Starboard Commercial Real Estate

Alex Popov | December 7, 2005

I remember attending a real estate conference about two years ago and hearing a broker from Miami who specialized in condo conversion go through a presentation showing how to make a bundle on converting apartment buildings into condos. It was easy to sum up the math- you buy on a CAP rate basis and you sell on a per unit basis. Let me explain this a little further- apartment buildings are income properties. Investors price these properties based on the cash flow they generate. CAP rates is basically the net income the property generates if you paid all cash for the building. This is different than Cash-on-Cash which factors in the financing component and actually down payment. So investors were pricing and buying apartment buildings on an income basis, which is a function of the rental income. However, if you took that charming 2 Bedroom apartment and all of a sudden could SELL it to someone as a condo, the math changes quickly. Apartment buildings that would normally sell for $200k-$300k per unit on a rental income basis now sell for $400k-$500k per unit as a condo. This has been driving the heated sales of apartment buildings.

The same could be said for commercial office buildings that are bought on a per sq ft basis. The quick math- Buy a building for $250 psf, add $200 psf in improvements, convert to residential condos and sell for $800-$900 psf as condos... This is what has been happening to older, smaller office buildings like the royal insurance building shown above in downtown San Francisco.

I believe there are too many units coming online with conversions and new construction. I heard that in 2007 there will be 30,000 condo units completed in San Francisco. Still less than the 60,000 units completed this year in Miami. Also, another sign, the average price of a condo in San Francisco is higher than the average price of a single family home... These condos might just be offered up as apartment rentals in the future should the market change.

Posted by: Alex Popov Commercial Sales and Leasing Specialist
Office: (415) 477-8474
Cell: (415) 269-1849
Posted 14 years, 3 months ago on December 7, 2005
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Comments on this post:

Re: Condo Conversions Magic
condos will never go out of style.The aging population is perfect for the boom to continue for many many years to come. Hold on the fun has only just begun.

2005/12/16 by Cliff Lones • • Reply
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Re: Condo Conversions Magic
I couldn't agree more. But both arguments are valid- with the aging population growing, condos going out of style is not likely- but with so much supply, how can demand keep up?

2006/01/20 by Todd Horwath wwwReply
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Re: Condo Conversions Magic
If someone could please direct me to more information to the pros and con's to condo converting i'd appreciate it

2006/01/29 by aridobz • • Reply
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Re: Condo Conversions Magic
I just walked by this building and it looks interesting. I thought the sign read, but the link does not prove as much. Does anyone have the correct link?

2006/02/07 by Dee • • Reply
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