On a typical day at the sales office for The Park Millennium, a condo conversion project on the New East Side, a guide takes four or five potential buyers on a group tour of the 480-unit building because there are too many shoppers for individual showings.
Often, when the tour is over, there’s a “kind of frenzy” as people dash to reserve a condo, says Carrie McCormick, sales manager for the developer, Centrum Properties.
At least one of the tour’s participants usually signs on the dotted line before the day is over, according to McCormick. By February 2006, nine months after sales got underway, Centrum had sold 465 of its 480 units, an average of about 49 a month.
“The condo conversion market is hot,” McCormick says. “If I had 100 more units I would sell them too.”
“Hot” seems to be a fair summation of the market for condo conversions. A record number of rental units were earmarked for condo conversion in Chicago last year as owners of apartment buildings decided to cash in on the booming condo market and sell to developers prepared to pay hefty prices. Around 3,965 downtown rental units were slated for conversion in 2005, up from 650 units in 2004, says Ron DeVries, of housing analyst Appraisal Research Counselors. Last year was the biggest year for condo conversions since 1979, when 4,350 units converted.
Historically low interest rates in 2005 inspired many renters and investors – two of the biggest audiences for condo conversions – to purchase units. Though mortgage rates have ticked up and some segments of the housing market show signs of a slowdown, condo conversions appear to be selling well. By February 2006, about 60 percent of the nearly 4,000 downtown units announced last year had sold.
Single-family homes still dominate in the north and northwest suburbs, but the boom in condo conversions has spread north of the city too. In the northwest suburban Cook County sub-market, which includes Palatine, Schaumburg and Arlington Heights, 2,139 units were earmarked for conversion in 2005, and 60 percent had been sold by February 2006, DeVries says. By contrast, only 1,156 units there were announced for conversion in 2004.
Why are condo conversions so popular?
In Chicago, many of the large apartment buildings that convert are located in popular lakefront neighborhoods with strong retail and amenities. The Park Millennium, 222 N. Columbus Drive, overlooks the lake and Millennium Park, just east of Michigan Avenue. Two apartment towers now converting have coveted Lake Shore Drive addresses – 474 N. Lake Shore and 1400 Lake Shore Drive – and views of both the lake and skyline.
Nim Sharon bought a one-bedroom condo at 400 N. LaSalle because it was a newer building in River North, home to a lively restaurant, gallery and entertainment scene. Other River North conversions include 2 E. Erie; The Flats on LaSalle, 1140 N. LaSalle St., by Metropolitan Development Enterprises; and Ontario Place, a 467-unit project by American Invsco, at 1 E. Erie St.
“You know when you go into an area and you are just blown away, and know that it’s right for you?” Sharon says. “That’s how I feel in River North. I’ve got Michigan Avenue, restaurants and the downtown theaters all close by.”
In some instances, buyers can get a foot in the door in these premium locations with vintage conversions that offer monthly mortgage payments comparable to rent – if they can come up with a down payment.
The downtown buildings that are 10 to 25 years old and converting tend to have studios and one-bedrooms starting in the low to mid-$200s. Builders generally overhaul the mechanical systems and common areas in these towers and offer a variety of renovation packages for units.
At 1400 Lake Shore Drive RDM Development offers a “Modern Luxury” package that includes opened-up kitchens and living areas, new kitchen tile and cabinets, granite countertops and Premier black appliances. These units also will have new drywall, refinished hardwood floors, new electrical fixtures and multimedia wiring.
The developer behind 474 N. Lake Shore Drive offers a “standard” package with walk-in closets (except in studios), hardwood floors in living areas, washer and dryer hookups, granite countertops, Ultracraft cabinets, GE appliances, stainless steel kitchen sinks and Moen faucets. Buyers also can opt for the “rental-ready” plan, which includes cleaning, painting, repair and replacement where necessary, and is offered at a discount off the standard purchase price.
Because of their prime locations, experts say, the current crop of downtown conversions are giving similarly priced new construction in outlying neighborhoods a run for its money. And rising construction costs have widened the gap between vintage conversions and brand new condos.
“New construction is drifting further away from what a conversion would cost,” says Tracy Cross, president of market analyst Tracy Cross & Associates.
“When your building is already completed there aren’t those added [construction] costs.”
Buyers more focused on the bottom line than the granite countertop might find they can do even better on price by purchasing such condos “as is,” or un-renovated. Expect Berber carpets, Formica or Corian counters and white kitchen appliances rather than hardwood floors, granite countertops and stainless steel. “As is” condo packages were being offered at 1400 Lake Shore Drive, 474 N. Lake Shore Drive, Pearson on the Park and Huron Street Lofts in early 2006.
Businesswoman Barbara Bliss always figured a lakefront condo would cost more than her budget allowed, but she was able to buy a studio at 1400 N. Lake Shore Drive with views of Lake Michigan. In early 2006, “as is” studios at 1400 Lake Shore were priced in the $130s. Units with updated finishes ranged from the $150s for studios to the $450s for three-bedrooms.
Whole prices are generally lower at conversions than in new construction even if the apartments are being upgraded because units built as rentals tend to be smaller than those designed and built as for-sale housing.
A number of new conversions, however, are competing head to head with new construction. Many of the buildings now converting are fewer than five years old – a stark contrast from the earlier conversion boom in the ’70s – and they’re laden with amenities. Some of the buildings in this club include the 452-unit 400 N. LaSalle, by DK/Equity; Terrapin Properties’ 37-story Grand Plaza West, 545 N. Dearborn St.; and The John Buck Company’s 2 East Erie.
These newer condo conversions in top locations have units priced from $350 to $425 per square foot, according to Gail Lissner, of Appraisal Research Counselors. Studios are priced at more than $200,000, one-bedroom units at more than $300,000 and two-bedrooms from the $400s.
The younger buildings that are converting have had to offer finishes and upgrades similar to those at new-construction developments, another major departure from conversions of the 1970s. At 400 N. LaSalle, DK/Equity is adding hardwood floors in living areas, new carpeting in bedrooms and fresh paint, and giving buyers upgrade options on things like cabinets, counters and flooring.
Newer conversions also have newer amenities, comparable to those in brand new high-rises. The sprawling Grand Plaza West has a resistance pool, outdoor swimming pool, basketball court, fitness center, outdoor putting green, library and business center. There is also a “winter garden,” or party room, and convenient retail tenants including Jewel-Osco and Bed, Bath and Beyond.
Some new-construction projects offer a level of customization – including the ability to move walls and reconfigure floor plans – that no conversion can match. But many new-construction developments do not offer this option, and some conversions have extensive upgrades that are indistinguishable from those at brand new buildings.
No delays, fewer surprises
Some current conversions – especially those offering units “as is” or with a low level of standard renovation – offer nearly immediate move-ins. Brand new high-rises, however, can be months or even more than a year behind the projected completion dates.
For Sharon and for many buyers of converted units, the ability to move into a new home quickly, rather than wait several years for a new-construction condo, is just as important as pricing.
“My father had warned me about the hassles and delays of new construction,” he says. “I liked that I knew what my condo looked like, and there were no surprises. The hardwood floors were not going to be low quality because I had already seen them before I bought the unit.”
First-time buyers tend to be nervous about what’s usually the biggest investment they’ve ever made. For some, the additional stress of purchasing based on a set of floor plans and an artist’s impression of what the building will look like is simply too much.
Price, however, continues to be the number one factor for buyers in condo conversions, which is why the suburbs still lure city renters who can’t afford to buy in Chicago.
Typical one-bedroom condos in the north and northwest suburbs range from the $120s to the $150s, and two-bedroom condos are priced from the $150s to the $200s – substantially less than their urban counterparts.
The units tend to be located in sprawling complexes of walk-up flats built in the 1970s, DeVries says. Such buildings are comparatively inexpensive for developers to purchase and then sell at moderate prices to the first-time buyers who drive the market. They might not include skyline views, but many have clubhouses, pools, barbecue areas, tennis courts and other amenities.
Runaway Bay Condominiums, at 5000 Bayside Drive, in Palatine, has units priced from the low $100s, and includes landscaped walks, a pool, a playground, a fitness room, a duck pond and more.
RDM Development’s The Terrace of Elk Grove Village, at 908 Ridge Square, in Elk Grove Village, has a clubhouse with a billiards room, a pool, a sauna, a fitness center, a business center and a seating area with Plasma TVs. The eight-building development has one-bedrooms priced from the $100s.
If interest rates continue to rise, they might slow condo conversion sales, which depend heavily on buyers sensitive to even small jumps in their monthly housing bills. Despite recent increases, however, rates remain very low by historic standards and a comparison of renting versus buying still makes homeownership an attractive option for many condo shoppers considering conversions.
Investors remain active in conversions too. Developers interviewed for this story estimate that up to 25 percent of converted units in Chicago currently are being sold to investors, and some observers think that’s a low number. At Plaza 440, 440 N. Wabash Ave., American Invsco reportedly sold more than half of the condos to investors, and even offered management services for owners who wanted to rent their units out.
Heavy investor participation could have a negative impact on resales of such condos if large numbers of similar investor units return to market at the same time. Some say a correction already is underway, however, and fewer investors are buying as interest rates rise and talk of a housing “bubble” continues.
Housing analyst Tracy Cross predicts fewer conversions in 2006 simply because there won’t be as many suitable apartment buildings available – too many already have been converted.
Rising interest rates may impact resale values for converted condos, Cross says, but he also points out that some of those who would otherwise have bought new-construction units might purchase converted units instead because of the rising costs of new construction.