Could coronavirus lead to Chicago condo deconversion resurgence?

Though a new law has made condo deconversions trickier to execute in Chicago, it hasn’t killed the investment strategy. Not by a long shot.

Deconversion deals – in which an investor scoops up all the condo units in a building and converts them to rental apartments – have closed in spite of the coronavirus complicating valuations and sidelining lenders, according to Crain’s.

The outlet cited Becovic Management Group’s $13.3 million purchase of the 90-unit Shore Manor in Edgewater ($147,000 per unit), and a recent 70-unit listing in Old Town for $21 million as evidence that investors still see upside in Chicago apartments.

In the fall, the city passed a law requiring 85 percent of owners to agree to a bulk sale, up from the prior 75 percent of owners. That’s had a bigger impact on the investment strategy than the coronavirus, which has thrown Chicago’s economy into chaos since mid-March, observers said.

“I don’t think Covid has changed it, at least not yet,” Kiser Group’s Andy Friedman, who is marketing the 70-unit LaSalle Towers in Old Town, told Crain’s. “I’m sure there will be effects.”

The Chicago condo market, which produced roughly 2,500 units annually before completely bottoming out during the Great Recession, has been steadily climbing in recent years.

But that has mostly come in the form of luxury product built for well-heeled buyers. Owners in older condo buildings – often plagued with rising costs and deferred maintenance – received bulk sale offers well above what they could fetch on the open market individually. Many took the offers. In 2018, investors paid $523 million to deconvert condos in Chicago, according to a TRD analysis in fall 2019.

For the investors, it was a smart play: while new development could easily cost over $400 a foot, they could buy condo units in bulk, rehab them and set them free in a hot rental market all for less than $300 a foot.

In fact, if Chicago plunges into a recession, the condo market could take an outsized hit and lead to even more deconversions, Friedman told Crain’s. After just a month with the assignment, he claims to have already received several legitimate offers for the LaSalle Towers. [Crain’s] – James Kleimann

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Andy Friedman