John:
In the 1990's it seemed like 50 percent of the north side apartment buildings were converted to condominiums in Chicago. So many were converted, it attributed to an apartment shortage in some areas. I think in 1998 somewhere near 60 percent of all my appraisal work was conversation projects. I had some pretty sophisticated clients and never had a complaint and can only relate how I handled the feasibility portion during many of these assignments.
I am curious as to what difference, if any, there is between the feasibility of converting a hotel versus an apartment? I would flash not much. My first reaction is if there was preferential treatment of one group of properties the preferred property would be selected over the other within the market. In other words, your developer would go out and find an apartment building to convert into condominiums rather than a hotel. I guess he/she could already own the thing, they hate the hotel business and want out but it seems like conversion cost of either type buildings would be similar. The conversations in Chicago were mostly gut rehabs. I would assume the same could be done to a hotel at similar cost. Further supporting this hypotheses is a number of loft warehouse buildings were also converted in the City during this time period and cost were remarkably similar. Also, selling prices were vary similar.
Be patient I coming to my point. If it is true that the type of building being converted is of little consequence, than you may be able to use various conversion projects rather than seeking a specific type. After all the demand for condominium units seems paramount in the feasibility equation. More so than the type of building being converted. If yours is the first project in the market area good luck you are going to have to wing it. With this said, a simple way to determine supply and demand (which basically determines feasibility) is MLS.
Here is how I do it. I look at the number of sales of condominiums over the last 3 years. I determine if sales and prices are increasing or decreasing. I further determine how many expired listing have occurred as of late. Is the number increasing or decreasing over a defined time line. Finally I look at marketing times, are they increasing or decreasing over said time line. If prices and the number of sales are increasing and marketing times and expired listings are decreasing then it indicates demand is growing. The next thing I do is find a conversion project(s). If no conversion projects are available look at new condominium development. I determine how long it took from the first listing to the last sale to absorb the units. Given market conditions I compare my subject to the comparable project and estimate absorption. There are a number of little things you can do within this context. This of course is the abbreviated version and could be adapted to various markets.
The more of these conversion projects you do the greater your data pool. Once you get three or four under your belt you can turn'em and burn'em. I found them very profitable after the first couple but the first few were very time consuming. Final word, in my market area it was impossible to judge how many new projects were coming on line. There were just to many apartment buildings with mom and pop converters. Therefore, future supply was an unknown. I always put this fact up front.
Steve Vertin
