With apartment rents skyrocketing in recent years, Chicago’s downtown and lakefront rental market is so profitable that developers are looking for ways to skip the typical two-year construction schedule needed to build a new high-rise.
Instead, several major developers are opting for “deconversion”—buying all of the units in an existing condominium building and rehabbing the apartments for rental.
Under state law, an investor can acquire all the condos in a building if 75% of the unit owners vote to approve a sale. Even if some owners vote “no,” the dissenting owners are forced to sell. An arbitrator would handle disputes over the appraised prices and terms.
Experts say the deconversion trend started nearly a decade ago after the Great Recession created the condo bust. Developers snatched up unsold condos in failed projects in bulk transactions and rented them out.
Over the past three years the trend has accelerated. The new wrinkle is investors are hunting for troubled older condo buildings and attempting to buy out individual owners in such hot neighborhoods as the Gold Coast, Lincoln Park, Old Town, Lakeview, Wrigleyville, Logan Square and the South Loop.
Dozens of condo boards have received offers from developers who want to “deconvert” their buildings by purchasing all of the individual units, upgrade them with new granite kitchens, fancy baths and wood floors, and turn them back into rental apartments.
Ironically, many of the high-rises now in demand for deconversion were originally built as rental properties, then converted to condominium ownership during the conversion boom of the 1970s.
Why would condo owners vote to dissolve their association? It’s simple economics, experts say. First, condo resale values plummeted during the Great Recession, and prices have not fully recovered in most buildings. For example, a typical one-bedroom unit that originally sold for $294,000 in 2005, resold for only $170,000—a 42% resale price decline—a decade later, according to Cook County property records.
Second, many of the lakefront buildings were built in the 1960s and converted to condos during the boom of the 1970s and 1980s. These aging properties are showing infrastructure wear and tear, and need new roofs, elevators, windows and mechanical systems. As a result, owners currently are being hit with hefty special assessments for repairs ranging from $25,000 to $75,000-plus per unit.
Third, buildings with low owner-occupancy rates signify trouble as traditionally financed sales and refinancing grind to a halt.
“Deconversion of a financially troubled condominium building is one way for owners to recoup some cash and escape from condo jail,” said Chicago Realtor Sara E. Benson, co-author of “Escaping Condo Jail.” “It is a national trend. Tens of thousands of condominium units have been deconverted to rentals.”
As apartment rents continue to rise, the market value of rental buildings is soaring. So, investors are willing to pay top dollar for a building they can quickly deconvert, renovate, and start the flow of rental cash.
One of the biggest players in the deconversion game is Strategic Properties of North America, a New Jersey-based company, which purchased and deconverted two North Side condo buildings in 2016.
Strategic Properties paid $35 million for the 133-unit Clark Place high-rise at 2625 N. Clark St. in Lincoln Park, and $51.5 million for Bel Harbor, a 207-unit tower at 420 W. Belmont Ave. in the Belmont Harbor section of Lakeview.
In 2018, Strategic Properties targeted the 268-unit Kennelly Square, a 22-story tower at 1749 N. Wells St. in Old Town, for deconversion. The company offered as much as $78 million to buy the property, and 75.8% for the condo owners in the building voted to approve the sale, according to an email sent out to unit owners.
A key reason Kennelly Square condo owners are eager to sell is they are facing a $14 million special assessment to cover deferred maintenance, including new windows, tuck pointing and other repairs.
A typical studio condo owner at Kennelly Square likely would have been slapped with a $35,000 special assessment on a unit with a market value of $120,000. By agreeing to sell the unit to Strategic Properties, the typical owner would receive about $150,000.
Another major deconversion is now underway at River City, a 448-unit South Loop condo complex designed by famed architect Bertrand Goldberg. In late 2017, owners voted to sell the complex to Marc Realty Capital, a Chicago investment firm.
However, not all condo boards and owners are jumping on the deconversion bandwagon. When a developer offered to buy the 492-unit Lincoln Park condo high-rise at 1660 N. LaSalle, the building’s condo board quickly rejected a $141 million offer without asking owners to vote on it.
Regardless, apartment investors hoping to take advantage of the rental boom in Chicago still have hundreds of units from which to choose in large and small condo buildings, and sellers are asking top dollar.
For example, the Kiser Group recently listed a vintage 250-unit that’s perfect for “condominium deconversion” at 1140 N. LaSalle in the Gold Coast. The price? “Subject to offer.”
For more housing news, visit www.dondebat.biz. Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit www.escapingcondojail.com.