There Is No Market For One-Bedroom Condos, And Insatiable Appetite For Condo Deconversions
The condo deconversion trend has expanded beyond Lincoln Park and Lakeview into Chicago’s outlying neighborhoods like Uptown and Rogers Park. And that is encouraging news for investors, landlords and renters alike.
Condo deconversions like Bel-Harbour Condominiums and 2625 North Clark are adding hundreds of smaller apartments to neighborhood supplies as renters are hesitant to pay the high rents sought by developers of new downtown apartment buildings.
With new apartment construction confined mostly to the downtown core, investors are venturing to the neighborhoods seeking vintage apartment buildings, including condo deconversion opportunities. Analysis from KIG revealed neighborhood multifamily transactions increased 175% in 2017 over 2016.
But there is very little supply of neighborhood, vintage apartment buildings for sale. Essex Realty Director Joe Scheck said condo deconversions allow Essex to meet investor demand by structuring condo-building sales as pure apartment plays.
Condo deconversions are a byproduct of the pre-2008 real estate boom, when developers and investors seeking to capitalize on the homebuyer craze bought vintage apartment buildings and converted them into condos. These buildings consisted mostly of studio and one-bedroom apartments, and conversions effectively removed the units from the apartment inventories of the outer neighborhoods.
When the Great Recession hit, developers were left with unsold condo units and were pressured to rent them, often at rents below what they expected the units to sell for.
Essex Realty Group entered the deconversion business by selling bulk condos for banks on fractured developments during the recession. Scheck said the firm studied Section 15 of the Illinois Condominium Property Act, which requires 75% of a condo association’s members to vote in favor of a bulk sale to trigger a deconversion, and recognized it had a new investment opportunity. Deconversions allow buyers to achieve strong yield in the rental market, while condo owners achieve equity appreciation on their units that would not be attainable otherwise, Scheck said.
“Because of our experience and knowledge of the Section 15 statute, attorneys representing condo associations began reaching out to us directly in assisting the association with a potential sale,” Scheck said.
Essex is contacted weekly by condo board presidents or members to learn more about the deconversion process. Last year Scheck and his partner, Essex principal Steve Livaditis, closed on five deconversions totaling over $27M in transaction volume, and adding 112 apartments back into neighborhood inventory. The buildings span neighborhoods such as Wrigleyville, Lincoln Square, East Lakeview, Lincoln Park and Uptown.
Essex’s Uptown sale, a $6.5M deal for a 41-unit building at 4630 North Beacon, consisted of studio and one-bedroom units converted into condos in the early 2000s. Most of the owners had seen little appreciation on their units.
Condo deconversions are almost exclusively smaller units that were previously apartments, according to Marc Realty Residential principal David Ruttenberg. The reason is simple mathematics: larger condo units can still sell for a high per-square-foot rate, while smaller condos cannot.
“A 400 SF studio apartment can command $4/SF rents. If you tried to do that with a 2K SF apartment, the rents would be closer to $2.50/SF,” Ruttenberg said.
Marc Realty Residential did the first deconversion sale under Section 15 of the Illinois Condominium Property Act. In 2011, the firm bought 31 of 38 units at Columbia Gardens at 1615-1621 West Columbia in Rogers Park.
Now the firm is offering River City's condo owners $100M to deconvert.
Getting a condo board to agree to a deconversion can be daunting. At Columbia Gardens, Marc Realty sued the holdout owners to force a sale. As the majority member on the condo association, Marc Realty argued it had the right to pursue a deconversion.
“There are a lot of first-time sellers and getting them together is like herding cats,” Ruttenberg said.
Parking can be a challenge in deconversions. Most of the vintage buildings converted into condos during the previous cycle, especially along the lakefront, had little to no available parking. Ruttenberg said purpose-built condos in the outer neighborhoods have up to two parking spaces per unit, and healthy-performing condo buildings will retain those ratios.