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News Update

Chicago Condos - November, December 2007

Anyone currently renting an apartment or a Chicago condominium or searching for a unit in a mid or high-rise knows that rental prices have risen dramatically while the supply has dwindled. Condominium conversions of apartment buildings is largely responsible and the driving factors behind the conversion boom are as numerous as the ripple effects it's causing and people that are being impacted.

The rapid growth of the condo market over the past couple of years, especially downtown Chicago condos, has made it extremely profitable for apartment building owners to sell out to developers. In neighborhoods that are already built-out, often the only way a developer can get a piece of that particular market is to convert rental apartments to condos. An average condo conversion takes about six to eighteen months from start to finish. That's significantly less than building new, which can take from two to four years depending on the scope of the project. Some fresh paint, new carpeting and an appliance upgrade is sometimes all that is needed.

According to statistics gathered by Appraisal Research Counselors, 2004 saw only about 650 apartments converted. The following year, 2005, that number jumped to over 3,900. For 2006 the total was similar but the conversion trend relocated to more suburban areas of Chicago instead of downtown. Only 1979 topped those figures with 4,350 conversions.

But what do all of those numbers mean for the housing market and who is most affected by them? For starters, it translates into a housing crunch for some lower and a lot of middle class renters. Granted, a fair amount of renters move into a new apartment building hoping to eventually get a conversion notice in the mail so they can buy their unit. But a greater majority of renters are where they are because while rents may be high, they just can't swing the cost of a condo.

A broad spectrum of people are being forced to find housing elsewhere, and some theorize that may eventually trickle down to a corresponding shortage in not only service industry workers but also middle income professions like teachers and first responders. When an apartment building goes condo, usually only 10% of renters opt to purchase their unit. The remaining units that sell often go to foreign investors or people planning to "flip" the condo for a profit. Today, the “flippers are out.

While the conversions spell profits for the developers and investors and generates tax revenue, it remains to be seen what the long term effects will be for the Chicago. It may be harder to put a value on the loss of tenants with a vested interest in making a long term contribution to the city.

The rental crunch has generated enough attention that Mayor Daley asked for the formation of a Condo Conversion Task Force to help with displaced renters, but so far the committee hasn't even met yet. As it is, new housing ordinances passed in 2006 require that 10% of the units in developments that qualify for a city land discount be priced at lower affordable costs and units would double to 20% if the developer got a break on financing. The Metropolitan Tenant's Organization wants a condo tax to implemented and a cap set on the total number of rental units that can be converted per year.

Ironically, with the current slowing of the condo market, a lot of the conversions that once were filled with renters now stand empty. The quality and location of the project is the make or break factor. Some recent conversions have been very successful and others not. American Invsco's 200 North Dearborn and Ontario Place are a prime example of conversions done right. Centrum Properties did well with the Park Millennium and Silver Cloud Condos from developer Creative Designs Builders recently was named Best Condo Conversion of 2007 by New Homes Magazine. Even the Belgravia Group's 565 Quincy could be classified as a conversion with the pre-existing lower 7 stories being transformed into posh lofts. These projects can all be described as a win win situation for both the developer and the condo buyers.

But there are also the projects that haven't faired as well for either party. 1400 lake Shore Drive did well as a rental in it's prime because of the fantastic location. But once it was converted, sales have languished. The main sticking point seems to be the kitchens. Because the building was originally intended as a getaway or short term stopping point for high-end renters, no kitchens were installed in the layouts. In order for RDM Development to market the converted condos, kitchens had to be worked into the space and the result was apparently not what buyers want.

Another shadow has fallen on more than one of the Kroupa Development's projects, including the Sheridan Tower. It's no secret that many of the buyers of these "as is" condos are not satisfied with their purchases. A number of developers are jumping onto the as is band wagon and while this means a much cheaper price for the condos, it also could mean a lot of work for the buyer. If you are willing to put in some labor and invest some money, this could be a sweet deal. But a buyer still needs to be aware that as is means just that, nothing more. And even in a converted building where the units have been upgraded you still need to be aware of the mechanicals. Cosmetic improvements may have been made, but big ticket items like central heating and cooling, hot water systems, roofing and even the elevators may be in disrepair and cause you problems later.

Like everything else, condo conversions have two sides and when the moving dust settles your opinion on the matter probably depends on whether or not you plan on living there.