In a changing world, deconversions remain viable
The COVID-19 pandemic turned the financial and real estate markets upside down, creating an unprecedented level of financial uncertainty.
In the midst of these challenges, however, there is opportunity for further life in the world of condominium deconversions -- the process of converting a condominium complex/tower into multifamily apartment rentals.
Previously, deconversion activity was propelled by a strong overall economy, attractive fundamentals -- high occupancies and increasing rents -- and continually shifting homeownership patterns.
These trends played a direct role in our ability to complete the largest-by-unit condominium deconversion project in Illinois, the sale of the 154-building, 924-unit Heritage Point condominium complex in Des Plaines to New Jersey-based CLK, LLC.
The world around us has changed dramatically since the end of 2019. Yet the viability of condominium deconversion efforts remains essentially unchanged. Certain characteristics that traditionally have further enhanced the attractiveness of these programs are even more relevant today than they may have been 12 months ago.
These characteristics include individual owner/seller motivation. The financial implications of the pandemic add further motivation for individual condo owners/prospective sellers.
As the pandemic lingers on, condominium owners who may have lost their jobs or been furloughed may find further motivation as:
• The supplemental $600 per week federal benefit has expired;
• The maximum level of unemployment benefits could be on the verge of running out for some people, and;
• Home mortgage loan forbearance measures won't last forever.
As individual owners evaluate the opportunity of a deconversion, many will be motivated by the ability to "cash out" and realize a lump sum sale price that can range from 10-20% above market as buyers look to sweeten the pot. That motivation may also be enhanced by shedding the maintenance responsibilities that come with ownership.
Further certain people who previously have been mortgage holders may no longer want to be rooted to a specific geographic area that limit job potential.
That brings us to association financial conditions.
In tandem with individual financial positions is the association's financial condition. A strong financial position is one of the greatest challenges of any homeowner association. The financial strength of the condominium association may only be as strong as the financial position of the unit owners.
As individual financial health is compromised by employment matters and other personal financial issues, so is the association's. In times of financial uncertainty, or a recession, delinquencies increase.
Physical conditions also are a factor.
It is a reality of ownership, with age the need for repairs and maintenance to the physical premises increases. Some of the most common repair and maintenance projects could include new roofs, new windows and balconies, parking lot repairs and repaving as well as the replacement of HVAC systems, among others.
Regardless of the size of the property, the pro rata share of these projects can be very costly and beyond the financial means of association reserves. Further, it may be impractical or virtually impossible to pass and collect a special assessment to cover significant maintenance and repair projects.
A number of other factors continue to underscore the viability of condo deconversions.
Of all of the asset classes, housing is the most essential. We need a place to live. We've learned that we can be effective working from home.
Further, based on the tremendous increase in online shopping for everything from groceries to softgoods, e-commerce isn't going away.
National trends continue to show a decline in the level of homeownership. Many people, across all age and socio-economic categories, continue to choose renting versus buying a home for myriad factors, including their financial position and tolerance for homeowner maintenance. This trend likely will continue.
The pandemic has caused many developers to hit the pause button on ground-up development. Over the long term this likely will reduce the supply of multifamily units available.
This in turn will create opportunities for deconversions as investors/developers can meet demand by more quickly redeveloping and repositioning existing condominium complexes than delivering new construction.
Not to be overlooked is the issue of property taxes, in Chicago, throughout Cook County and even across the area. Given financial woes that have been heightened by the COVID-19 pandemic, counties other than Cook may be forced to increase property taxes and add to a homeowner's financial burden. As a result, certain condominium owners will be motivated to consider exit strategies, like a deconversion.
In the end these current conditions bode well for continued transactions in the condo deconversion sector. The process still requires a sound and proven strategy to:
• Present the concept and broad overall plan to condo boards;
• Secure 85 percent approval of unit owners;
• Establish pricing levels that will be advantageous for all parties, and;
• Identify and market to a pool of potential investors with the expertise to complete the deal.
Condominium owners, board members and those who advise and guide them, should look to those with a proven track record to orchestrate the plan that is suitable, for complexes from 50 to 500 units and can be executed as efficiently as possible.
• Mirela Dulu, Managing broker, and Heather Gallagher, broker, are with Cagan's Realty in Skokie.