Monday, July 30, 2007

Conversion Property Sales Up (but stats are deceiving)

2 major deals drive first-half jump in apartment sales

(Crain’s) — Sales of apartment buildings in the Chicago region soared almost 70% in the first half of the year to $1.45 billion, buoyed by two massive downtown transactions and rent growth that continues to fuel demand from institutional investors.

Sales in the city through June totaled $944.25 million, almost triple the amount from the same period last year, while sales volume in the suburbs fell 4.9% to $502.59 million, according to a new report by CB Richard Ellis Inc.

With another $750 million of deals in the works, sales could climb to $2.5 billion this year, predicts John Jaeger, first vice-president with CB Richard Ellis’ multi-family investment unit in Chicago. That would shatter the all-time high of $1.89 billion reached in 2005.

“I think $2.5 billion is achievable. It’s not a stretch,” Mr. Jaeger says. “You’re seeing mega-deals as well as large and mid-sized transactions.”

Two downtown deals accounted for more than 50% of the volume in the first half of the year: the 2,346-unit Presidential Towers, which was bought for $475 million by Chicago-based Waterton Associates LLC, and the 481-unit Grand Plaza east tower, which a foreign investor bought for $263 million.

Institutional investors such as pension funds and private-equity firms are dominating the landscape, as condominium converters have been almost non-existent.

Through June, not one apartment downtown was bought by a converter, a developer that would convert the building into condos. One such deal was put under contract, though: American Invsco’s agreement to buy a 46-story tower at 200 N. Dearborn St.

The Chicago region has become popular with institutional investors trying to find so-called value-add properties where renovations can lead to big rent increases. That’s because much of the apartment stock here consists of 20- to 30-year-old complexes, says Mr. Jaeger, and because few new apartments have been built in recent years.

“Value-add deals continue to be the buzz as investors are chasing higher yields through a renovation program and resulting rent premiums,” the CB Richard Ellis report says.

One value-add investor concedes that deals have been hard to come by.

“It’s a challenge to successfully win those opportunities in this environment when so much capital is seeking value-add properties,” says Bennett Neuman, a senior vice-president of acquisitions with Chicago-based Laramar Group.

But Mr. Neuman says Laramar, which last bought a property here late last year, is hopeful about some current prospects.

“We’re seeing good increases in market rents, and vacancies are declining,” he says. “In general, we have the wind at our back.”

From Crain's Chicago Business

Related story: Thompson to resign as Winston & Strawn chair

Related story: Over the past 11½ years, condo converters have accounted for 43% of apartment sales in the city, according to CB Richard Ellis.

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