Uh-oh… they’re baaaa-aaaccckkkk

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We’ve now reached the point in the cycle where brokers describe their over-priced apartment deals as “condo conversion opportunities”.

Why would a broker do this? Well, if your client demands a price so high that no buyer could actually achieve any kind of yield on their investment, you don’t really have many options.

But, in all seriousness, what does the re-emergence of “condo conversion” as a strategy tell us about the current state of the market?

To answer this question, you first need to think about where we’ve been since 2008 or so. With interest rates at zero, capital has been chasing yields. Apartment buildings are reliable income generators, so capital has flowed into apartment buildings, raising prices and reducing returns.

But two factors are converging to change this state of affairs:

1. There’s only so high prices for cashflowing assets can go. Once you hit the point where the price is so high that the yield is negative, it’s pretty hard to convince even the stupidest buyer that he should go forward with an acquisition.

2. There is no limit to the insanity of single family home buyers in LA. Residential real estate in LA is totally, 100% detached from any fundamentals. No one thinks about what kind of rental yield they could get by renting the house or condo out. No one considers what it would cost to build the same house or condo across the street. Instead, they just convince themselves to pay a bit more than whatever the last sucker paid for a comparable house.

Given the above, it’s no wonder we’re seeing the re-emergence of the condo conversion as a marketing plan: If the price for your apartment building can’t go any higher, just transmute it into residential real estate and float away from the dreary world of actual returns into the beautiful fairy-tale of wanna-be stars living the dream.

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