Don't count out deconversions yet

Around this time last year, we saw headlines like "The Chicago deconversion craze is dying."

A lot has changed since then, with the COVID-19 pandemic challenging virtually every major property sector.

Yet deconversions - the process through which investors acquire individually owned condos in bulk and revert them to rentals - are alive and well in Chicago and particularly in the suburbs, where the threshold for owner consent stands at 75%, below the 85% now required in Chicago.

Why have deconversions remained popular? The answer is simple. For many owners and investors, they still make financial sense.

The ABCs of deconversions

Today's deconversion trend follows an earlier wave of apartment-to-condo conversions that occurred in the early 2000s. Back then, more people were eager to own equity in their home rather than rent.

The U.S. homeownership rate peaked at just under 70% in 2004. By 2016, after the Great Recession ravaged the housing market, the rate had plummeted to a 50-year low of 62.9%. It rebounded in 2017 and 2018, to 64.4%, with the largest increase among households in the 25-39 age group, according to the Harvard Joint Center for Housing Studies.

Despite the gains in homeownership, many of today's would-be buyers still prefer to rent. Whether they're shying away because they saw their parents or others get burned by the housing crisis, don't have the down payment or simply enjoy the flexibility, they continue to make rent payments rather than mortgage payments each month.

With apartment living still hot, investors remain interested in well-located multifamily buildings that can be acquired below replacement cost. The COVID-19 pandemic hasn't changed this. If anything, multifamily assets are even more attractive right now because of the steady income they offer in fulfilling a basic human need: housing.

By acquiring an existing property the investor avoids the costly and time-consuming construction process - though some renovations may be needed to achieve desired rents - and realize immediate cash flow, especially if some of the former owners remain in their homes as renters.

For condo owners who are ready to sell and move on, a deconversion often gets them a higher price than is possible on the open market and without the hassle associated with a traditional sale. Those who are underwater on their unit or facing a special assessment usually welcome the opportunity for a bulk sale. This year, from what I've seen, even the pandemic is not deterring owners from accepting an offer and moving if it makes sense financially.

Suburbs to city and back again?

Last year the Chicago City Council passed an ordinance requiring 85% of condo owners to consent to a deconversion sale, well above the 75% percent required under the Illinois Condominium Property Act. With the higher threshold in the city, some investors are turning their eye to the suburbs.

The suburbs also are attracting attention again because after years of young people preferring to live, work and play in the city, they appear to be heading back to the suburbs again. While some of them will buy, others will first opt to rent to test out the location and ensure they're ready to make this financial commitment.

Evanston and other inner-ring suburbs are especially popular, giving renters quick access to downtown Chicago via public transit and offering shops, restaurants and other walkable amenities. They also tend to have older condo and apartment buildings that can be renovated and rented at higher market rates.

This summer, amid the pandemic, I helped broker the $17 million deconversion sale of 2730-66 Hampton Parkway in Evanston. This 91-unit condo building near Northwestern University was built in 1939 and, because of its age and location, was an ideal deconversion candidate.

The property was the largest condo or apartment building sold in Evanston since 2018 by unit count, according to CoStar, with a per-unit sale price of about $187,000, representing about a 25% premium for owners.

Is a deconversion right for you?

Condo boards interested in exploring a deconversion should consult a broker who can educate owners about the process. At Interra our goal is a 25% premium or more over what the units would sell for individually. The broker also will help procure the most qualified investor. In all, the deconversion process takes about six months.

The time required to plan and execute a deconversion sale makes now an ideal time to begin these conversations. While much is unknown about how and when the pandemic will end, the resilience of the local rental market, coupled with the appeal of suburban living, suggests the suburban deconversion trend is far from over.

• Patrick Kennelly is managing partner at Interra Realty, based in Chicago. For more information, visit https://interrarealty.com.