Highrise condo conversion boom is biggest since ’79
Rob and Linda Williams spent a year and a half scouring Chicago for the perfect condominium, but when in late 2003 the suburban empty nesters still hadn’t settled on a unit, they decided to rent at 400 N. LaSalle, a brand new highrise. Eighteen months later they were nudged into homeownership when the building’s new landlord, DK/Equity, informed tenants that it was converting the 45-story tower to condos.
The couple considered buying elsewhere, but they loved the convenient River North location of 400 N. LaSalle. They also loved their views, and they liked the fact that they could have their condo immediately instead of waiting years for delivery. Perhaps most of all, they liked that at 400 N. LaSalle they would be buying something tangible instead of a home that existed only on paper.
“With a newer building they hold onto your money for three years, and we already lived here,” Rob Williams says. “We know everything about it.”
The Williams are not alone.
At least a dozen highrise condo conversions totaling more than 4,700 units (many of them already sold) are underway in Chicago, and 2005 is shaping up to be the biggest year for condo conversions since 1979. In its first quarter Downtown Chicago Residential Benchmark Report housing analyst Appraisal Research Counselors projects that developers will announce the conversion of 4,128 units in 2005. That’s almost twice the number converted in 1994, the last big year for condo conversions, and just slightly fewer than the 4,350 announced in 1979.
The conversions currently on the market offer a wide variety of prices, locations and building types. Developer DK/Equity’s 400 N. LaSalle and the Park Millennium, a project by Centrum Properties and MCZ Development at 222 N. Columbus Drive, are conversions of highrises that were completed in 2003. Such buildings offer buyers condos that are virtually new but without the long delivery times of new construction.
“(With conversions) you’re buying into a project that is old a lot of times,” says John McLinden, a partner at Centrum Properties. “(The Park Millennium) is viewed as a new building. Here you can buy into a new building and move in today.”
Well, not quite a new building. One disadvantage to conversions, at least for some people, is that previous occupants have lived in the space. Depending on the development, buyers also may have fewer options for customization, especially when it comes to moving walls, adding closets and making the sorts of major changes some new-construction projects allow.
At new highrises, buyers generally have a long list of choices, from flooring to cabinets to colors, and some developers allow for major changes. However, converters point out that such customization comes with a price tag, and conversions also offer upgrades that allow buyers to personalize their spaces.
At 2000 N. Lincoln Park West, a 195-unit building with one- and two-bedroom condos, developer NVG Residential offers a range of upgrades including stainless steel appliances, granite countertops, marble floors and re-glazed bathrooms. The developer also is cleaning the faÃ§ade and adding marble to elevators and the landings on each floor.
Unlike the virtually new Park Millennium and 400 N. LaSalle highrises, 2000 N. Lincoln Park West is a vintage structure, built in 1931. Some buyers are leery of older buildings, fearing expensive repairs and high assessments down the road, but others prefer the character of vintage construction.
“They don’t make them like this anymore,” says Charlie Frankel, a renter-turned-buyer at 2000 N. Lincoln Park West. “New construction is very superficial. You can put a granite countertop in an older building too.”
Location is more important than building age for some buyers, and in highly developed neighborhoods like Lincoln Park, new highrises are not an option. That puts 2000 N. Lincoln Park West and Clark Place, another conversion by NVG Residential, at 2625 N. Clark, at a premium.
Nicholas V. Gouletas, of NVG, points out the rarity of conversions – and major residential developments of any kind – in Lincoln Park. The last highrise condo conversion announced in the neighborhood was 345 W. Fullerton in 1992.
It was in this context that Frankel saw 2000 N. Lincoln Park West, which overlooks the park and the lake on one of Lincoln Park’s prettiest streets, as a golden opportunity after renting for 12 years.
“I was hoping that someone would try to convert the building,” Frankel says. “It’s a gem of a building, and the location is spectacular.”
Premium locations are common with conversions, according to Gail Lissner, a vice president at Appraisal Research Counselors, because the apartment towers usually have been built in developed areas. “(Condo conversions) are buildings that have excellent locations with a lot of good retail in established neighborhoods,” Lissner says.
River North, an area full of restaurants, galleries and apartment towers, has become the city’s most popular neighborhood for condo conversions. The current crop includes 2 East Erie, a 253-unit conversion by the John Buck Company; 30 E. Huron, a 460-unit conversion by Crescent Heights; Ontario Place, a 467-unit project by American Invsco, at 1 E. Erie; and 400 N. LaSalle, the 452-unit conversion by DK/Equity. Terrapin Properties and Jaeger Equities also are converting the 37-story west tower of Grand Plaza, at 545 N. Dearborn, in River North, though NNP Residential and its partners are retaining the east tower as rentals.
Lakeview has a couple of major conversions – the 30-story highrise at 525 W. Hawthorne Place and Park Place, a massive complex at 655 W. Irving that totals around 900 units. Other available locations range from the New East Side, where the Park Millennium is underway, to the Gold Coast, home to RDM Development’s 1400 N. Lake Shore Drive, a 398-unit conversion.
These and other condominium conversions tend to be more affordable than new construction because the units, originally built as apartments, are often smaller than brand new condos. At 2 E. Erie, one of the most affordable conversions on the market, prices range from the $190s to the $410s, and Clark Place has units priced from the $240s to the $280s.
“When you look at a conversion versus new construction, there’s quite a gap in pricing,” says Cheryl Bancroft, of DK/Equity. “New construction is way up there.”
With much new construction priced at $600 a square foot and up, Bancroft says, buyers can save $350 to $450 a square foot at a conversion. And immediate occupancy can mean immediate savings because buyers don’t have to pay rent for another one to three years while they wait to close on their units.
The costs – and risks – in a conversion can be lower for developers too, not just buyers, according to Michael Ansani, COO of RDM Development and Investment, which is converting 1400 N. Lake Shore Drive into 398 condos.
Ansani attributes the boom in condo conversion partly to rising prices for land and materials such as concrete, scrap steel and oil, which are necessary for new construction. The cliché that “time is money” also applies, Ansani says: “It takes a long time to build a new development. In this case the building’s already built.”
RDM’s 1400 N. Lake Shore conversion illustrates another perk for developers working with existing buildings instead of new construction, the ability to avoid contentious zoning battles. While the development process has been comparatively smooth for 1400 N. Lake Shore, a new highrise in this Gold Coast location would almost certainly have its share of critics.
The perks in new highrises might be more up-to-date, but many conversions also have elaborate amenity packages, including 24-hour door staff, fitness centers and sundecks – and lower prices, according to Lissner. Grand Plaza, where condos range from the $250s up to $1.2 million (one of the highest top ends among current conversions), has a party room, a business center, a media room and wireless Internet access throughout the building. Grand Plaza’s 50,000-square-foot private club includes a fitness center, an outdoor running track, an indoor basketball court, golf putting greens, a swimming pool, a sundeck and a winter garden.
So who’s buying into these conversions?
According to McLinden, of Centrum Properties, conversions have three main audiences – renters, investors and buyers who need quick delivery. Low interest rates have substantially deepened that first pool of buyers, tenants who can now afford to own.
“Working in a bank, I see the people who rent, I see the finances and everything,” says Jennifer Light, a 25-year-old branch manager for a bank in Park Ridge. A first-time buyer, Light recently purchased a unit at NVG’s Clark Place, largely because it made financial sense. “The difference between my mortgage payment and my rent payment is not different enough to (continue renting),” she says.
The first and in some ways best audience for a new conversion is a building’s tenants. Developers interviewed for this story estimate that in the current market, 5 to 20 percent of renters are purchasing units when their buildings convert. That’s not a high number, but it doesn’t surprise McLinden.
“It’s not a huge number because for a lot of these renters, if they were interested in buying they would have bought already,” McLinden says.
The number of investors buying in today’s conversion market is greater – 20 to 30 percent on average, according to Appraisal Research – than the number of tenants buying in their own buildings. Some recent conversions, such as Plaza 440 and 10 E. Erie, reportedly sold more than half of their units to investors.
At a time when many are still skittish about the stock market, conversions have obvious appeal as investments. Purchase prices tend to be lower, and investors may have a better chance of renting out their units and covering their mortgages than they would with new construction. They also can generate near-immediate income from the units they rent out instead of waiting years for new condos to be finished.
Eager for quick sales, developers have courted and accommodated investors. Some condo converters have even opened leasing offices on site and created management packages to help investors rent out their condos. Some experts warn that a high percentage of rentals in a condo building can take its toll and hurt resale values in the long run.
Are these investors helping to inflate the alleged housing bubble that’s become the subject of raging debate in the media?
“There’s always been an investor presence in our market,” Lissner says, maintaining that they won’t hurt the market “as long as the numbers don’t become overwhelming.” So far, she doesn’t see that happening.
And despite the steep price increases of recent years, Chicago continues to offer comparatively good value, according to Bancroft.
“The Chicago market is much more stable than other markets,” Bancroft says. “Miami has gone berserk, asking prices for rental buildings that are in the stratosphere. Chicago has been more realistic.”