With housing prices on the rise, local developers have started tapping into inventory that until recently was avoided like the plague: condos left over from the last real estate boom that have been living out their lives as apartments.

L.A.'s slim supply of housing, combined with the dramatic jump in the cost of single-family homes, has created more demand for condos. In the San Fernando Valley, the hottest local submarket for condos, sales were up 12.1 percent in August over the same period a year earlier, according to the Southland Association of Realtors.

And the owners of units that were originally developed as condos but later rented out as apartments during the housing market's lean years have noticed.

Industry leaders say it's just a matter of time before developers look to newly gentrifying areas of L.A. for opportunities to convert apartment buildings to condominiums.

From a 60-unit luxury complex a few blocks from the Brentwood Country Club to a 16-unit complex in Glendale, brokers say they're seeing more investor interest, and they expect it to increase.

"I think we'll start to see more of them as the single-family home prices keep going up," said Laurie Lustig-Bower, senior vice president at CB Richard Ellis, who recently brokered the $14.5-million sale of a 63-unit building for a condo conversion on McClellan Drive in West L.A.

So far, such straight conversion deals are somewhat rare. That's because there's still more upside to upgrading and selling off condo inventory that didn't come on the market during the last recession and was converted to rental use instead.

But it's just a matter of time, if the housing market in L.A. holds up as expected, before conversions of apartment buildings into condos pick up, said Leslie Appleton-Young of the California Association of Realtors.

"It's a good idea to start watching it," Appleton-Young said. "It's a good bellwether for how things are going in the housing market overall."

Smaller players

The trend has been pushed by local developers and individual investors, not by institutional investors, according to officials who handle permits for condo conversions at the state Department of Real Estate. A recent survey conducted by that agency found that almost no major builders were doing any condo conversions.

Instead, the trend so far has been driven by companies such as Tarzana-based D & S; Development. Partner Stephen Bock said the company bought up about 60 rented condos in Toluca Lake, Beverly Hills, Glendale and other areas, and sold them off.

With the cost of buying homes rising so steeply, Bock and partner Darris Davis saw potential.

"Condos got a bad name, but this market has become really much more affordable (relative to single-family homes)," Bock said. "We find that there's opportunity throughout the area."

In addition, most of today's condo conversion projects are done on a much smaller scale than those undertaken a decade ago.

Department of Real Estate officials oversee only two or three conversions every month in L.A. That's a trickle, considering the size of the market and the volume of such projects undertaken during the last real estate cycle. But it's still a marked increase over the near-total inactivity in recent years.

Industry observers point to a number of reasons why the market has not seen a repeat of the 1980s frenzy. Not the least is the increased risk of litigation like that which plagued the condo development industry in recent years.

In addition, there's plenty of money to be made in the current market by holding onto apartments and raising rents. Historically low levels of apartment construction much less that what was seen in the 1980s has come nowhere close to keeping pace with job creation in Los Angeles.

For example, Donald Hunt of Hunt Enterprises Inc., owner of 4,500 apartment units in the region, has a 160-unit complex in Gardena that would be ideal for conversion; but it's packed with renters and vacancy is low.

"The last good cycle, there wasn't a shortage (of apartments)," Hunt explained.

And as Appleton-Young notes: the housing market hasn't peaked yet. If L.A.'s slow-to-build real estate market continues to rise as expected, developers who see condo conversions as hit-and-miss today might not see it that way tomorrow.

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