County, lenders have begun foreclosure on three complexes purchased for conversion, Seaside Villas, Shore Club Pasadena and South Pasadena.
The developers planned to remodel the waterfront complexes and even have pending contracts from some buyers. Construction at all three complexes has halted.
Wachovia Investment Holdings LLC and Fremont Investment & Loan claim the developers defaulted on $90 million in mortgages.
It's difficult to pinpoint how many apartment-to-condominium conversion complexes have gone into foreclosure because public records classify complexes as either "condominium" or "apartment" and don't show which condos used to be apartments.
Mike Kane, chief executive of ForeclosuresDaily.com, said his company's data show hefty foreclosure increases for apartment complexes.
In January, there were 286 apartment complexes in foreclosure, up 267 percent from 78 in January 2006.
Some See Market's Potential
The misfortune of some developers could be an opportunity for others. As some try to unload properties to avoid foreclosure, companies such as The Cypress Co. LLC in St. Petersburg are waiting on the sidelines.
Blake Whitney Thompson, vice president and general counsel for Cypress, is looking into buying distressed properties, including conversion complexes, and holding them until they'll sell for a profit.
Thompson said he has hired Flom, the conversion consultant, and is considering buying a few area condo conversion complexes.
But, he said, he doesn't want to get into the same dead-end situation that some of the other developers are in. So he's picky.
Some developers going into foreclosure are in a bad spot, Thompson said. They can't simply convert the whole complex back into apartments and then sell the property because individuals now own some units. Another problem, he said, is condominium bylaws require developers to keep property in good condition and to set aside a reserve for future expenses such as a new roof.
"I won't buy a partially converted project without working it out with the lender," he said. "And I won't buy unless we can hold on to it for 10 years. You cannot forecast when this market is coming back."
The slow market hasn't been bad for everyone. With prices dropping on conversions, more buyers have been able to afford a home, said Jim Bobbitt, senior vice president at commercial real estate firm CB Richard Ellis.
"With single-family home prices skyrocketing, it's helped people who want affordable, maintenance-free living," Bobbitt said.
Although the trend squeezed some renters out of apartments a few years ago, it's helping them now. Converted condos for rent are plentiful, leaving renters in a good position to negotiate a deal.
Amanda Gates, for example, knew her landlord bought three condos at CrossWynde and needed tenants fast. He wanted $850 a month for the one-bedroom condo. Gates and her husband talked him down to $700.
"We knew he didn't have anyone else," Gates said. "And price was very important to us. We're just starting out."
Reporter Shannon Behnken can be reached at (813) 259-7804 or sbehnken @tampatrib.com.