Converting condominiums has been a steady business in major cities and counties for several decades. As a sign of the times, residents such as baby boomers, early retirees and empty nesters, who no longer want to deal with the hassles of home ownership, opt for the low maintenance, luxury and efficiency that a condominium provides, says Raymond Mobrez, Ph.D., associate partner of Los Angeles-based Portfolio Securitization Capital Group.

People also typically choose to buy condominiums in order to be closer to the major metropolitan cities rather than out in the suburbs. They might choose to move to the city to be closer to their children that already live in the city, or to be closer to various cultural amenities and major medical centers.

According to Mobrez, who has been monitoring the activity and market trends of condominium conversions and developments nationwide for the past few years, entry-level purchasers also sometimes opt for converted condominiums because of their affordability and proximity to the city. Also, with interest rates at an all-time low, a large number of people are leaving the rental market and buying homes.

Although common sense would indicate that the conversion of rental apartments to condominium units is keeping pace with the market, the decision to convert a property is not solely based on demand. A deciding factor in apartment conversions is the size of the project, not in terms of square footage, but in the amount of money, time and work that will be spent.

Adaptive reuse projects, when a developer converts an old office or manufacturing building into for-sale residential units, require an immense amount of work and therefore proceed at a rate immune to the demands of the market. Conversely, rental apartment buildings that are more modern and require a limited amount of construction for successful conversion are more likely to be transformed due to consumer demand.

Simple Conversions

“In Chicago, there’s a lot of new construction and conversions, and the new construction is taking place because of the lower interest rates,” says Nicholas Gouletas, president of sales and field operations for Chicago-based American Invsco. The company has converted approximately 100 buildings in its 34-year history including The Sterling, a 379-unit conversion on LaSalle and Kinsey, located one block from the Chicago River.

According to Gouletas, conversions are slightly more competitive than new developments because it often costs more to build something brand new than to convert a building. Developers can keep the project costs low and meet market demand by purchasing and converting well-maintained modern buildings. “Some developers will go in and put in new kitchens or new baths or really kind of transform the character of a building, but that is more of the exception,” says Gail Lissner, vice president of Chicago-based Appraisal Research Counselors.

For projects being converted from rental properties, the makeup of its renters can provide a clue as to how well the property will adapt to a condominium project. “Viable rentals typically make viable conversion projects,” Lissner says. Buildings with long-term renters who have the right income to purchase a unit have an advantage, and a lack of comparable rental alternatives in the immediate area may entice them to purchase. “You don’t necessarily convert buildings, you convert people,” Gouletas says.

The exception to the rule is if drastic changes are made in the conversion process. “If you start making substantial physical improvements to a building, you’re really going to change the character and price point of the building and then its formal rental history becomes a lot less important in the analysis,” Lissner says.

While some conversion companies may leave well enough alone and barely change a building, others may gut a building and make drastic changes. “I’ve gone through and changed windows and HVAC systems, or changed kitchens and upgraded bathrooms,” Gouletas says. “On some of the older structures, I’ve done all of those things. It just depends on the building.”

Along with the rental history and current state of the property, location and view are extremely important to those looking to convert properties in the Chicago area. An example of a prime property is The New York, a 594-unit building at 3660 N. Lake Shore Dr. that American Invsco is converting. Built in 1987, the building allows condominium owners an unobstructed view of Lake Michigan and the skyline of Chicago.

When looking at a prospective conversion, companies also look at the price at which they can offer a building to residents while making the improvements they feel are necessary. “We want to pass along value to our end consumer,” Gouletas explains.

American Invsco is also currently making improvements on a conversion called River City, a 440-unit building, at 800 S. Wells at the South Loop. The building was originally built in 1986, and the company purchased it almost 2 years ago.

Gouletas says that American Invsco updates most of the buildings it purchases for conversion, and he emphasizes the importance of each building’s lobby. “When you look at the lobby of a building, that truly is your front door,” he says. “You might not make a sale at the curb, but you can certainly lose one.”

With increasing numbers of apartment buildings that have been converted in Chicago, the shrinking number of available apartments has driven up rental rates in the area. “Only in the last 5 years, have they started to build new rental buildings again,” Gouletas says of area developers. “At some point those new apartments will also be made into condominiums.”

Adaptive Reuse

Although apartment-building-to-condominium-conversions are popular, Chicago’s rich history as an industrial town has also provided many light manufacturing warehouses and offices for conversion into residential units. While homeowner purchasing is high, these types of projects are determined by a different set of criteria.

“You can’t respond to fluctuations in interest rates,” says Neil Stenholt, president of Chicago-based Conversion Marketing & Management. Stenholt points to the long planning process, due diligence and the lengthy construction timetable involved in producing large developments as factors keeping these types of conversions in check.

Location, another added difficulty when developing these adaptive reuse projects, is most conversion developers’ first priority when scouting for a potential conversion. A sturdy building is also important. “Finding a building that is structurally sound is a challenge,” Stenholt says.

However, these factors do not taint the appeal of working on these projects. “To save and restore old buildings that have become inefficient for their original intended use makes them useful again,” Stenholt says. “It’s nice to see an old building with character be restored and revitalized.”

Conversion Marketing & Management is currently working on its largest project to date — The Edge Lofts and Tower, designed by Chicago-based PappaGeorge/Haymes Ltd. The building, originally a 144,000-square-foot, five-story building constructed circa 1912, was previously the Western Newspaper Union Building. Located four blocks from the Sears Tower and next door to St. Patrick’s Church at 210 S. Des Plaines, half of the building will be torn down, but the façade will remain intact.

“Basically we’re taking a building that is almost square and we are tearing down about 50 percent and leaving intact an L-shaped portion along Adams and Des Plaines,” Stenholt says. In place of the demolished portion, a seven-level parking garage will be put in place to support a soon-to-be-constructed 16-story residential tower. The base of the building will include 48 lofts, and the tower, which is entirely new construction, will include 176 traditional apartments.

This combination is unique among Chicago developments. “It’s going to appear from the street as if this concrete and glass tower is sitting on this old building,” he says. “But in fact, none of the weight of the new tower is supported in any way by the old building that we are saving; it is supported by the new parking garage that you won’t be able to see from the street.” Demolition of the rear of the building is complete and residents will begin moving into The Edge Lofts and Tower in September 2004.

The development process for adaptive reuse conversion is not the only condition slowing their development. In fact, many conversion and development companies are enamored with the urban adaptive reuse of old warehouse space, but the number of available and attractive sites is limited. “The problem is that all of the good turn-of-the-century buildings have been pretty well picked over, and there are very few left now that are loft candidates,” Stenholt says.

Much of the desirable, adaptable property in the central business district, downtown and on Lakeshore Drive was swallowed up in the wave of condominium conversions that occurred in the 1970s and 1980s, says Gouletas. Some developers are circumventing this current shortage by looking to other kinds of property to convert.

Conversion Marketing & Management, for example, is taking 40- and 50-year-old office buildings, which are currently Class D office spaces, and converting them for residential use. “Nowadays, so many of the warehouses have been converted that some developers are even starting to build structures to look like old warehouses,” Gouletas says.

The Big Picture

The Chicago residential conversion market has been active since the mid-1960s, but the peak for residential conversions was in 1979 when 4,842 units were converted. The market has slowed considerably since then, with only 1,864 units converted in 2001. According to Lissner, the average number of conversions between 1991 and 2002 was 951 units each year.

Although the adaptive reuse market may be slowing somewhat, Lissner thinks the future is bright for conversions of older apartment buildings to condominiums. “Right now the market is ripe for additional conversion product,” she says.

“In 2002, buildings were not being offered for sale; the rental market was weak and developers were hesitant to put their properties on the market, thinking that they would wait until the market firmed up a little before they sold,” she says. “But we think that during 2003, we will see several buildings in the downtown area converted.”


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