Condo conversions have been one of the hottest multifamily trends lately, but developers and investors proposing to flip apartments to condominiums are beginning to face reluctant city councils and increased regulatory restrictions around the country.
Some municipalities are even considering prohibiting these conversions in an effort to preserve rental stock, particularly in the affordable price range. Cities like Key West, San Francisco, and Boston are considering temporary freezes and other restrictions to protect rental inventory.
“There's been an explosion of conversions in South Florida that correlates strongly with the rise in housing prices,” says Gleb Nechayev, research economist with Torto Wheaton Research. In the last two years, he estimates, about 20,000 rental units have been flipped in the South Florida region. “That's almost as much as all the new multifamily construction over the same period.”
Developers and property owners say conversion keeps rental vacancy low and provides relatively affordable for-sale housing for people increasingly priced out of the single-family market. (Those opposed say it decreases the supply of rental housing, displaces tenants, and leaves low-income residents with few options.)
But not everyone is convinced that condo conversions are the solution. In San Francisco, City Supervisor Chris Daly proposed legislation that would restrict conversions to 200 units annually in buildings of two or more units. But he was unsuccessful. In November, San Francisco's board of supervisors voted to allow unrestricted conversion of two-unit buildings except when the tenants are senior citizens, sick, or disabled. (Critics speculate that Daly, who declined to comment for this story, was motivated to propose the legislation because he was evicted from his apartment in a conversion deal.)
In Waltham, Mass., a city council committee approved a 120-day moratorium on all multifamily development, including conversions, until the council revisits its zoning ordinances.
Benjamin Lambert, a lawyer who specializes in condominium and real estate regulatory law, says cities' ability to use zoning laws against condo conversions varies state by state.
“Towns can use the letter of the law to impede condo development or condo flips,” says Lambert, a partner with Ohrenstein & Brown in Rutherford, N.J. “If strictly enforced, many of the laws ... are almost impossible for a developer to meet.”
Torto Wheaton's Nechayev says the long-term impact of conversions—and their restriction—remains to be seen. “There's a lot of discussion today about conversions, but very little data to get an idea of what's actually happening.”