TAMPA, FL-Condo converters continue to scope Central Florida for almost any rental apartment asset that can easily be transformed into a for-sale condo home. However, lenders are watching the activity this year more closely than they did in 2005, top brokers at Marcus & Millichap in Tampa and Orlando, and at Prudential CRES Commercial Real Estate in Tampa Bay tell GlobeSt.com.

Rising interest rates this year, however, may slow but not curtail the condo conversion craze in all Central Florida markets. "Lenders have begun to pull in the reins and underwrite with a microscope, but continued demand for product will drive this trend well into the second and even third quarters of 2006," says Darron Kattan, a partner with Andrew Wright of the Kattan-Wright Group in the Tampa office of Marcus & Millichap. Other team members are Kristina Peters and Jeff Frederick.

Kattan's reasoning is that "positive demographic growth projections and an inability for new construction to fill the increasing demand for affordable home ownership lends strength to the movement and may be the answer to tightened capital markets."

Wright adds, "Just as Southeast Florida seems to hit its condo conversions peak, Tampa has become a hotbed for activity." Wright notes "it's not only the class A newer constructed communities that are getting converted, but also the 1980s and older vintage properties. With a widening housing affordability gap, projections for 2006 conversions continue to increase."

In the primary Tampa Bay submarkets of Hillsborough and Pinellas counties,, a total 12,831 apartment units were sold at an average unit price of $107,151 for immediate conversion in 2005. Demand was so intense, one 1031 Exchange buyer paid $45.25 million or $53,487 per unit for the 846-unit Wynnton portfolio "despite significant deferred maintenance, environmental problems and challenging demographics" at the property, Kattan says.

Still, says Kattan's partner, Wright, "the biggest question on everyone's mind is, when will the [buying] insanity end?" He says, "We believe that the market will continue its torrid pace, with a slight slowdown to allow for lenders to be comfortable with the rapidly changing investment landscape."

Wright says there will be "some struggling condo conversions, as inexperienced converters have become prevalent and some will simply not succeed." However, "demographics and construction costs will cover mistakes made and buyers who overpay for properties."

Kattan adds, "We do not anticipate appreciation will mirror the last few years, but NOI growth and continued demand will sustain the current values, keeping the supply and demand curve clearly weighted to the demand side, and the cap rates as today's level for 2006 and beyond."

The Casey Babb-Bill Renje team at Prudential CRES Commercial Real Estate also expects no sharp downturn in the condo conversion arena. "The affordability of housing in the Tampa Bay area continues to be an issue," Babb says. "While activity for listed [apartment] properties has slowed, the depth of the buyer market is still as deep as ever and for good opportunities, private investors and institutions are still very active, particularly for apartment deals that will continue to operate as apartments."

Babb-Renje shows 18,000 apartments units were sold for conversion in 2005 in Hillsborough and Pinellas counties, differing from Kattan-Wright's 12,831 figure. The total 2005 sales represented a 375% increase over the 4,000 units sold in 2004, according to the Pru CRES team.

"To say that the Tampa Bay multifamily sales market was white hot in 2005 is almost an understatement," Renje says. "It was much hotter than that. In 2005, the Tampa Bay market saw an enormous migration of capital from South Florida. Almost all investors coming into the market had an appetite for condo conversion product."

Babb adds that in Hillsborough County alone, the transactional volume in 2005 "shattered all previous records and was, in a word, staggering." In Hillsborough, volume quadrupled from about $600 million in 2004 to nearly $2.25 billion in 2005, a 288% increase. In neighboring Pinellas County, sales jumped from nearly $532 million to almost $1.3 billion, a 136% spike.

"The rising market is best illustrated by the increase in average price per unit which this past year was around $82,000 and $78,000 in Hillsborough and Pinellas counties respectively, up from around $61,000 and $67,000 in 2004," Babb notes.

In metro Orlando, 80 miles east of Tampa, strong employment growth and limited new supply will continue to keep the multifamily market robust for the rest of 2006, says Steven M. Ekovich, first vice president of Marcus & Millichap and regional manager for the Orlando and Tampa offices.

As in the Tampa Bay markets, "investment in Orlando apartments is dominated by condo conversion deals," Ekovich agrees. "Conversion buyers remained active at the end of 2005 and are expected to maintain a steady pace of acquisitions this year, buoyed by strong demand for affordably priced housing."

Ekovich is seeing cap rates "being driven as low as 4.5% to 5% for high-end properties in prime areas such as MetroWest [Universal Orlando] and Lake Buena Vista [Walt Disney World], while cap rates for class B and C assets in suburban locations are at approximately 7%."