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Condo conversions can be risky business. That’s the lesson learned in Chicago over the last four years, where many efforts to transition apartment properties into for-sale condominium units flopped – and in some cases even reverted back to apartme
nts once again.
Chicago, the nation’s third largest condo market, saw median sales prices plummet when the economy crashed. The Case-Shiller Home Price Index reports that the Chicago condo index is now back to July 2002 levels, having fallen a total of 22.5% from its peak in September 2007.
Steven Maher, Managing Broker and Director of Investment Sales for Kinzie Real Estate Group, has had a close-up look at the Windy City’s winners and losers in sales and leasing for more than two decades. He specializes in urban infill development, particularly in the construction and adaptive reuse of mid and high rise condominiums, multi-family housing, resort properties, and condo conversions.
After taking a close look at trends in Chicago adaptive reuse development, Maher shared his expertise with us.
MHN: Condos, especially in urban markets, were one of the development types that really suffered when the economy spiraled. Many of them found new homes as apartment communities, rather than the owner-occupied use originally intended. Where was this type of reuse most common and was it successful?
Maher: We have seen “fractured Condominium” projects all over the City as well as in the suburbs find temporary shelter as apartments. In some cases, especially when less than 25% of the units were sold, the properties were actually de-converted from condo ownership back to a single PIN and will likely remain as rental apartment buildings for the foreseeable future. In my opinion, this strategy has been most successful with condominium conversions that really should not have been converted in the first place. With adaptive reuse projects and ground up new construction projects that delivered product in 2008 & 2009, location is everything. Well located projects are starting to have success selling again as Condominiums.
MHN: Which parties involved in such transactions really came out as winners?
Maher: In my opinion, probably investors and renters (at least at the beginning)… As the properties went through the foreclosure process developers and banks obviously both lost as did owners who found themselves underwater on their mortgages and/or unable to sell their homes. Investors on the other had have been able to pick up the properties post foreclosure at prices typically below the cost of replacement. And, although CAP Rates appear to be compressing, the market for income producing assets is very strong. As for renters, at the beginning of the cycle when there was a lot of inventory, tenants could find beautifully appointed condos at very reasonable lease rates.
This interview was created for Multi-Housing News. Read the full transcript on MHN.
