Riding the wave of condo conversions.

After a five-year slump, the apartment industry is family experiencing steady growth. One reason for the turnaround: apartment owners in several cities have been selling properties to condo converters at a fevered pitch. Thanks to converters eager to snatch up properties in markets such as South Florida. Southern California, Phoenix. Las Vegas and Chicago, all of which experienced a record number of conversations in 2005, National occupancy rates continue to rise steadily.

According to New York-based Real Capital Analytics Inc., a national research and consulting firm more than $10.4 billion was spent acquiring apartments for conversion in the United States during the first six months of 2005 alone. Astonishingly Florida's Broward and Palm Beach counties accounted for $1.1 billion worth of those conversions. Equally as impressive, Las Vegas has converted more than 1,7,600 apartments to condos in the last three years, according to a recent report in the Las Vegas Sun. Further, there are another 17,000 apartment units projected for conversion in the city's pipeline, according to Dennis Smith, President of Home Builders Research.

In Chicago, as many as 4,000 former apartment units were estimated to have gone up for sale as condos in 2005, shattering the previous one-year record of 2.424 units set in 1994. according to Chicago-based Appraisal Research Counselors.

Converting Into Higher Occupancy

On average, between 10 percent and 20 percent of buyers in condo conversions come from the communities being converted. While this reduces the pool of renters, demand for apartments has stilt increased since the number of units subtracted has been greater than the number of renters who have exited the rental market. Due to this growing demand,; apartment managers are reporting higher occupancy rates and. in turn are raising rents In Chicago, of 228 communities polled by Appraisal Research Counselors, results showed that occupancy rates rose to 95.8 percent for the second quarter of 2005. This represents the city's highest occupancy rate since 2000. Further, in the second quarter, only 45 percent of those 228 communities polled were still offering concessions. With condo converters likely to continue to purchase apartment properties, and so little new apartment construction in the pipeline in most major cities, occupancy rates and rents should continue to increase, while the number of concessions being offered by apartment managers should continue to decrease.

In rare instances in which new apartments have hit the market, renters have been absorbing them at a record pace, Chicago's downtown apartment market added only three new apartment buildings or 912 total units in 2005 (compared to the addition of 2,921 condominium units in 2005). Nearly all saw exceptionally fast lease-up.

For example, The Shoreham, a 46-story apartment tower at 400 E. South Water St., managed by NNP Residential & Development, has leased nearly 90 percent of its 548 apartments in seven months. Consider that the typical timeline for lease-up of a new apartment community of this scale takes approximately 24 months to complete.

Housing Prices Keep Renters Renting

For as much as condo conversions are reshaping the apartment landscape nationwide, not every city is experiencing this unprecedented wave. In cities such as Dallas/Fort Worth and Denver, condo conversions are virtually non-existent. In these cities, the combination of a more slowly recovering job market and downtowns that have yet to undergo a complete rebirth after years of experiencing massive suburban sprawl, has kept converters at bay. Until these cities experience a run-up in condo prices in their downtown markets, there will be little reason for apartment owners to cash out and sell their properties to converters.

Nevertheless, the apartment markets in Dallas/Fort Worth and Denver are still improving thanks to gradually rising interest rates, which have forced many potential first-time buyers to stay in the rental market. In downtown Denver, the average apartment rent increased in the third quarter of 2005 to an all-time record high of $845, according to a report by the University of Denver. In the short term, rents will continue to escalate as jobs are added and the employment market in these regions improves.

While some are fearful of how much rents may rise in the foreseeable future, renting will still be considerably less than the average monthly mortgage payment of a condominium or single-family home, especially in areas, such as Southern California, which is in the midst of perhaps the nation's most dire affordable housing crisis.

Even in Chicago, where median housing costs have increased at what experts call healthy levels, the spread between rents and housing prices is at its largest gap in the 20 years that the FDIC has tracked such figures.

Interest Rates Dictate Growth

Overall, with interest rates increasing, the apartment industry should sustain its pattern of growth in 2006. Additionally, certain markets, such as suburban Chicago, Minneapolis and Denver, which have experienced minimum rent growth since September 11 while reproduction costs have increased 24 percent, should experience substantial rent increases over the next three years.

The strongest regions for apartment sales will continue to be the areas--such as Southern California, Las Vegas and D.C.-Virginia-Maryland--where converters are willing to pay top dollar to apartment owners. As this happens, the continued drain on the supply of apartments will increase apartment demand, garnering higher rents. As a result, the year ahead should be yet another positive one for the apartment industry in both the conversion and non-conversion markets.

Tom Moran is Senior Partner and Chairman of Chicago-based Moran & Co., a national brokerage firm specializing in the sale of institutional-quality apartment communities. He can be reached at 312/407-6700.