Condominium ‘Deconversion’ Wave Hits Smaller Walk-Up Buildings
Condominium “deconversions” are sweeping Chicago, as more investors and small developers are tapping a profitable market.
A survey by The Home Front column revealed that more than 2,500 condo units in more than 20 existing condo buildings have been “deconverted” and rehabbed into rental apartments over the past three years.
Buyers include major landlords, out-of-state investors, and 1031 tax-deferred purchasers who are looking to acquire real estate to defer capital gains on recent property sales.
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. Now, the deconversion movement is spreading to Albany Park, Avondale, Lincoln Square, Uptown, Wrigleyville and South Shore.
The big players in the deconversion game include New Jersey-based Strategic Properties of North America, New York-based ESG Kullen, and Marc Realty Capital, a Chicago investment firm. Essex Realty Group is a major player in marketing the smaller walk-up buildings that generally are priced from $3-million to about $7-millin for 18 to 41 units.
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% of the condo owners in the building voted to approve the sale.
ESG Kullen recently took over the 250-unit condo building at 1140 N. LaSalle, and is close to completing the deconversion of the 391-unit tower at 1400 N. Lake Shore Drive in a $112-million deal. Now the company is targeting the 309-unit 2 East Oak and offered $92 million. However, only 69% of the owners voted for the sale.
Owners at the 202-unit 1250 North LaSalle have hired the firm of Avison Young of represent the condo association in an effort to market the 18-story building to an investor.
Another recent major deconversion was 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. The deal closed in early 2019.
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 is simple economics, experts say. Here are the facts:
• 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.
• 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.
• 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,” Benson said. “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.
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. DECONVERSIONS SPREADING TO THE NEIGHBORHOODS
Developers and investors are targeting smaller walk-up condominium buildings for deconversion to rental apartments.
Here is a list of recent deconversions grouped by neighborhood.
ALBANY PARK 4954 N. Ridgeway—22-units.
AVONDALE 3507-3511 N. Elston Ave.—12 units.
EAST LAKE VIEW 659 W. Aldine Ave.—9 units.
GOLD COAST 159 W. Goethe St.—14 units.
LINCOLN PARK 915 W. Montana St.—18 units. 2317 N. Cambridge St.—7 units. 915-925 W. Schubert St.—29 units.
LINCOLN SQUARE 4459 N. Campbell Ave.—18 units.
LOGAN SQUARE 2601-2607 N. Hamlin Ave.—11 units.
NORTH CENTER 1946 W. Bradley Pl.—10 units.
SOUTH SHORE 7420 S. Colfax St.—27 units.
UPTOWN-SHERIDAN PARK 4630 N. Beacon St.—41 units.
WRIGLYVILLE 1050 W. Dakin St.—18 units. 1244 W. Byron St.—21 units.
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.