A 16-story residential tower near Lake Michigan on Chicago’s North Side has been put up for sale by individual owners of its 145 units in the latest example of a deal common to Chicago but rare elsewhere: the condo deconversion.
The condo board at 3033 N. Sheridan Road hired Kiser Group brokers to seek a sale of the entire building to a single buyer interested in converting the 55-year-old structure to rental apartments, the brokers told CoStar News.
The sale marks something of a test of demand for Chicago apartments as the market has for the first time since 2009 climbed above the average for the United States in rent growth, a key measure of buyer interest. Those findings in a CoStar analysis show high demand for Chicago apartment buildings bought through traditional means or as part of a deconversion.
Bids are expected to be around $52 million for the entire building, or more than $358,000 per unit, a much higher price than the units would sell for individually, Kiser Group’s Andy Friedman said.
That is because developers specializing in condo-to-rental redevelopments are willing to pay a premium to the units’ value on the for-sale residential market, particularly on decades-old buildings, while still leaving room for profit on rents after making upgrades.
Adding to the Sheridan Road tower’s value is its location near the lake and just over a mile from Wrigley Field, home to Major League Baseball's Chicago Cubs. It is in the high-demand Lakeview neighborhood, where just three residential buildings of more than 90 units have been sold in the past five years, all in deconversion deals, according to Kiser Group.
There is relatively little land available in Lakeview, and developers that have built apartment towers have held on to them as long-term investments, Friedman said.
“Lakeview has concentrated ownership,” Friedman said. “There are really a handful of property management companies that own most of the properties. Once they buy them, they don’t sell. You just don’t get inventory creation until you get the deconversion.”
Rare Process
Deconversions are unknown to investors in most other markets, except in South Florida. The process is called deconversion because in the years leading up to the Great Recession, many apartment buildings in the Chicago area were converted to condos and sold off one unit at a time. By 2008, a glut of unsold condos and a financial crash caused condo values to plunge.
Unwilling to sell their units at a big loss, some condo owners rented them out after moving to new homes.
After the economy recovered, apartment investors began buying up condos in bulk or even converting entire buildings back to their for-rent origins, creating the deconversion trend.
Older buildings in need of costly repairs often are targeted for deconversions because selling to a developer is a way for individual owners to avoid paying thousands of dollars each in a special assessment.
The Lakeview tower has undergone about $3 million of repairs to the parking garage and facade in recent years, causing the condo association to take out a loan and increase monthly dues, which decreases the resale value of individual units, Friedman said.
The Sheridan Road tower was converted from apartments to condos around 2005, according to Friedman. A large percentage of units are being rented out by their owners, making them willing to agree to a sale, Friedman said.
“Like many of these condo buildings, it’s a building with a large number of investor-owned units,” Friedman said. “That always hurts individual condo owners. It’s less attractive to owners when 40% to 50% of the units in the building are renters.”
Illinois law requires 75% of a building’s unit owners to agree to a bulk sale, and the standard is 85% within the city of Chicago.
If brokers secure a suitable offer for 3303 N. Sheridan, unit owners will vote on whether to approve it.
Some buildings have fought back against the deconversion trend, and a potential forced sale by the minority of residents who want to stay, by adding amendments such as limits on how many units can be controlled by one owner or caps on the percentage of total units being rented.
One high-profile example of a building adopting such amendments was the 70-story Lake Point Tower near Navy Pier.
Big deconversion deals last year included a nearly $57 million sale of a 427-unit condo complex in Elk Grove Village, Illinois, and a nearly $63 million sale of a 357-unit building in Schaumburg, Illinois.
Many deconversion investors are long-term investors, but some have cashed in on flips.
Brooklyn-based Greenstone Property Group bought a 188-unit building on Chicago’s North Side for $27.2 million in 2018 and sold it for $43 million in 2021 after finishing a conversion.
Market Test
Known as 3033 Sheridan Tower, the newly listed tower has one- and two-bedroom units, some of which have large enough living areas to add another bedroom or an office, Friedman said.
Amenities include in-unit laundry and a rooftop deck, and a buyer is likely to add a fitness center to boost the property’s value, he said.
The property is going up for sale after months of deals throughout the country being slowed by rising interest rates and economic worries and in the wake of recent bank failures that are expected to add to challenges in financing deals.
But after years of many investors avoiding the Chicago area because of concerns over property taxes, crime and other factors, the area is gaining attention from new investors, the Kiser Group brokers said.
The capitalization rate, or expected annual rate of return, remains higher on Chicago apartment deals relative to other markets that have seen high demand before recent pullbacks in rent, they said.
“While there’s a bit of a tough first year in a deconversion, you’re going to wind up with yield in this building that is in excess of what you would see in Texas, Colorado or Florida,” Friedman said. “We are starting to see investors take Chicago off the forbidden list because they are seeing cap rates of 50 to 100 basis points higher here.”
For the Record
Condo owners in the building are being represented in the sale by Kiser Group brokers Andy Friedman and Jake Parker.