Invest1 publisher2 min readPublished
Chicago's Loop finishes its first office-to-apartment conversion at 117 units
Delivered units make conversion a real use for obsolete downtown offices. The resale prices underneath the trade are still distress prices, and by one banker's account only a fraction of empty buildings qualify.
The Investor · Invest desk
What happened
- The first office-to-residential conversion in Chicago's downtown Loop financial district was completed this week, adding 117 apartment units to the district.
- Five more buildings in the same area have already been earmarked for the same treatment.
- Conversions account for 38% of all new housing units in New York City this year, according to a New York Times analysis of city data, nearly double last year's pace and far above the single-digit pre-pandemic norm.
- Office vacancy across 79 mostly urban US markets hit a record 21% earlier this year, Moody's data show, against a pre-pandemic norm of about 16%.
- About 26% of paid full-time US workdays were done from home in July on the Barrero, Bloom and Davis survey, off the 30% peak of 2022 but well above the 7% pre-pandemic norm.
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Why it matters
- decision An owner sitting on an empty Loop tower now has a completed local project to weigh against continuing to lease it, and the entitlement path is no longer theoretical in that district.
- cost The design brief Levine describes optimises for unit count, so the renter absorbs whatever the maximum-density layout does to the apartment.
- constraint Structure and capital requirements screen the pipeline, so vacancy totals overstate how much housing this route can produce in any city.
- contradiction The Daily Upside's own sources point opposite ways on durability: New York's conversion share is doubling while the experts it quotes expect cities to run out of viable candidates.
A tower in the Loop sold for $4.2 million last October, after fetching $68 million when it last traded in 2016, according to CoStar data reported by The Daily Upside [6]. The second price is about 6% of the first, a markdown of roughly 94% [15]. That tower is not the building that just delivered. Prices at that level are what a conversion budget starts from: $4.2 million across 117 units is about $35,900 per unit of shell, before construction [16].
The Daily Upside did not report what the Chicago project cost to build, what its apartments rent for, or how it was financed [19]. The completion does establish that the permitting and the construction can be got through, at 117 units [1].
Chris Mitchell, a senior banking official at Northern Trust Wealth Management [12], told The Daily Upside that "A pattern we're seeing is that the market is conflating 'vacant' with 'convertible,'" [7]. He added: "In reality, structural constraints and capital requirements narrow the pool to a fraction of total inventory. Even when conversions are possible, they're highly selective." [8]
Spencer Levine, president of the New York developer RAL Companies [11], has been at this longer than the current cycle. "I often joke around that we were doing conversions before it was the cool thing to do," he said [20]. The energy is different now. "It is a quantity game," Levine said [9], and "A lot of the conversions that are taking place now are about how many units can we fit in a building, rather than what is the quality of life or quality of unit that is being provided." [10] New York has run the cycle twice before: a 1980s office boom ended in recession, city officials encouraged conversions through a tax incentive program in the 1990s, and the global financial crisis prompted another round [14].
In my view the 117 units are a use for written-down office basis, not support for office values, because if Loop shells still traded near their 2016 prices the sums would not close. Two ways that could go otherwise. Conversion bids may become the marginal bid for obsolete towers, setting a price above liquidation, and the New York conversion numbers are the evidence for it [3]. Or the candidate pool empties, which is what the experts cited by The Daily Upside expect [13], and the pipeline stops before it moves any city's housing count much. What would settle it is a conversion purchase struck well above the marked-down comparables, or a second New York year at 38% or better drawn from a wider slice of the stock.
What to watch
- Whether the five earmarked Loop buildings file permits, and at what unit counts each one lands.
- New York's conversion share next year: another reading at or above 38% would mean the candidate pool is deeper than Mitchell describes.
- Moody's next vacancy print across the 79 markets, since a move back toward 16% pulls shells out of the conversion pipeline.