GEORGE FANTINI
Disciplined capital

With a number of apartment and office buildings in the Boston area being transformed into condominiums recently, some commercial developers are grappling with the issue of whether to jump into the condo business.

The boom in condo sales and prices has generated intense interest, with several high-profile conversions in recent years capturing the attention of developers. Confronted with high vacancy rates, some office and apartment building owners have already decided that the best strategy is to go condo.

Within the last year, for example, a Florida firm shelled out more than $147 million to purchase Museum Towers with plans of converting the Cambridge apartment complex into high-end condos, and the owners of 99 Broad St. in Boston were granted approval to convert the office building into 48 moderately priced condos.

But a group of industry leaders behind some of the most successful condo projects in the region urged commercial developers last week to be cautious, advising them to consider and assess issues like location, timing, pricing and competition.

“You need a unique selling proposition,” said Merrill H. Diamond, founding partner of Diamond/Sinacori, a Boston-based development company. Diamond was part of a panel discussion organized by the Massachusetts chapter of the National Association of Industrial and Office Properties last Wednesday at the Hyatt Regency Hotel in Boston’s Financial District.

Focusing on what’s on the horizon for condo development and conversion, the panel of experts tackled such issues as supply and demand, absorption rates and available capital. They also offered advice to owners who are considering converting office space into residential condos.

Critical Issues

Diamond, whose former company, Parencorp., preserved and renovated the old Norfolk County Jail in Dedham into luxury condos, said conversions are sometimes difficult to pull off because of the layout of office buildings. Diamond also noted that it’s important for developers to do their homework by assessing competition in the marketplace and being creative about their product.

Ronald M. Druker, president of The Druker Co. in Boston, was even more cautionary, saying he wouldn’t advise office owners who know nothing about residential development to plunge into the business.

Location and timing are the most critical issues to consider in condo development, said Druker, who recently completed Atelier 505, a mixed-used building in the South End featuring 103 luxury condos, theaters and retail shops. “We hit the market even though we didn’t understand we were hitting the market,” Druker said of his most recent condo developments.

George Fantini, an investment banker who served as the panel moderator, provided an overall market snapshot, noting that condos sales have been strong, investor buyers are returning and there are a greater number of luxury condos in the pipeline.

“I think [today’s] projects are well conceived,” said Fantini, chairman and principal of Fantini & Gorga in Boston.

While capital is available and strong, it is also disciplined, said Fantini. Unlike 10 or 15 years ago, investors today are much smarter, questioning feasibility studies and requesting more and better information, according to Fantini.

“This market, if it’s going to be overbuilt, won’t be overbuilt for long,” he said.

However, Fantini warned against initiating “mega-projects” like 400-unit high-rises, describing them as risky in today’s environment.

While large, high-rise projects are riskier, they can be successful if they are completed in phases and have locked-in presales and nonrefundable deposits, according to Diamond, who pointed that such large-scale condo developments are popular in cities like Chicago.

The NAIOP discussion came just as the Massachusetts Association of Realtors released December sales results. December sales of Bay State condos were 22 percent higher than December 2003. Meanwhile, the median price for condos sold in December, $265,000, represented a 15 percent increase from the median price of the prior year.

Several of the panel experts last week noted that the condo market is driven by demand from empty nesters and echo boomers. “These two markets are so incredibly deep and so incredibly strong,” said Jon Gollinger, president of The Collaborative Cos.

Some observed that it’s difficult to gauge the supply of condos because unlike the office sector, which has specific market information available, there is little data on residential supply and the market studies that exist are very narrow in focus.

Pamela McKinney, a consultant and principal of Byrne, McKinney & Assoc., said data on condo supply is only good at “a moment in time.” But based on data that her firm has collected, there is not an oversupply of condos. Of the 25 projects totaling 3,300 units in the Boston and Cambridge areas that her firm is tracking, half are either under deposit or reserved.

“The demand fundamentals are very, very strong,” said McKinney. “We see that going on for a minimum of five to seven years.”

Still, some questioned whether the demand is enough to absorb the thousands of units, including the high-end residences, which are in the pipeline. “I question sometimes the depth of the empty-nester market,” said Diamond, whose company is collaborating with EA Fish Assoc. on a luxury condo project bordering Boston and Brookline called The Waterworks at Chestnut Hill.

The big question, Diamond said, is whether a lot of the empty nesters seeking to move into condos will be able to sell their suburban homes. Future residential sales will largely hinge on interest rates, acknowledged Diamond and other experts.

Aglaia Pikounis may be reached at apikounis@thewarrengroup.com.