Why Are More Developers Drawn To Condo Deconversions?
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Condos in Chicago during our current recovery are usually of interest to high-income buyers or families. But with an aging inventory of older condos in North Side neighborhoods, more investors and developers are enticing condo owners with deconversion offers.
Last week, Strategic Properties of North America agreed to buy Bel Harbour, a 207-unit condominium building at 420 West Belmont Ave, and Strategic intends to deconvert the building into condos. This would be the second condo deconversion Strategic is undertaking in Chicago. It previously paid $35M for Clark Place, a 133-unit condo tower at 2625 North Clark St in Lincoln Park and successfully deconverted the condos into rentals. If Bel Harbour's condo owners approve of the plan, it would be the largest condo deconversion in Chicago.
In neighborhoods like Lakeview and Lincoln Park, the real estate fundamentals make sense to pursue condo deconversions. New multifamily development in these markets has lagged, especially when compared to all the cranes in the air in the downtown core and central neighborhoods like River North and the South Loop. And Chicago has added affluent renters at a faster rate than their homebuying counterparts; high-income Chicago renters increased 36% between 2014 and 2015, versus a 9% increase in high-income new homeowners. Condo deconversions would also allow new owners to capitalize on growing rent spreads. Rents in remodeled former condos can increase $300 to $400/month. At Bel Harbour, 45.4% of the total condos are rented out.
But the process to deconvert condos to rentals is not for the faint of heart. Under Illinois law, 75% of condo owners in a building must approve a deconversion. And while apartment activity has led to Chicago's multifamily resurgence, many condo owners who bought their units prior to the 2008 real estate collapse are still struggling to recover. They either have too much mortgage debt to sell or they intend to hold on to their units in case the market shifts back in favor of condos. For those owners renting out their condos, those tenants will have to vacate the units once a condo board approves of a deconversion.
Take the case of River City. Marc Realty offered to buy the condos in the building for $83.1M, but only 58% of owners supported the plan.
Marc Realty principal David Ruttenberg said his firm's offer of $225/SF was much higher than what he felt owners would get for their units on the market, but the River City experience hasn't deterred him from seeking other deconversion opportunities across the city.