Developers rushing to condos.

Just a few years ago, you couldn't pay most developers to build condominiums.

That has changed in the blink of an eye.

There are currently more than 3,000 new condominiums or conversions underway in the San Fernando Valley, more than half the number that sold last year.

And the market is awash with those searching for new opportunities.

"The number one call I probably get these days when I get a listing is does it have a condo map," said Dean Zander, a partner with multifamily real estate specialist Hendricks & Partners. "The demand is overwhelming."

So what's different?

First, the cost of constructing or investing in an apartment property has risen so astronomically, it's difficult for many of these projects to pencil out, and developers and investors are seeking different alternatives.

Along with that, the price of single family homes has risen sharply--as of January the median price of a single family home in the Valley exceeded $450,000--creating a market for condominiums in the $300,000 to $500,000 price range that never existed before.

"It's still an alternative to people who can't afford a single family house," said John Battle, a partner with Lee & Associates--L.A. North/Ventura Inc. "Most developers assume the housing demand is going to continue, and if you can offer a higher end product in a good area like Warner Center people will be willing to pay whatever a reasonable price is. And I think they're probably right."

For years, developers were unwilling to build condominiums because state laws held them liable for potential construction defects for 10 years from the date of construction. That in turn drove many insurance carriers away from the California marketplace, and the few who were left were charging exorbitant rates.

But in recent years, new legislation has alleviated some of the risk by requiring owners to allow a builder to repair the problem before filing suit. Developers report that some insurers have returned to the California market, increasing the competition among these carriers and easing premiums. And even higher premiums can now be absorbed more readily because selling prices for condos have surged.

In January, the median price of a condominium rose to $315,000, up 5 percent from 2004 and a whopping 72 percent from 2002, when the median price of a Valley condominium was $182,625, according to statistics from the Southland Regional Association of Realtors.

"We made a decision last year that we were committed to the industry and the local community and since the insurance market was coming back and there's been some favorable legislation providing a fix-it period, we made a decision to get into condominium product," said Todd Pratt, executive vice president at Chandler Partners, a 30-year old development firm in Burbank.

Benefits of conversion

Investors who have operated apartment properties are finding that selling their buildings as a condominium conversion can yield a much higher price.

Consider the recent acquisition of Warner Center Apartments, a 1,279 unit complex that sold for $325 million.

Had the complex been bought for an apartment rental, the price it fetched would likely have been about $220 million.

"It became apparent to the apartment acquisition people that yes, they could bid on it, but they wouldn't be anywhere close to the final and best offer," said Charles Macbeth, a general partner in the joint venture that ultimately acquired the property, Warner Center Condominiums LLC.

Not all apartment owners can switch gears so easily. Converting an apartment building to a condominium requires a specific permitting, a different parking ratio and other features.

Most condominium converters are unwilling to take on a project not already equipped with those features because the risk is too great. They may not get the necessary permitting or the required land to build the additional parking, for instance, and if that happens, they are left with a property purchased at a price that won't justify the income from rental units.

A number of multifamily buildings currently managed as rental apartments actually have the necessary permitting and parking for condominium use--landlords simply did not take advantage of them before because the market for condominiums wasn't strong enough.

But that has changed as the price of single family homes has risen. The real measure of the new attractiveness of condominiums now is the demand for home ownership and the affordability of single family homes.

Even the median price of a single family home doesn't buy much these days, developers and brokers point out, and a newly developed or renovated condominium looks especially attractive by comparison.

"When a condo is brought to the market with all new kitchens and you can bring it on for 50 percent or 60 percent of the median home there's going to be an immediate demand," said Zander.

More product

Even the large number of new condominiums and condo conversions coming into the market in the next several years is not expected to dampen the demand.

First, because the price of single family homes, while not expected to rise as dramatically this year as last, will likely continue to increase. Most expect another 10 percent increase in the median price of a home in the Valley in 2005.

Second, there is a relatively small supply of condominiums, even with the construction now in the pipeline.

Even with more than 1,000 units in the Warner Center complex, which has been renamed The Metropolitan Warner Center, the owners say they expect to sell out, and quickly.

"There are Very few condo opportunities for first time buyers," said Macbeth. "Generally, the older product is bought up in the first day, and they're usually bid up. So we're not competing with anybody. And there is a lack of first-time buyer type homes in the area. So we felt all the stars lined up."

Already the condominium builders and converters in the market are filling several different niches--price points under $300,000, those between $300,000 and $400,000 and luxury units at $400,000 and above.

And brokers report that still more builders and buyers are entering the marketplace.

"The overall trend is probably going to continue," said Battle. "A lot of the discussion is the lack of available land and that's why you see what's happening in Warner Center."