As housing prices escalate rapidly in the Truckee Meadows, investors are moving quickly to buy up apartment complexes that can be converted into condominiums.
Their thinking: Condominiums will fill the gap for first-time homebuyers who have been priced out of the market for single-family homes.
Relatively little of the condo-conversion activity has reached a point where investors are talking publicly about their plans.
But real estate brokers say they're busy scouting properties on behalf of investment groups, and city officials say they're fielding a rising number of inquiries from investors who want to understand the local rules for condo conversions.
"We're getting inquiries on a weekly basis," says Todd Blonsley, a broker with Marcus & Millichap in Reno.And he suspects that brokers are seeing only a small portion of the business as investors approach building owners directly without the use of a middleman.
Floyd Rowley,who handles sales of investment real estate for Colliers International in Reno, says the potential returns are eye-popping more than a 50 percent gross margin for an investor who buys apartment units for $80,000 each and sells them for $125,000.
But conversions aren't necessarily easy money.
The City of Sparks, for instance, places a two-page set of conditions on developers who want to convert rental apartments into condominiums.
Those conditions range from potentially costly upgrades to meet building standards to a requirement that investors provide at least 200 square feet of storage space outside each newly created condo unit.
And if the conversion forces tenants to move, the Sparks ordinance specifies moving allowances up to $500 for long-term renters that the developer is required to pay.
Both Sparks and Reno forbid conversions if the vacancy rate in apartments falls below 5 percent, and in recent months it's been almost exactly at that number.
The risks are less if investors can latch onto properties that were originally permitted by Reno or Sparks officials as condominiums but developed instead as apartment units, says Len Ramos, a specialist in multi-family properties with the CB Richard Ellis office in Reno.
"If it comes mapped as condos, you've got a premium,"Ramos says.
A second risk is that the market for condo conversions is relatively untested in the Truckee Meadows.
Among the big projects on the board is the conversion of the 440-unit Tanamera apartments in South Meadows to condos.
Kevin Kearney, a Keller real estate broker who will become sales manager of the property once it closes escrow, says the units will be priced from the low $200,000 range.
The buyers of the property, a group of San Diego investors, expect to clear regulatory hurdles and begin marketing the property in March.
Among other significant Reno projects is creation of condominiums at the former Wood Chase apartments in south Reno.
Sparks officials,meanwhile, have approved developer Alex Umana's request to convert the 131-acre Mountain Meadows apartment complex at El Rancho Drive and Wedekind Road into condos.
The Truckee Meadows is a late entrant to the condo-conversion business.
While developers in other Western markets were busily converting apartment complexes into condominiums in recent years, they stayed away from Reno because its historically affordable entry-level housing left them with a thin market.
As the Reno housing market took off and created problems for first-time buyers, Ramos said, investors first looked toward condo conversions in shuttered downtown hotels.Now they're looking beyond downtown and beyond hotels.
In at least one instance, a project that was designed as rental apartments was shifted mid-stream into a condominium project.
Chris Nelson,whose Portland-based Capstone Partners is developing 218 residential units on a 90-acre parcel near Idlewild Park, began construction of the units for the rental market.
After the floor slabs and underground utilities were in place, however, the company took a new look at the market and decided to build the project as condominiums.
"We perceive a shortage of supply in affordable high-quality housing in close-in Reno (within the Mccarran Loop)," says Nelson."The demand/supply dynamics for condos versus apartments and the risk/return analysis we conducted made the change an easy one." Prices for the Idlewild project will start in the $170,000s.
Still, Rowley says,"The depth of the market is totally speculative at this time." Also uncertain is the effect that a substantial number of condo conversion projects would have on the rental market.
Ramos, for one, expects that landlords' concessions such as free rent will continue to disappear as condo conversions reduce the supply of rental units on the market.
Rent increases, which have been running 1 or 2 percent a year recently, are likely to accelerate to 4 or 5 percent annually, Ramos projects.
As the supply declines, he says, it's unlikely that many new apartment units will be constructed in Reno or Sparks because rising land costs and stagnant rents continue to kill profit margins for developers.
Blonsley, however, says the number of rental units that are converted to condos is likely to be small enough at least in comparison to the total number of apartments on the market that conversions won't have a big effect.
