Everywhere you go, you see the marks of condo-mania. In my tiny Arlington, Va., neighborhood alone, there are two new condominium projects under construction and one condo conversion in progress within a two-mile radius of our own (ahem) condo. Colorful signs at these construction sites and properties highlight the lifestyle, the starting prices, and, of course, the way to the sales office. Would-be homeowners and investors are lining up to buy them.

And why not? While the stock market has languished in recent years, real estate has racked up record gains. Our townhouse unit now lists for more than 50 percent over what we paid for it, and we bid high three years ago.

As satisfying as it is to feel you bought at the right time, such rapid price growth does give me pause—as does the current volume of activity and interest in the condo sector. Local business journals from Philadelphia to Minneapolis are publishing stories on the skyrocketing levels of condominium construction downtown. Multifamily firms that have traditionally concentrated on apartment properties are focusing on condos right now, building and selling them while the market is hot. Converters are offering prices for popular properties that apartment companies can't refuse and then quickly flipping the buildings as condos. Local governments are joining the fray too, but for different reasons. Concerned about housing affordability, some cities are attempting to limit conversions, which they believe reduce the supply of moderately priced rental apartments.

Alison Rice
Katherine Lambert Alison Rice

While I'm happy that higher-density living is finally gaining acceptance (after all, not ever yone wants a McMansion with a Super-Size commute), I do wonder if there are enough buyers for all the condos that are being built. Maybe there are; after all, 2004 saw a record number of existing condos and co-ops being sold (970,000 units), according to the National Association of Realtors.

But the health of the condominium market isn't just about volume. It also depends on who's buying these units, homeowners or investors, and many worry that there aren't enough owners in the condo market today. At our recent MULTIFAMILY EXECUTIVE Leadership Summit in Vail, Colo., apartment executives talked about the opportunities and threats that they believe condos currently present to the industry. One big worry: investors, who many believe represent a significant percentage of condo buyers in Las Vegas, Miami, and elsewhere.

The presence of excessive numbers of investors in the market has implications for both condo owner–occupants and apartment firms. If a building has too many investors, buyers may have difficulty getting a mortgage—and the builder may have trouble selling those units. The popularity of condos with investors also raises concerns about speculation, excess supply, and a shadow rental market that drives down rents for everyone.

At the same time, given apartments' relatively weak rents and occupancy challenges, who can blame companies for jumping into one of the most active and financially rewarding areas in the multifamily market today?

No one—as long as the craze continues.

Alison Rice can be reached at: arice@hanleywood.com