The conversion of properties into condominiums has risen considerably and rating agencies are starting to show concern that the sector is overheated. Fitch Ratings, in particular, said last week that these loans are riskier than traditional CMBS due to the element of construction or renovation risk with the properties not apt to generate sustainable in-place net cash flow.
Real Capital Analytics Inc. statistics showed that condo conversion leaped to $13.3 billion in 2004 from $3 billion in 2003, a roughly 350% jump - primarily driven by low interest rates and high single-family home prices. Fitch said that the buyers tend to be young, first-time homebuyers, empty nesters and second homebuyers - further buoyed up by sellers driven by the large premiums paid by converters. The rating agency does not believe that the current pace of condo conversions is sustainable specifically with interest rates rising and markets being overbuilt.