The Big Picture with Erin Berenton: From ‘For-Keeps’ To ‘For-Rent’

As the national housing market continues to slow down, a number of condo projects in major cities are being reborn as luxury apartment developments.

Take, for example, Chicago. The overall housing market in Chicago hasn’t suffered the big dips areas like California and Miami have seen.

While the single-family market has tanked in parts of California, and overall U.S. single-family home prices fell a record 16.35 percent in July compared to 2007 levels, according to the Standard & Poor’s/Case-Shiller Home Price Indices, Chicago prices only fell 10 percent.

However, credit is still hard to come by pretty much everywhere in the U.S. As the San Francisco Chronicle reported in mid-September, although mortgage rates had fallen, lenders are still extremely picky about who they’ll issue mortgage loans to.

Even though many Chicago homes have retained their value fairly well during the down cycle, let’s face it: Buying isn’t what it used to be.

As a result, some condo projects that have been in the works for years are now opening their doors as rental properties.

–Downtown decisions: Take, for example, the new 298-unit Burnham Pointe development, located on Clark and Polk in Chicago’s Printer’s Row neighborhood.

Developed by Terrapin Properties, the building features one- and two-bedroom apartments with floor-to-ceiling windows, deluxe kitchens, private balconies and city views.

Burnham Pointe was originally planned as a condo complex. In a January 2006 construction update, Terrapin reported that sales were “75 percent of the way to our goal to begin construction in December 2006.”

However, the project transformed during construction into a high-end apartment building, as the Chicago Reporter noted in early October.

It is now managed by Chicago-based property multifamily management company Jupiter Communities.

–Suburban shifts: And the trend isn’t limited to the city. Just last week in Franklin Park, Ill., JDL Development president James Letchinger announced plans at a committee meeting to transform his condo complex project into a high-end apartment building.

His reason? Low market demand for for-sale units.

Condo Cause and Effect

Repositioning a building into rental units because you anticipate slow sales does pose problems—if your construction loan is due soon after completion because it’s expected that you’ll repay using the millions you garner from closing on unit sales, as The Wall Street Journal points out is often the case, your lender probably isn’t going to want to wait for you to amass the money through monthly rental fees.

And those fees will probably have to be quite high.

The reality is, if a developer poured money into creating a top-notch, luxury building, to turn it into a rental structure, the rents are going to have to be high in order for that developer to make enough over time to recoup the costs. (Rents at Burnham Pointe range as high as $4,857 a month.)

However, if the local market has changed drastically since the project began and it really doesn’t seem like it could sell well, converting to a rental property can save the hassle of having to deal with cancelled contracts if the building truly doesn’t fill up.

A Market’s Worth of Options

We certainly have our fair share of condos for buyers who want them: Demand appears to just now be catching up to supply in many parts of the country.
At the end of 2007, the U.S. had a condo supply large enough for 10 months of demand, which the National Association of Realtors says is the highest level since it began keeping condo records in 1999.
In Fort Lauderdale, Fla. And Miami–where the condo market is so overstocked that Miami-Dade County has a 41-month supply of condos–nearly 10,000 new units are about to go on sale, according to New York-based real-estate-research firm Reis Inc.
It is quite possible that some of those projects—either after sales prove to be slow, or before the units ever hit the market—will be converted into rental properties.

Which makes sense—as the foreclosure rate rises and home loans becomes harder to get because of increased restrictions that require a higher downpayment and nearly flawless credit, the market is going to see an influx of renters who may previously have been buyers.

However, in the current weak economy, that doesn’t mean—as much as everyone loves swimming pools–that they’re all going to opt for a high-cost, luxury apartment.

That could be an issue for developers trying to rent units in buildings they paid a ton to construct.

However, if the building being converted from condos to rentals is not yet complete, the buyer may have a little more leeway with pricing.

In Rockville, Md., the Monterey—a  planned 432-unit building—began as a rental, was briefly a condo development and is now returning to its former life as an apartment building.

The previous owner’s decision to turn it into condos hit a snag in 2007 when, after taking at least a $37 million writedown on the property, the owner blame "significant deterioration" in the Washington-area condo market and put the condo plans on hold, according to the Washington Business Journal.

New York-based investment company Angelo, Gordon & Co. bought the property for millions less than the seller paid for it three years ago—which means they’ll be able to offer renters a lower monthly price.

"We’re stepping in to finish what’s unfinished with the renovations [to create] apartments that are condo quality in what we think is a great market," Dana Roffman, an Angelo, Gordon director, told the Business Journal. "In the end, we’re going to have a great value product and, because of our [low purchase price], we’re going to be able to offer a condo-quality product at a rental apartment rate."

It’s interesting that—so far—renters have been eager to snap up fairly expensive units.

But if the economy continues to falter, I wonder: Will more condo projects turn into rentals, and will pricing be based off what developers need to recoup—or what renters want to pay?

What do you think?