Chicago multifamily investment firm Bear Peak Capital completed the $21.7 million purchase of a 152-unit suburban Naperville complex in a deal that will turn the property’s housing from condos into apartment rentals.
The transaction for the Quail Ridge property at East Bailey Road, Ishnala Drive, and Kiowa Circle, known as a condo deconversion, is the first of many that Bear Peak has moved to finish this year. The firm made $500 million of unsolicited offers for dozens of suburban Chicago condo properties in recent months, said Iman Jalali, one of Bear Peak’s leaders along with Michael Pouliot and Scott Skinger.
While it’s unlikely that the firm gains enough traction to reel in purchases of most of those properties, the bullish approach to suburban condos primed to turn into rentals reflects Chicago’s surging multifamily market. Investment firm Albion recently set a record with the almost $140 million purchase of a suburban Palatine apartment complex.
“Once that offer reaches the condo board members, you have no idea how they’re going to respond,” Jalali said. “All we’re looking for is a foot in the door.”
To pull off a deconversion, buyers have to get condo unit owners who together control at least 75 percent of a property’s value to vote in support in an election held by the property’s condo association board. Owners against selling are overridden and forced to sell if that vote meets the threshold. In Chicago, the threshold rose to 85 percent in 2019, turning investor attention to suburban assets since the lower bar remains intact outside the city.
Bear Peak uses property records to focus on condo complexes with high sales volumes before the Great Recession cooled a Chicagoland market that had been overheating.
Property values on many of those units never fully recovered. While condo owners who bought at the peak are likely to be seeking to get out from underwater mortgages, others who bought at the bottom of the market often also want to cash in by accepting deconversion offers, which can net sellers 20 percent more than an individual condo unit would get on the market.
Bear Peak hunts for properties that have a high concentration of unit owners who bought at either of those points.
Rental rate growth in Chicago has been strong enough that deconversion investors can offer condo owners premiums, since their buildings as a whole are worth more as rentals than individual condo units.
The political nature of getting condo owners’ approval intimidates some investors who would make traditional apartment investments without the headache of campaigning for a hyperlocal election to complete acquisitions. When holdout unit owners refuse to accept a deal, the process can get contentious, litigious and lengthy, so there is a limited pool of deconversion buyers.
“You have to communicate and educate the current unit owners on what the offer means,” Jalali said. “If you have that down, and you know the right properties to target, it’s not as scary.”
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UPDATE, 7/29/2022, 7:45am: This article has been corrected to fix references to Bear Peak