Overall, there’s been a steady increase in renter households the past several years and multifamily construction has reached the highest levels since the 80s, according to a report from FreddieMac. In Chicago, vacancy rates are expected to remain tight this year which will boost rental-income growth expectations.
That means developers and investors are looking for creative ways to enter the multifamily market—one being condominium deconversions. The positive outlook for multifamily this year comes at a time when condos built in the 70s and 80s are starting to age and associations might be considering a sale instead of making updates.
Some recent condo deconversions include a 101-unit Buena Park property at 732 W. Bittersweet Pl. for $16.2 million, 133-unit Clark Place at 2625 N. Clark St. for $35 million and, one of the largest deals to date, the 207-unit Bel Harbour at 420 W. Belmont Ave. For $51.5 million. Several other condos such as 268-unit Kennelly Square, 150-unit Park View Tower and 293-unit Century Tower could also be turned into apartments.
Condo deconversions are known to be incredibly complex and time consuming. In order to purchase a condo building, the buyer must get 75 percent, sometimes more, of owners to agree to the sale. That means finding and contacting all the owners, who might not even occupy the unit, and making sure they are comfortable with the offer.
“Getting all the owners on board and explaining the deal is like trying to get congress to agree on something. You move in one direction and then you upset someone else,” said Sonny Ginsberg, a real estate and finance lawyer at Chicago-based firm Ginsberg Jacobs.
Another difficulty is the variation between units, some owners might have updated their kitchen last year while some haven’t made any changes since they first purchased the place, Ginsberg added. There are lots of factors at play that can complicate the process such as deciding whether owners can stay in their units or figuring out a deal that works with owners who have mortgages. One thing you don’t want to do is start individual negotiations with the owners. The best-case scenario is when condominium associations organize the owners and then search for a buyer. Although, Ginsberg says he hasn’t seen too many deals like that yet.
Despite all the time-consuming challenges, there are aspects to this deal that make it worth it for investors and developers. Multifamily has become a lot more expensive in recent years due to high costs for materials, labor and government requirements and that’s what has really driven the trend in condo deconversions, Ginsberg said. Investors and developers are looking for different ways to get around the high cost of new construction.
Saul Kuperwasser, CEO and co-founder of Strategic Properties of North America, favors condo deconversions because it allows him to be more competitive in a tight market.
“We like this type of deal because were able to give tenants luxury living for a good price. We’ll do renovations and turn it into a Class-A building for much less than new construction,” he said.
Strategic Properties has finalized three condo deconversion deals in Chicago, including Bel Harbour and Clark Place. Kuperwasser said a fourth deal in Lincoln Park is in the works and he’s on the lookout for more buildings.
After Strategic Properties acquires a building, they don’t just update a few finishes and then market the property, Kuperwasser said. The renovations at Clark Place, which will be renamed The Kent, call for a knocking down interior walls to create an open kitchen in addition to modernizing the finishes. New building amenities include a 24-hour fitness and yoga space, a rooftop deck and even a daily continental breakfast for residents. These amenities will also be offered at Bel Harbour along with a rooftop pool.
“We can’t turn these properties fast enough. We have a long waiting list of tenants,” Kuperwasser said.
In addition to transforming the outdated condo buildings, Strategic Properties is also very flexible when it comes to working with owners. For example, if an owner needed a few extra months in the unit that can be arranged.
“Many companies would rather entertain other projects and can do without all the extra effort and time. At first we weren’t certain about these types of deals, but now we’ve figured out a process that works so we’ll continue to look for more,” Kuperwasser said.