Condo conversion rate exceeds new construction.

The rate by which condo conversions exceeded new construction of apartment units grew in second quarter 2005 and is expected to still grow in the next three years, according to New York-based real estate research firm Reis.

Reis, which tracks the top 67 markets in the country, identified approximately 25,000 apartment units being converted to condominiums, up from the first quarter's 20,500 unit total, according to its "First Glance Report--Second Quarter 2005," available on its Web site, www.reis.com.

Conversions exceeded new construction by 7,800 units during the second quarter after doing so by 1,000 units during the first. While the impact of this trend on the rental apartment market is difficult to fully quantify, it is clear that the removal of formerly competitive apartments from the market has the arithmetic effect of muting the market's reported net absorption rate, said the report, written by Reis CEO Lloyd Linford.

Based upon Reis's calculations, the absorption of 10,300 units during the second quarter is effectively "understated" by approximately 25 percent to 35 percent. Conversions were most prevalent in metro areas with desirable climates and robust single-family home markets: Las Vegas (3,600 units), Tampa (3,050), Fort Lauderdale (2,506), Miami (2,089) and San Diego (1,623).

The influence of the condominium craze is not limited to the volume of conversion activity, Lynford said. New condominium construction also has become a dominant factor in the ecology of residential markets across the country. As recently as two years ago, condominiums accounted for 10 percent of the new multifamily housing projects tracked by Reis. Last year that percentage rose to 18 percent, followed by 31 percent this year, and is projected to rise to a stunning 43 percent of the anticipated 2006 total.

Again, as households that previously would have selected apartment units are steered into a growing inventory of for-sale units, net absorption rates may well "statistically" underperform expectations. The implications for apartment investors are manifold, according to the report. To date, many sellers have celebrated the lower cap rates being tossed about by investors eager to convert their way into comparatively easy profits. However, as the supply of available condominium units becomes newer and amenity-laden, and the rental inventory--or at least a portion of it--older and less competitive, apartment investors may be faced with the need to commit additional resources to their properties as well as to develop innovative asset management and marketing strategies to maintain their competitive positions.