The Emergence of Condo ‘Reversions’

Earlier this week, I wrote this post about some beautiful, brand-new Beverly Hills condos that aren’t selling. The nine-unit complex, called Barcelona (pictured), is in the southernmost part of Beverly Hills, and each condo has over 3,000 square feet.  The developer isn’t able to sell them, even after putting them up for auction in August at prices starting at $1.7 million.

A blog reader named Emmanuel Cervantes commented on the post, noting the phenomenon of developers getting burned on high-end condos and condo conversions in L.A. and other places, like Florida and Nevada.  Increasingly, developers are converting their condo complexes and conversions into income-generating apartment buildings, he said. He called it “condo reversion.”

It turned out that Emmanuel is a senior analyst with AptBldgTrader.com, a Woodland Hills-based investment-property arm of ReMax Commercial. I asked him if he could elaborate on the trend.  Here are some of the points he made, via e-mail:

• People trying to sell investment property are in denial about the market for condos.  “The days of condo conversions are gone!” he wrote in this December 2007 blog post.
• High-end condos and conversions are not selling because developers paid too much for the property as the market tanked and were not able to sell the condos at the prices they needed to. Now, Emmanuel says, there is “a surplus of properties and a shrinking buyer pool.”
• Increasingly, developers are converting their condos into rental units. Emmanuel cites the Mozaic in downtown L.A. and a complex at 7323 Winnetka Ave. in Canoga Park, as examples of this trend. 

Mozaic’s condos were listed at around $600K; when they didn’t sell, the developer converted them to luxury rentals, priced at $1,900 to $2,700 per month. Here is a photo:

And 7323 Winnetka was converted to rental units when the condos failed to sell, even after prices were reduced from the $600s to the $400s.

Meanwhile, the Social, a five-story, 65-unit complex in North Hollywood, aborted its plans to sell condos and is now trying to sell the entire complex for about what it paid to build it: $21 million — a price Emmanuel calls “priced to sit instead of priced to sell.”

Los Angeles is replete with new condos that aren’t selling. Some, like Larchmont Lofts, have been converted to rentals, but at high prices. “Those investors who cannot break even by renting out the units really only have one choice… they should cut their losses and attempt to sell the property as an apartment complex…60% of something is a lot better than 100% of nothing,” Emmanuel says.

What does this mean?  Well, something’s got to give with these condos. They’re not going away.  So as the buildings change hands, the new owners will be able to rent them for less.  And people like you and me might be able to rent a beautiful place to live at a fraction of what it would cost to own it.

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