Converting Instead of Constructing

Condo conversions take a slower pace today, but the trend still exhibits reasonable revenue potential.

Condo conversions make economic sense in expensive housing markets like Washington, D.C., Philadelphia and Miami, among others where converted rentals remain the best option for entry-level buyers. Companies like Apartment Investment and Management Co. (AIMCO), CityView and J.A. Reinhold Residential look to capitalize on the for-sale trend.

Jeffrey Reinhold expects the conversion trend to stay hot for a long time to come. The CEO of Philadelphia-based Historic Landmarks for Living even formed a separate company to focus just on this niche. J.A. Reinhold Residential aims to solely turn multi-family rentals into condos for sale. The new firm’s initial purchase included five apartments in the area for about $88 million, two of which are being converted into a $55 million to $60 million process. Reinhold’s 110 unit Locust Point will see $9 million in upgrades or approximately $100,000/unit, which would sell from the mid-$200,000’s to mid $400,000’s. The 108 unit Lofts at Logan View will get $7 million in renovations. A one-bedroom could sell for more than $270,000, while the two bedroom could fetch $450,000 or more. Reinhold believes his affordable luxury product will appeal to first-time homebuyers who wish to live in the city but cannot afford the high home prices. The strategy works well for the company since it bypasses land and construction costs to build in such a central location. Another bonus; no oversupply worries because the area isn’t overbuilt and enjoys a robust economy.

Historic Landmarks for Living owns and operates nearly 2,000 apartments in urban areas and is able to provide Baltimore Apartments, St. Paul Apartments, Minneapolis Apartments, Chicago Apartments and Philadelphia Apartments. As a private company it doesn’t look for a fixed IRR. Reinhold remains on the search for suitable investment opportunities to purchase an asset. He keeps his options open to convert the company’s existing portfolio as favorable market conditions dictate.

As the CEO of Historic Landmarks for Living, the company responsible for rehabbing and managing some of Philadelphia’s most interesting rental properties, Jeff Reinhold knew there was an abundance of historic buildings in Philadelphia that could be converted into sophisticated luxury homes.

Yet in the current housing market in Philadelphia, many condominiums are geared toward a wealthier demographic, leaving little choice for young professional homebuyers who want to stay in Center City. For Reinhold, the lack of affordable condominiums presented a new opportunity.

“As the market was starting to appreciate in price, we were starting to see homes and condos inching up towards the $700,000 to $1 million range — prices the -first-time homebuyer really couldn’t afford,” says Reinhold. “In front of me was this great niche waiting to be created.”

Last year, Reinhold launched a new residential real estate company called J.A. Reinhold Residential. The concept was simple: Take well located multi-family properties and turn them into for-sale condominiums. Because the units would be conversions and not new construction, Reinhold could offer the properties at a lower price point, making them accessible to the first-time homebuyer. The first two properties J.A. Reinhold Residential has converted are the Lofts at Logan View at 17th and Callowhill streets and Locust Point at 25th and Locust streets on the Schuylkill River in desirable Fitler Square and adjacent to Schuylkill River Park. Both buildings are conveniently located, with the Lofts at Logan View situated by the Parkway’s museums and minutes away from the Center City business district, and Locust Point set equidistant to both Center City and University City. The sales of offices at both properties are now open with fully furnished models. The properties are being renovated inside and out. Locust Point and Lofts at Logan View are beautiful examples post-industrial architecture, with features like 13- to 17-foot timbered ceilings, exposed brick walls and dramatically tall windows showcasing striking views of the city. The units themselves have been renovated with the high-end details common to luxury condominiums, such as granite countertops, Decora cabinets and hardwood flooring. Pricing at Locust Point, which also boasts 70 parking spots, begins in the high $200,000s for a one-bedroom condo.

“At that price points you would generally have to look for something south of South Street or in Northern Liberties— it would be difficult to find a condominium within walking distance of Center City,” says Reinhold.

A longtime Center City resident himself, Reinhold found his work extremely satisfying, and particularly enjoys the creativity that goes into re-imagining existing architecture. Reinhold eventually hopes to expand the company to other cities, and believes that his conversion model is fulfilling an unmet need in the real estate market. “I know that people really appreciate living in historically significant properties,” Reinhold says. “With our company we’re taking what are already tremendous buildings and doing something truly different — restoring them at a luxury level that is still affordable.”

Second-Home Buyers Go Condo

Vacation Houses Lose Out In a Weak Market; Coping With Pool Rules

The second-home market is in a slump. But one type of vacation property is still showing signs of life: condos (see Ballantyne Condos & Matthews Condos.

A new National Association of Realtors study estimates that sales of vacation homes in 2007 fell 31%, to 740,000, from 2006. But sales of condos dipped only slightly -- down 2.8% -- while sales of detached homes dropped 38%. The upshot is that condos cornered a substantially larger share of the vacation-home market last year: 29%, up from 21% in 2006.

Condos, including South Charlotte Condos, are selling better than single-family vacation houses for a number of reasons. They don't require their owners to maintain lawns, trim shrubs, paint the exteriors or replace roofs -- increasingly important concerns to an aging population. Condo communities also tend to offer amenities such as pools and clubhouses. And condos usually are cheaper to buy, and easier to resell, than houses.

Yet the prices of vacation condos haven't held up. Median prices fell almost 10% to $180,000 last year from the year before, while prices of single-family second homes remained flat, says the Realtor group. Part of that decline reflects the general downturn in the housing market, but the price pressure on condos also comes from investors who bought units in resort markets during the real-estate boom and now are trying to get rid of them. While the price-cutting is bad news for existing condo owners, it can make the units seem like relative bargains to buyers compared to houses.

Tod Phelps and his wife, Shelly, are among the second-home buyers attracted to condos. The couple since 2001 have owned a three-bedroom house on Beech Mountain, N.C., a 2½-hour drive from their primary home in Greensboro, N.C. But Mr. Phelps, an information-technology executive, says he is tired of spending weekends cleaning gutters and painting doors, and paying at least $3,000 a year to have people mow the lawn, weed flowerbeds and plow the drive in winter. "I didn't expect it to be as much trouble as it was," he says. Now the couple plan to sell the house and replace it with a "ski-in, ski-out" condo in the same community.

Condos are also making inroads in vacation spots where they've rarely been seen before, including beach villages along Lake Michigan. Some of these are attracting a new type of buyer used to an urban environment. Mary Morrissey, a government policy consultant in Chicago, and her husband recently bought a $350,000, two-bedroom loft at the Vineyards, a converted winery in Harbert, Mich. It features such downtown design elements as concrete fireplaces and window seats, exposed ductwork and soaring ceilings. The unit is much more open, light and fun than the usual cramped cottages found in the area, Ms. Morrissey says, and the contemporary style was the main reason they were attracted to it. "We never even thought about buying a single-family home," she says.

And in some places, such as Hawaii, prices have risen so high in recent years that condos are the only viable choice for many buyers. Maui broker Georgina Hunter says $1 million buys a two-bedroom condo in a resort with golf, pool and fitness center, but isn't enough for a single-family home. Since acquisition costs are so high, many buyers look to rent out their places when they're not vacationing there. Here condos also have the edge: Local zoning allows most condos to be rented for a short period, while most houses must be rented for at least 180 days. "You just get more bang for your buck," Ms. Hunter says.

But condos aren't popular in every second-home area. In New York's Hamptons, people prefer detached houses because they offer a yard, extra rooms and privacy -- "exactly what New Yorkers often lack in their primary residences," says Rick Hoffman, East End Regional vice president for the Corcoran Group brokers.

Condo living also can require an attitude adjustment as owners contend with close-by neighbors and live under a condo association's rules. Wayne Zawila, an Orlando, Fla., futures trader, paid $619,000 a little over a year ago for a three-bedroom weekend getaway in Daytona Beach, Fla. He thought the fourth-floor condo would be more secure and easier to manage than the Galena, Ill., lakefront house he used to own, which he once drove to at 3 a.m. because he was worried the pipes had frozen. But though condo life can be more carefree, at least when it comes to security and exterior maintenance, it's not rules-free. Mr. Zawila sometimes chafes under communal regulations he's never had to deal with before, like the one that bans him from smoking cigars while lounging in the pool. "It drives me nuts," he says.

Because many affluent second-home buyers like the common ownership and upkeep of exterior elements but still want a detached house, some builders are combining them in "condo homes." That setup attracted Sue Anne Davidson-Kalkus, a retired antiques dealer in Rome, Ga., and her husband, Tony, a retired Army colonel, who were married last year. A few months ago they listed her four-bedroom vacation retreat on 10 acres on Lookout Mountain, Ga., for $1 million and started searching for an easy-care vacation condo in the $600,000 range in New England, nearer to Mr. Kalkus's grown children. But after owning a custom-built place, Mrs. Davidson-Kalkus found the apartment-style condos she looked at to be "very ordinary." So the couple has just inked a deal to buy a detached, two-bedroom condo home at Winnapaug Cottages, a 35-acre development in Westerly, R.I. Their $300-a-month homeowner's fee covers landscaping, garbage collection, snow removal and exterior maintenance. "This is the best of both worlds," she says.


By JUNE FLETCHER
April 18, 2008; WSJ