Mondo condo: Lessons from last year's 'craze'

Recently, real estate agents and the local media have touted last year's robust condo sales as evidence that the slump in the real estate market isn't as bad as people think, especially in Charlottesville. 

"Condo sales soar" shouted a headline in the Daily Progress just a week ago. Condominium sales, the paper reported, are up 133 percent, with 362 condos sold in 2006 compared to only 155 in 2005, accounting for one of every two residential transactions in Charlottesville. 

And in the Charlottesville Area Real Estate Association's 2006 market report, the source of the DP data, CEO Dave Phillips credits the sharp increase in Charlottesville condo sales for making the 2006 season the "second-best ever." 

Indeed, while residential sales were down almost everywhere in the area compared to 2005, sales in Charlottesville were up 35.9 percent, thanks to all those condos. That certainly sounds like good news. A closer look, however, reveals a different story.  

Just two years ago, developer Hunter Craig (who didn't immediately return the Hook's call) appeared to make a killing converting his 184-unit Hessian Hills complex into condos, as did developer Rip Cathcart with his 164-unit Carriage Hill conversion.

In short order, several apartment complexes followed suit, including Walker Square (225 units), Riverbend (125 units), Old Salem/Barracks West (364 units), Meadows Villas at Southern Ridge (220 units), Hollymead Square Townhouses (100 units), and 1800 JPA (227 units).

Add to those the smaller private condo projects around town like downtown's upscale Holsinger and the under-construction Randolph, and proposed sprawling student communities like the Woodlands (300 units), and that's nearly 2,000 conversions or new condo offerings.

Some owners, like Walker Square/Riverbend honchos Nathan Metzger and Coran Capshaw, chose to sell to a corporate real estate company that specializes in conversions and quickly puts the condos up for sale in a marketing blitzkrieg. Others, like Rip Cathcart, who came early to the game, were able to sell their conversions on their own. 

The results were impressive. Cathcart says he sold 108 of his units at Carriage Hill last year, and Craig did so well with his Hessian Hill venture that he purchased the nearby Old Salem Apartments for $31 million last year and began converting them into condos under the name Barracks West. 

However, according to developer Richard Spurzem, you don't have to be a rocket scientist to understand the local dynamic.  

"The reason condo sales went up last year was that there were so many condo conversions," Spurzem chuckles.

Indeed, while 362 condo sales last year sounds impressive, there could still be, according to Spurzem's count, around 800 unsold condo units just sitting idle. So what does a condo glut portend?

"Well, you might be able to get a condo real cheap this year," Spurzem laughs.

On a deeper level, however, the oversupply may also serve a symptom of something we're all aware of– that Charlottesville is becoming an almost ridiculously expensive place to live.

"When you have a situation like this in Charlottesville, where real estate is so expensive," says Spurzem, "suddenly you have a situation where the only thing people can buy is what used to be a crappy old apartment."

Nationally, developers haven't been able to resist the condo conversion craze, especially in popular places with tight real estate markets and rapidly increasing prices. Sound familiar? Indeed, in a market like ours, suddenly seeing a bunch of places for sale for under $250,000, despite the fact they might have been student-quality apartments, sounds like a deal– an unfortunate mindset created by the jaw-dropping price tags on single-family homes.

In almost all cases where developers try to take advantage of this situation– a kind of final strategy for cashing in on a pricey real estate market before it begins to adjust (that is, before it becomes clear to folks that they just can't afford anything!)– a glut of condos is created. The local condo conversion craze was created by enterprising developers "who thought they could make some money," Spurzem points out.

"The part that bothers me as a professional property manager," Spurzem says, "is that the first wave of conversions were sold to investors." He contends that these properties tend to "fall apart" because no one is nearby to keep a watch on things. "People can't get their dishwashers fixed because the landlord lives in Ohio somewhere," says Spurzem. "It ends up being a screwed-up situation."

So what does the future hold for condomania?

As the Wall Street Journal reported last June, some developers around the country were beginning to have "condo conversion aversion" as the market began to cool. As a result, developers were pulling a 180, reverting the condos to rentals, a turn-about some have dubbed "repartments."

As Cathcart told the Hook recently, that wasn't necessarily a bad thing for property owners willing to rent. "The rental market, as far as landlords are concerned, has improved dramatically," said Cathcart, explaining that condo conversions had lowered the inventory of rental properties, just at a time when more people, shocked by real estate prices, are looking to rent. 

However, according to the Journal, as the glut of condos drives more developers to "reapartment" their units, we could see a decrease in rents, and, as Spurzem mentioned, a sharp decrease in the price of area condos still on the market.

Of course, that's not such good news for developers who recently bought properties with the idea of converting them to condos. As the Journal pointed out, properties ripe for conversion last year were selling for 35 to 40 percent more than their value as rental properties. 

Indeed, if the "for sale" signs on the bulk of units at Barracks West is an indication, the condo conversion craze may already have come to a screeching halt. Instead of selling the condos one by one locally, developer Craig has enlisted the help of Transwestern's Institutional Multifamily Group, a big corporate real estate agency, to sell 277 units to investors interested in operating them as rental properties.

"It was an overreaction," says Spurzem of the condo conversion craze. "It became all the rage last year, and everyone jumped on the bandwagon in a time of speculative frenzy."

Signage tells the tale: Old Salem Apartments, converted to Barracks West Condominiums last year, could become apartments again.



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