Partners, Volume 15, Number 1, 2005
Partners, Volume 15, Number 1, 2005
|Condo Conversions: Gauging the Impact on Affordable Housing|
Condominium conversions have emerged as a hot, new trend in high-priced, high-growth real estate markets.
Fueled by strong residential demand and relatively low interest rates, developers and investors across the country are in a frenzied search for rental properties they can purchase and transform into profitable condominiums. The downside is that speculative condo purchases are on the rise and renters are being displaced.
Deals attract both developers and property owners
The prospect of conversion to condominiums is enticing to many multifamily property owners as well. They are able to sell when the market will support the highest price possible. For some, the sale is much more attractive than the continued flow of rental income.
Increasing land and construction costs drive conversions
Peter McDougal, with Citigroup’s Center for Community Development Enterprise, says conversions have caught on with developers who apply for Low Income Housing Tax Credits as well. Although he has not yet financed a low-income conversion project, he says they make sense for developers on tight budgets faced with increasing land and construction costs.
Conversions most common near pricier homes
However, as more developers converge on these profitable markets, even Class B and Class C buildings are being targeted. In neighborhoods targeted for revitalization, a Class B conversion can enhance its marketability through the improved infrastructure and higher property values that accompany new construction projects.
Market indicators reveal a slow down in conversions
New construction projects have become more competitive with conversions by improving amenities and adding upgrades, thereby forcing converters to invest more in each unit to maintain the project’s marketability.
Ultimately, better (and costlier) amenities are driving median home prices higher thus pushing the prices of condominiums beyond the reach of median income families.
Impact of conversions on housing affordability
While statistics show that 10 to 20 percent of existing renters will purchase converted units in their building, the remaining 80 percent will be displaced.
Tracy Peters, managing director with the Red Capital Group in Ohio, says that conversions do not seem to be directly affecting the affordable housing market yet, but he believes the impact will become more apparent as market dynamics change. Dan Hogan, also with Red Capital, says creating incentives and increasing subsidies that support the development of affordable housing stock, along with assisting low-income families to become homebuyers, can protect communities where housing prices continue to rise.
Affordable housing advocates propose strategies
With regard to those not eligible for ownership, advocates underline the importance of protecting low-income families, seniors, and the disabled by ensuring that adequate housing alternatives are readily available.
Speculative investors drive housing prices higher
“Flipping” is highly speculative and leaves purchasers exposed to shifts in market demand. When these investment purchases stop trading hands, industry experts predict many of the units will end up as rental properties. The resulting flood of unplanned rental vacancies could affect municipal planning and market pricing in a community.
Balancing benefits and costs of conversion activity
Questions remain about how well municipalities will manage the impact of rental property conversions. Industry experts seem to agree that helping more renters realize homeownership and protecting affordable rental stock must be considered as seriously as increasing the tax base and attracting private investment.
Careful consideration of both opportunities and concerns can help conversion projects become part of the solution to the affordability gap in competitive housing markets.
This article was written by Ana Cruz-Taura, regional community development director in the Atlanta Fed’s Miami Branch.