Owners of 220 townhouses in Chicago’s far northwest suburbs are looking for an investor to buy all the units for nearly $60 million and convert them to rentals in one of the largest offerings of its kind in recent years.
Brokers at 33 Realty said they have been hired to find a bulk buyer for all the separately owned units within the Treehouse in the Woods complex in Round Lake, Illinois. The asking price is $59.5 million.
The Lake County deal is a twist on a trend that has become common in the Chicago area over the past two decades, following a period of overbuilding heading into the Great Recession. Deconversion specialists buy an entire tower or complex of separately owned units to switch them to rentals, usually upgrading units and property amenities to maximize rents.
The practice, typically only seen in the Chicago area and in Florida, is known as a condo deconversion. That is because many condo buildings now being switched to rentals are reverting to their original use.
In this case, the 27.5-acre offering could appeal to investors in the single-family rentals sector, allowing a developer to upgrade an existing property with townhouse units rather than building a complex from the ground up, said one of the 33 Realty brokers marketing it for sale, Sean Connelly.
Treehouse in the Woods units have addresses on Treehouse and Whispering Oaks lanes and Macgillis Drive.
Some big, well-known multifamily properties, such as the 448-unit River City complex designed by architect Bertrand Goldberg in Chicago’s South Loop, have undergone deconversions in recent years.
Century Tower, a completed 293-unit deconversion in Chicago’s Loop business district, went on the market for sale earlier this year.
Big suburban projects in recent years have included a 357-unit project in the tower at 21 Kristin Drive in northwest suburban Schaumburg.
Such projects have slowed in recent years because of factors such as rising interest rates and an overall slowdown in multifamily development, Connelly said.
But an overall dearth of new construction has helped the Chicago area outpace the nation’s other major markets in apartment rent growth, once again opening the door to new construction and conversions, he said.
“In the suburbs, rents are strong,” Connelly said. “In secondary markets, rents may not justify new construction unless you’re getting [tax increment financing].
“With build-to-rent product, you’re seeing tenants stay for five years. There’s lower turnover. This is already built, but it needs to be lightly rehabbed. It has a lot of value-add potential.”
Most targeted properties
Condo associations with a high percentage of units being rented out are the most likely to seek out a deconversion deal because it’s difficult for new unit buyers to secure a loan, Connelly said. In the Round Lake property, about half the units already are rentals, according to 33 Realty.
Completed in 1996, Treehouse in the Woods includes two- and three-bedroom townhouses with attached parking and balconies. A buyer could push up rents over time by making improvements to units and amenities, the brokers said.
Critics of condo conversions say they force some owners to sell against their will. In Illinois, a bulk sale must be approved by at least 75% of the unit owners. In Chicago, the threshold rises to 85%.
Proponents say such deals allow owners to sell their units at a premium of what they could in a single-unit sale, allowing unit owners to cash out and avoid looming repairs or other events that would lead to a major special assessment.
In Florida, where new safety regulations and soaring insurance costs have forced some condo associations to institute assessments into the six figures, condo owners are actively seeking bulk buyers for their properties, Connelly said.
“When we started doing these deals initially, they were getting done because there was a price premium for the sellers,” Connelly said. “What we’re seeing more of now is the need to do a deconversion because of [capital expenditures] and deferred maintenance. There’s still a premium, but not what it once was.
“If there’s a need for repairs, that’s daunting for an association. For investors, they just look at it as a capital project. A real estate investor can pay more because they’re able to fix the roof and build a clubhouse, and they know they can create upside on rents.”
For the record
The sellers are represented by 33 Realty brokers Sean Connelly, Matthew Petersen and Liam Moore.