Phoenix's Condo Market Continues to Recede

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PHOENIX-In late 2005, “condominium conversions” dominated multifamily market discussions. One year later, things have taken a 180-degree turn.

“On the transactional side, we’re seeing the condo converter entity is not nearly as prevalent as it was in 2005,” says Todd Braun, senior director with Cushman & Wakefield of Arizona Inc. in Phoenix. “In 2004 and 2005, everything hitting the market had some potential condo play. But, people realize now that it wasn’t that well-conceived of an idea.”

Apartment Realty Advisors’ principal Brad Goff agrees, pointing out 16,000 units were converted across all classes in 2005. In 2007, 30% of those conversions are anticipated to return to the market as rental units. “The trend in 2006 has been condo ‘revergence,’ instead of convergence,” Goff says.

As a result, institutional investors are coming out of the woodwork, wanting the income stream for their multifamily portfolios. “Institutions liking A product kept bumping into condo conversion and had to pay more. It was frustrating for them to get any product so they opted to wait it out,” Braun says. “But now that the converters are way down in activity, a lot of institutions are ramping up and getting aggressive in buying A product.”

One of the larger deals supporting Braun’s insight involved the 504-unit Villas on Camelback. The class A property changed hands twice in the past year when condo conversion plans fell through both times.

In Greater Phoenix, the lack of new supply is a major concern. Braun says in previous years of spiking occupancy, developers snapped up land to add new units to the market, but it’s not happening this time around. “It’s difficult to find multifamily land,” he says. “Construction costs have gone up dramatically. When you combine those, you have a lot less new construction coming out of the ground.”

Furthermore, land that could have been used for apartment development has been acquired by condo developers. “That trend will take a little while to revert back to full rent-type product,” Goff says.