Condos look to leasing to fill units during sales slump

The Metropolitan condominium tower in downtown Dallas has a private theater, a rooftop pool and will soon overlook a new park.

More than 140 units have been sold at prices starting at just under $200,000. Still, almost half the 4-year-old project is unsold.

So, the Metropolitan has joined a number of condominium projects to offer units for rent.

"It's a great deal for someone who is not sure if they want to be a downtown condo owner," said Christine Lutz of Garrison Partners Consulting, a Chicago firm that's marketing the Main Street project. "You can test drive the product."

It's also a way for condo developers to fill empty units at a time when sales are in a slump.

Condominium sales in North Texas are off almost 20 percent this year from 2008, which was already a down year for the projects. That's left many new deluxe units sitting idle.

Another high-profile condo project that has begun to lease is the posh Residences at Palomar on Mockingbird Lane at North Central Expressway. It has rented out 37 of the 44 remaining units. Fewer than 10 of the condos are in the hands of individual owners, tax records show.

The Palomar condos – which adjoin the namesake luxury hotel – are renting for $2,000 to $5,400 a month. Renters get to partake of the same amenities as the condo owners, including a fitness center, pool and outdoor terraces.

"We are very flexible and will lease anywhere between six months and two years, including a popular lease-to-own program," said Sam Gillespie, chief operating officer of building owner Behringer Harvard Opportunity REIT.

The downtown Metropolitan condo is also working on a lease-to-own plan, that will debut in January, Lutz said.

"At least 25 percent of our renters are interested in becoming homeowners," she said. "The others are just thrilled to be renting in a luxury building and occupy a new unit.

"No one is saying we wanted to be a rental building, but this has been a positive experience," Lutz said.

Renting out the costly condos is a short-term solution that doesn't make long-term sense.

"All they are doing is paying for the lights and the taxes – they are reducing the pain and getting some kind of income," said consultant Mike Puls with Foley & Puls. "They have to do something if they aren't selling them."

Of course, the last thing competing apartment owners want is competition from the luxury condo market. Apartment vacancies in North Texas are already over 10 percent and expected to go higher in the next year.

But the number of condos turned apartments is lower in Dallas than in many markets that have a glut of the for-sale units, said Greg Willett, vice president with Carrollton-based apartment analyst MPF Research.

"There are some locales out there where competition from rental condos remains a big deal for the apartment market's performance," Willett said. "For Dallas, condos comprise a very small share of the total multifamily stock, even in the heart of the city, so they don't have much impact on apartment sector fundamentals in the big picture."

A bigger challenge for the Dallas rental market is that construction of 4,000 new traditional apartment units will be completed in the next few months.