Thanks to the robust housing demand driven by favorable demographic trends, condo conversions are the big story in the South Florida market and are capturing much of the area's attention. The Fort Lauderdale, Miami, and West Palm Beach metros have a population exceeding 5.3 million people, and households are expanding by 2.7 percent annually–a trend that pushed vacancy rates down and rents up in 2005. This growth, along with a positive economic outlook for South Florida, is attracting real estate investment capital from both local and out-of-state buyers, whose keen interest in the area continues to drive prices higher. So long as these trends continue with both owners and developers, it will help smooth out the apartment market's supply/demand balance over the long term.

Conversion Rate

Strong job and population growth make South Florida a highly attractive market for investors, renters, and condo buyers. In Aventura, Fla., the 20-story tower (below) now known as Parc Central East was acquired in 2005 for converting to condos.
Strong job and population growth make South Florida a highly attractive market for investors, renters, and condo buyers. In Aventura, Fla., the 20-story tower (below) now known as Parc Central East was acquired in 2005 for converting to condos.

The condo conversion trend remains rampant in South Florida, where a potent combination of low interest rates and the widening affordability gap between rents and mortgage payments helps maintain condos' popularity with both owners and investors.

First-time homebuyers clamor for condos as an accessible way to enter the market. Luxury condos attract well-paid, young professionals who desire an urban lifestyle as well as retirees seeking to downsize. The weakened dollar also attracts foreign investors to U.S. real estate, including condos, for both investment and personal use.

On the investment front, the condo trend allows long-time apartment owners to cash out at high returns, but condo converters are pushing prices on targeted assets out of the range of income-oriented investors. Once interest rates trend up, the condo play will be less desirable for both developers and prospective home buyers.

Troy Campbell
Corbis Troy Campbell

Contrary to initial impressions, the onslaught of condo conversions will not have dire consequences for local owners and investors. While renters who take the plunge into homeownership do drain the tenant pool, properties being converted will reduce the apartment inventory. For example, more than 10,700 South Florida apartments were removed from stock in 2005, and a significant portion–if not all–of the amount is attributable to condo conversions. In Miami alone, approximately 5,400 units were removed from the apartment market, including 1,845 units in North Miami Beach. Fort Lauderdale lost more than 2,500 rental units to conversion. It leaves fewer apartments in South Florida for more renters, a supply-and-demand situation that should result in higher rents for owners and managers.

In terms of property sales, conversion deals accounted for a larger portion of transactions in West Palm Beach as the dollar volume of deals in West Palm Beach soared in 2005. The current median price of $151,000 per unit for condo deals represents a 60 percent premium for the West Palm Beach submarket to the median price for all transactions in the county. Demographically, West Palm Beach appears to be a prime condo market as the rate of homeownership and median household income are the highest among the three South Florida metros. For these reasons, conversion deals may become an even larger share of the West Palm Beach submarket in 2006.