Easy come. Easy go.

The death of the condo conversion craze may have caused speculators heartburn, but it signals the return of a healthier transaction market for income investors. Some opportunistic companies see a chance to pick the bones of busted condo deals. Others see relief at the bidding table. Mid-America Apartment Communities CEO Eric Bolton said that, with condo converters gone, his REIT is better positioned to compete for condo-quality assets in Phoenix. Mid-America entered the Valley of the Sun last October with the acquisition of 480 units at the newly constructed Talus Ranch at Sonoran Foothills in the Sonoran Hills master-planned community just north of Phoenix, with plans to expand its footprint in the region.

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While Bolton is seeing little change in pricing in Phoenix today, he is seeing a change in the way deals are structured. “The fact that condo converters are out of the equation hasn’t really affected pricing because there still is a lot of capital chasing these high- quality assets. It’s just that now they are being priced as apartment deals, as opposed to a condo deal, and we’re able to compete more effectively in that kind of environment.” said Bolton.

According to the Boston-based research firm Portfolio & Property Research, hopeful condo converters who went under contract in mid-2004 to early 2005 paid an average of 33 percent more than income buyers for their purchases.

But the end of the condo craze doesn’t mean converters are loosing their shirts, said Brad Goff, principal in Apartment Realty Advisors’ Phoenix office. “When these guys were buying in 2005 and 2006, we were all scratching our heads at the pretty high prices. But not one property has traded below what the converter paid for it, for two reasons. One, cap rates have remained low and, two, we’ve had some good rent growth in our marketplace. You could say the rental market has bailed out the condo converter in Phoenix,” Goff said.

Converters still have carrying costs and debt to cover and they may not exit whole, but they aren’t getting hit as hard in Phoenix as in other markets, said Goff, who along with ARA Principal Bret Zinn, represented SunVest Communities in the recent sale of the eight-year- old, 272-unit Laguna Villas in Chandler for $38.5 million, $2.6 million more than the company paid for the property in January 2006.

SunVest spent about $1 million on landscaping, paint, the exterior parking lot, pool furniture and the clubhouse, bringing the asset to for-sale quality, especially from the curb appeal perspective, said Goff. When the condo market collapsed, the company was left wondering what to do with the asset, as well as another they owned in Phoenix.

Because leasing had been discouraged during upgrades and in preparation for condo sales, the community was down to 80 percent occupancy before SunVest realized the condo market was gone and began to aggressively lease the asset. “That’s when my phone rang and they said they needed to sell to an income buyer,” said Goff, adding that the property is still well-positioned to be a condo play when the timing is right.

Bidders for Laguna Villas were either institutional investors or local and regional privates using institutional equity. The asset ultimately went to Southern California-based Del Rey Properties, which also acquired SunVest’s final condo conversion attempt in the Phoenix area, the 112-unit Santa Rosa, which traded for $16.5 million, or $147,321 per unit. Average rents at Laguna Villas currently run $886, or around $0.94 per sq. ft. The buyer plans to push those rents to market, which in Chandler is about $1 per sq. ft.

Goff said around 17,000 units were targeted for conversion in Phoenix over the past several years and, today, 9,000 are returning as investment plays. That huge supply infusion is driving the return of concessions to the market, but Goff sees those giveaways as a short- term phenomenon. “The concessions are primarily because of conversion reversions like Laguna Villas, where the owner realized he’s 60, 70, 80 percent occupied and the exit strategy of condo is gone and he needs to lease aggressively, so he throws out two months free. That’s not really the market–it’s an artificial concession–but now the property down the street has to do something like that too. So there is kind of a trickle down effect,” said Goff, adding that Phoenix’s tremendous job growth and net in-migration will help to stabilize the situation by year-end.

Mid-America is offering one month free on a 12-month lease in the effort to stabilize Talus Ranch, which was 50 percent occupied when the REIT purchased it six months ago. The garden-style community, which consists of one-, two- and three-bedroom units that currently rent for $780 to $1,261, is located near the I-17 and Loop 101 interchange on the periphery of North Central Phoenix, where, according to Goff, three-bedroom, single-family homes with garages and pools still are priced at around $250,000. In those outer regions of the Phoenix Metro, apartments are seeing competition not only from conversion reversions, but also from single-family homes. Of the 480 units at Talus Ranch, 30 are three bedrooms and more than one-third of those were still vacant as of mid-May.