Condo Conversions Return as DC Supply Tightens

• June 17, 2010
• 4 Comments

by Ryan Holeywell

When a blighted building sells at a bankruptcy auction, it’s usually not big news.

But Madison Investments’ $3.2 million purchase of a 28-unit apartment building at 1020 Monroe Street at the end of May was a quiet indication of a trend the region hasn’t seen in years: condo conversions.

1020 Monroe Street NW

Madison Investments will turn the building into a 28-unit condo project that is expected to begin sales a year from now. But area real estate leaders are speculating that other developers could pursue similar deals, and an uptick in condo conversions could begin in the fourth quarter or early next year.

Madison Investments Barry Madani told UrbanTurf that when the housing market slowed in the past couple years, developers who had new condos in the works hedged their bets and converted them into apartments. A potential influx of condo supply vanished and condo conversions essentially came to a halt in 2006.

That may be about to change.

“The way you satisfy demand quickly is through condo conversions,” said Grant Montgomery, a vice president at real estate research firm Delta Associates. “The product is already there. You just need to get your condominium regime up and running.”

The statistics illustrate how quickly and drastically that condo supply dried up. In the first quarter of 2010, the metro area’s inventory of new condos for sale was 4,600, including only 916 in DC proper, Delta Associates VP William Rich explained. To put that number in perspective, in 2006 there were about 25,000 units for sale in the metro area and 5,000 in DC.

In order to increase inventory to meet demand, developers will likely be turning to small, distressed properties like 1020 Monroe Street, as many lack the financing to pursue the construction of large, new condos.

“There’s not much out there in terms of new stuff, and what is selling are units in older buildings from five or six years ago,” Madani said. “I think in DC it’s going to start switching back to a seller’s market. We were in a buyer’s market for awhile – especially condos – but now, that’s where the short supply is.”

Madison Investments has also converted the nine-unit Trevelyan House at 1436 Ogden Street NW, which was bought in 2008. Units will go on the market in the coming weeks.

Due to the cumbersome process of conversions in DC (mainly due to the city’s tenant rights laws), William Rich said most of the new conversions will initially occur in the Rosslyn-Ballston Corridor and Montgomery County. But Stacey Milam, vice president of investments and director of national multi-housing at real estate broker Marcus & Millchap, said DC neighborhoods that weren’t drastically affected by the housing crunch, such as Dupont, Logan Circle and U Street, could also see an uptick in conversions, noting that he anticipates many developers from outside the region setting their sights on the DC area. 

“If you run a fund, it’s a no-brainer to come to this market because your risks are mitigated,” Milam said. “There’s a lot of money chasing this market.”

Not all condo conversion projects are small these days. In January, sales began at the converted 76-unit Embassy Condominiums in Mount Pleasant, though that project was several years in development.  And the Waterfront Tower conversion in Southwest has been selling units since 2009. There is also speculation that Miami-based Crescent Heights, which purchased The Palatine, a 262-unit complex in Arlington at a foreclosure auction earlier this year, may plan to convert the property from rentals to condos, though the company remains tight-lipped on its plans.

Restored lobby of The Embassy

But Mark Franceski, director of market research at sales and marketing firm McWilliams|Ballard, said purchases of bankrupt and blighted buildings like 1020 Monroe may prove to be the new model, due to the speed and ease of the process.

“They’re flying under the radar with bankruptcy sales,” Franceski told UrbanTurf. “If you get the right people to work on it, you can turn units over in six to eight months as opposed to building a new building. The money’s not huge, but you don’t need gigantic loans that are hard to get.”

Franceski noted that projects like these also afford developers the opportunity to “get their feet wet” and learn about the conversion process while minimizing their risk. What’s more, developers may find that it isn’t worth it to convert large apartment buildings since rental prices haven’t been devalued. “They’re almost too valuable as apartment buildings,” Franceski said.

Other likely candidates for conversions include buildings that were originally planned as condos but were instead changed to rentals when the housing bubble burst.

“Product-wise they were planned, built and designed as condominiums, so they make obvious candidates for conversions back to their original planned use,” said Montgomery, of Delta.

But real estate experts caution that developers aren’t going to launch a giant conversion bonanza, since the sting of the housing bubble won’t soon be forgotten.

“We will not see (conversions) like we did last time,” Montgomery said. “I think the market has been chastened.”

Ryan Holeywell is a Washington, DC-based journalist whose work has appeared in USA Today, The Detroit Free Press and washingtonpost.com. He can be reached at .(JavaScript must be enabled to view this email address).

This article originally published at http://dc.urbanturf.com/articles/blog/condo_conversions_return_as_dc_supply_tightens/2180

4 Comments

1. Agist said at 2:34 pm on Thursday June 17, 2010:

   This is good to know. I have been looking for awhile and the number of places on the market is pretty slim. It is nice to know that there are some new projects in the works, even if they won’t be delivering for months.

1. Barry said at 12:34 pm on Friday June 18, 2010:

   I know that there are a number of projects that are coming online in Columbia Heights and Petworth, but is there anything in the works for Dupont?

1. Jamie said at 3:36 pm on Monday June 21, 2010:

   This can only be good for the city and developing neighborhoods, kind of a silver lining to the housing bust.

   While big projects are dramatic, there are many, many buildings like this one (especially around Columbia Heights) that probably were too small for big players to bother with during the boom…. and too big for any individual seeking to buy or live in the neighborhood.

   But by renovating/restoring properties such as these, there’s much less impact during the construction in any given area; troublesome spots in get a big lift; and hopefully some nice historic buildings such as this one will be spared the wrecking ball (and the much bigger replacement building) that might otherwise have come.

1. K. David Meit said at 11:04 am on Friday June 25, 2010:

   Additional conversion leads to continued loss of much needed rental housing. Of course the economics of rent control force housing providers to make this economic choice to earn a reasonable return on their capital. With rent control up for renewal this year, the City Council should wake up and take notice.

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