IllinoisMultifamily Condominium deconversions: As viable as ever in post-pandemic world Mirela Dulu and Heather Gallagher July 23, 2020 Share on Facebook Share on Twitter Share on LinkedIn Share via email The outbreak of COVID-19 turned the financial and real estate markets upside down, creating an unprecedented level of financial uncertainty. In the midst of these challenges, however, there is opportunity for further life in the world of condominium deconversions—the process of converting a condominium complex/tower into multifamily apartment rentals. In 2019, throughout Chicago and across the U.S., condo deconversion projects were being announced at a feverish pace. The steady stream of activity was propelled by a strong overall economy, attractive fundamentals—high occupancies and increasing rents—in the multifamily sector, and continually shifting home ownership patterns locally and throughout the U.S. In fact, these trends were factors that played a direct role in our ability to complete the largest-by-unit condominium deconversion project in the state of Illinois, the sale of the 154-building, 924-unit Heritage Point condominium complex in Des Plaines to New Jersey-based CLK, LLC. The world around us has changed dramatically since Heritage Point condominium complex was sold. The onset of COVID-19 and the sheltering in place orders brought everything in Chicago and across the U.S. to a virtual standstill. Yet when it comes to the viability of condominium deconversion efforts, the more things have changed, the more this have stayed the same. We have actually discovered that certain characteristics that traditionally have enhanced the attractiveness of these programs are even more relevant today than they may have been 12 months or even just six months ago. Individual owner/seller motivation The financial implications of the pandemic—with unparalleled job losses and financial struggles—add further motivation to act for individual condo owners/prospective sellers. As the pandemic, and the threat of a second wave, lingers on, condominium owners who may have lost their jobs or been furloughed may find further motivation. Consider that the federal government’s supplemental payment of $600 per week is slated to end at the end of July. Additionally, the maximum level of unemployment benefits could be on the verge of running out for people who were among the first to be let go or temporarily furloughed. Finally, home mortgage loan forbearance measures won’t last forever. While there is great likelihood that the government will extend some of those benefits, nothing is certain; many people don’t have the luxury of time. Even with the federal supplement, condominium owners may still face serious financial challenges associated with collecting only a portion of their regular income. As individual condominium owners evaluate the opportunity of a condominium deconversion, many will be motivated by the ability to “cash out” and realize a lump sum sale price that can range from 10 to 20 percent above market as buyers look to sweeten the pot. For some that motivation also will be enhanced by shedding the maintenance responsibilities that come with ownership. Further, with uncertainty in the employment markets, some people who previously have been mortgage holders may no longer want to be rooted to a specific geographic area that may limit their job potential. Association financial conditions Running hand-in-hand with the financial position of the individual condo owner is the financial condition of the association. One of the greatest challenges of a condominium, townhome or homeowner association is maintaining a strong financial position. Generally, day-to-day maintenance and operational matters are paid out of the monthly fees charged to owners. The financial strength of the condominium association may only be as strong as the financial position of the unit owners. As the financial health of these individuals is compromised by employment matters and other personal financial issues, so is the association. In times of financial uncertainty, or a recession, delinquencies increase. Physical conditions It is a reality of ownership that with age, the need for repairs and maintenance to the physical premises increases. Some of the most common repair and maintenance projects could include new roofs, new windows and balconies, parking lot repairs and repaving as well as the replacement of HVAC systems, among others. Regardless the size of the property, the pro rata share of these repair and maintenance projects can be very costly. The cost of these improvements may be beyond the financial means of an association, through the reserves it has on hand. Further, because of the financial commitment it places on owners, it can be virtually impossible, or at least impractical, to pass and collect a special assessment to cover significant maintenance and repair projects. Other factors at play There are a number of other real-estate-related factors that continue to underscore the viability in the condo deconversion marketplace. Of all of the asset classes, housing is likely the most essential. We all need a place to live. We’ve learned from the pandemic that we can be effective working from home. Further, based on the tremendous increase in online shopping for everything from groceries to soft goods, e-commerce isn’t going away, which needs a home address for delivery. National trends continue to show a decline in the level of homeownership. Many people, across all age and socio-economic categories, continue to choose renting versus buying a home for a myriad of factors, including their financial position and tolerance for homeowner maintenance. This trend should only continue as it will take time for some to recover financially or elect to either avoid or delay this financial burden. The pandemic also has, at least for the moment, caused many developers to hit the pause button on new ground-up development. Over the long term, this likely will reduce the supply of multifamily units available. This in turn will create opportunities for deconversions as investors/developers can meet demand by more quickly redeveloping and repositioning existing condominium complexes than delivering new construction. Not to be overlooked is the issue of property taxes, in Chicago, throughout Cook County and even across the metro area. Certain condominium owners will be motivated to consider an exit strategy, like a deconversion plan. In fact, given the state’s financial woes—which only have been heightened by the COVID-19 pandemic and the tremendous shortfall in revenues—counties other than Cook may be forced to increase property taxes and add to a homeowner’s financial burden. In the end, these current conditions bode well for continued transactions in the condo deconversion sector. The process still requires a sound and proven strategy to present the concept and broad overall plan to a condo boards; secure 75 percent approval of unit owners (85 percent in the city of Chicago); establish pricing levels that will be advantageous for all parties and identify and market to a pool of potential investors with the expertise to complete the deal. Condominium owners, board members and those who advise and guide them, should look to those with a proven track record to orchestrate the plan that is suitable, for complexes from 50 to 500 units, and can be executed as efficiently as possible About the authors Mirela Dulu and Heather Gallagher have both been recognized as top performing agents at Cagan’s Realty. They have extensive market knowledge and expertise in commercial and investment properties and bring more than 30 years of combined experience to help Chicago residents achieve finding their home.