Condos are become rental properties at a brisk pace in Chicago, with more than 20 deconversions (Section 15 deconversions) in the city over the last two years as of July 15, Avison Young reports.

The deconversions have been in buildings ranging from quite small — fewer than 10 units — to quite sizable, or more than 300 units, according to the midyear Condo Deconversion Report by Avison Young's Chicago office, citing Real Capital Analytics data.

The properties targeted for deconversion are generally buildings developed from the 1960s through the 1980s. Most are in popular city neighborhoods, such as Old Town, Lincoln Park and the Gold Coast.

Demand by investors for rental apartments is driving the trend.

"Many homeowners’ associations are realizing that a significant value premium can be achieved through a deconversion sale versus the sale of an individual unit as a condominium," Avison Young principal James Hanson, who is based in the company's Chicago office, said in a statement. "The whole is worth much more than the sum of its parts.”

Recent Chicago deconversions include Kennelly Square in Lincoln Park. Earlier this year, Strategic Properties of North America acquired the property, a 22-story, 268-unit condo tower at 1749 North Wells for $78M.

Kennelly Square is the investor's third condo deconversion on the North Side. Strategic Properties bought the 133-unit Clark Place at 2625 North Clark for $35M in 2016, and Bel-Harbour condominiums at 420 West Belmont in 2017 for $51.5M, which deconverted 207 condos into apartments.

Hanson, along with colleagues Richard Hanson and Paul Cohen, has taken on the deconversion of Gallery 1250 at 1250 North LaSalle St. in Chicago, representing the condo association in its effort to market the building to an investor.

The property is typical of condos that have switched to rental recently. It was built in 1987 as an Old Town rental property and was converted to condos in 2003.

The numbers that make the deconversion attractive to investors also make the transaction attractive to condominium unit owners, as they often receive a 25% to 40% premium in per unit pricing, the report said.

Also, as many older buildings are facing significant capital investments for repairs and upgrades, a deconversion might obviate the need for a special assessment.

For investors, buying an older condo property and deconverting it is an avenue for gaining entry into coveted neighborhoods that are otherwise hard to enter.

There are potential pitfalls to the process. The report notes that a lack a clear commitment from unit owners for a deconversion can be a deal-breaker. Because 75% of the members of the condo association need to approve a deconversion by Illinois law for the transaction to proceed, strong owner support is critical.

The deconversion of Kennelly Square, for instance, barely squeaked by, with 75.8% of members of its association voting yes.

Even so, the report predicts that deconversions in Chicago will proceed at a steady pace, especially as new investors enter the market. One upshot of the activity will be an increase in the stock of Class-B apartments in the city, especially in neighborhoods where new development is tough.