Florida Condominium Conversions Boom

What drove the boom in Florida condominium conversions in the 2000s and how does it affect the market today?

By: Adam Matyskiel, Senior Managing Director at CAG

The early 2000s in Florida saw a significant increase in condominium conversions. There were several key drivers that contributed to the increased conversion activity. The housing market crisis of 2008 and the following years significantly molded the ownership make up of today’s condominium.

The early 2000s marked a period of rapid growth in the real estate market, not only in Florida but also across the United States. Low interest rates and favorable economic conditions created a surge in demand for housing, leading to a housing boom. Developers and investors recognized the opportunity to capitalize by converting existing rental properties into condominiums.

Changing demographics also factored into the increase of condominium conversions. Florida has long been a popular destination for retirees, second-home buyers, investors, and snowbirds seeking warmer climates. Condominiums, with their low-maintenance lifestyle and desirable amenities, were seen as attractive options for these demographics.

Next, Florida’s laws and regulations that were in place facilitated condominium conversions. These regulations streamlined the conversion process, making it easier for property owners and developers to navigate the necessary procedures. This favorable legal environment encouraged more conversions to take place, with minimal roadblocks for developers. The increased demand for housing in Florida during this period began to outpace the available supply. Condominium conversions helped increase the housing stock by converting rental properties into potential owner-occupied units.

The housing market in Florida experienced a significant downturn during the global financial crisis of 2008. This resulted in an oversupply of condominiums and a subsequent decline in prices, causing financial difficulties for many developers and investors involved in conversion projects. This caused a decline in condominium prices. Investors who had purchased condominiums as speculative investments faced difficulties in selling their units at a profit or even recovering their initial investments. This created a negative cycle as distressed sales and foreclosures further depressed prices. In addition, Buyers who bought for their primary residence were faced with the same issues. To help stabilize the Florida condominium market, investors and industry stakeholders took various measures.

A large number of investors, particularly large institutional investors and real estate funds took advantage of the low prices and acquired condominium units in bulk. These bulk purchases helped absorb the excess supply, but it also severely depressed prices because they were foreclosure sales. This new wave of investors leased out the units to tenants, offering more flexible lease terms to attract them. This helped generate cash flow and offset the costs associated with owning and

maintaining the properties. In some cases, investors converted unsold condominium units into rental properties, or reconverted these communities BACK to rentals. This allowed them to avoid selling at low prices in a weak market. Converting units to rentals helped reduce the inventory of unsold condominiums and stabilized the market. However, the result for the vast majority of condominium conversion projects has been that they are over 95% owned by investors and they are still rental communities operating in a condominium regime with a multitude of individually managed rental units. This poses huge challenges for the associations and their management companies.

So where does that leave the market today and how do past decisions affect these communities today? Well, because numerous garden style condominium communities found themselves as a condominium in name only, many were run by investors who focused on managing their investment and maximizing cash flow. With that in mind, the associations voted to waive reserve funding, and keep monthly maintenance fees low. These decisions caused a snowball effect of deferred capital for communities who now find themselves in the cross hairs of the Florida Building Safety Act, better known as Senate Bill 4-D.

The Florida Building Safety Act, enacted last year, requires Florida condominium communities three stories or higher, and 30 years of age or older, to have a “Milestone Inspection” completed no later than December 31, 2024, and every 10 years thereafter. The inspection focuses on the common elements of the community. Additionally, Florida condominium associations are now required to obtain a Structural Integrity Reserve Study, or SIRS no later than December 31, 2024. This reserve study must consider all common area items that surpass $10,000 in replacement cost. The reserve advisor must determine the remaining useful life of these items and fund all replacements pursuant to the schedule. Condominium associations will now no longer be allowed to waive annual deposits to reserve accounts.

The future of many of these condominium communities is still unclear as we grow closer to the deadlines next year. The largest concern is for properties where deferred maintenance has been accumulating at an even higher rate because unit owners voted to waive reserves, forestall expensive projects to properly maintain the property and kick the can down the road. Those days are now officially over in the State of Florida.