Monday, May 28, 2007

The Rogers Park Conversion Stampede

Residents of the area surrounding Pratt and Sheridan will be pleased to note that the formerly seedy, dangerous building at 1200 W. Pratt Blvd., on the northwest corner, is being gutted and redeveloped into condominiums that range in price from $129,900 for a studio unit to $299,000 for a duplexed two-bedroom with two baths.

Since I live next door to this place, I'm really happy to see the reconstruction of this interesting building, because it was a major source of problems in the area, and was dangerously overcroweded and decrepit. Because I am in the market for a reasonable, attractive condo, I have been eagerly awaiting the completion of the project, so when a couple of models were opened to the public last week, I trotted right over and toured the models. Only two were completed for display, both of which were two-bedroom, two-bathroom units that would fit easily into the living and dining room of my rental, and perhaps claim part of the kitchen.

First, let me say that these are attractively finished units with nice appointments, including stainless appliances, granite counters, and lovely, large marble baths, one of which is fitted with a spa tub. But these were the smallest two bedroom apartments I have ever seen. They were pretty units, and the architect managed to make an attractive, well-appointed apartment out of a very small, strangely -configured space, but the second bedroom was scarcely larger than the walk-in closet in my living room, and there were only two extremely small closets, and extra space in the furnace closet, for in-unit storage. A storage locker comes with the unit, and you will need it for anything that isn't stored on a hanger. The unit is supposed to have 800 sq. ft., but it somehow felt and looked much smaller.

The best feature of this building is its premium location, a block from Pratt Beach, and on one of the cleanest, most crime-free streets in the city, let alone Rogers Park. Pratt is a wonderful street. The proximity to restaurants, retail, entertainment, and public transportation also more than offset the lack of parking, which it would be impossible to provide in any case. Still, even with the glossy finishes and appointments, and the excellent location, these units seem steeply overpriced to me. The two bed two bath unit I looked at, attractive as it is, would still feel like a steep comedown from the lovely, large rental I now occupy nearby, with its incredible millwork, perfectly proportioned rooms, and massive closets, and I have to conclude that there is still a massive "affordability gap" in the housing prices, betweeen reasonable rents for beautiful places versus outrageous prices for a tiny place lacking in distinction or storage space.

Therefore, I expect that there will be considerable give-back in the prices of these units as even more conversions and newly-constructed units come to the market and add to the substantial glut. Maybe, just maybe, the sellers will price the units to be affordable to the single person making $40,000-$60,000 a year, without having to resort to the "creative" mortages that are the cause of the problem to begin with.

It strikes me that we are seeing more overpriced conversions and new construction than ever at the very moment the tanking housing market seems poised to take the next leg down of a precipitous drop, due to vast numbers of unsold homes all markets coast-to-coast. There's nothing to indicate that the market will pick up anytime soon, nor is there any reason why it should, given the massive drop in existing home sales, and the drop in prices of new homes. While new home sales experienced their biggest surge in 14 years, the prices paid for them dropped more than they have for the same time period, and you have to figure that there is a causal relationship between the drop in prices and surge in sales, which in any case was limited to the West Coast- sales of new homes here in the Midwest dropped 4% for the same period.

Yet the conversions and new projects continue apace in Rogers Park and Edgewater
, as well as Lakeview and Lincoln Park, even as 17 remaining units in 1415 W. Lunt were auctioned off and hundreds of rehabbed and existing units languish on the market. Now, there were many projects that were already in the permitting pipeline for a couple of years that are now just being completed, and there are also numerous cancellations and deferrels of new projects, especially large buildings in Uptown and Edgewater that were slated to be completed by now, but haven't even been started and likely won't be for some time. So we have to wonder why so many owners are rushing to convert amidst some of the worst selling conditions in recent history.

Could it be that it has become just too unrewarding to be a landlord? A friend of mine owns numerous properties, both commercial and residential, in Uptown and on the west and south sides, and may be compelled to sell or redevelop by the escalating taxes, which are rendering his commercial property unprofitable and vastly increasing the load on the residential properties, a couple of which are running negative cash flows already. He assures me that this situation is very common among investment property owners. The taxes are particularly crushing on the commercial property, but the lower taxes on the residential properties are more than offset by losses from non-paying tenants who must be evicted, and legal expenses pursuant to tenant issues. Additionally, there are expensive repairs and improvements that must be done pretty much constantly for the apartments to be attractive to good tenants, and harrassment by city officials over minute code violations (nobody's perfect) is pretty much ongoing. All in all, the whole business of operating rental property has become all pain and no gain for this guy, and he is not alone.

Many people have remarked on the fact that Rogers Park alone has lost over 3,400 rental units to condominium conversion, and at least one of the aldermanic candidates in the last election openly advocated forcing landlords to allocate at least 30% of all units in large buildings to low-income housing. Another candidate proposed a one-year moratorium on all condominium conversions. These proposals are blatant violations of basic property rights, and like all such violations, they would only cause more problems than they solve, by forcing the slumification of good buildings and by triggering more conversions when it became legally possible to do them. Landlords will only be marking time to the end of the moratorium so they can unload the building completely along with stratospheric taxes,prohibitively expensive mandatory repairs, and unruly tenants that it costs a minimum of $5000 and four months of legal wrangling to evict. Only professional slumlords will find it rewarding to operate rental property.

So, instead of promulgating more socialized housing for ever-higher income brackets, as increasingly stratospheric taxes make housing, and life in general, less affordable for everyone who isn't in Paris Hilton's income bracket, why not work to reduce the tax load, present and future? What is the use of TIF-spurred "economic development", if the net result will be to erode the tax base while creating impossible business conditions for all businesses that don't receive some sort of Corporate Welfare in the form of tax abatements and TIF district "gimmes"?


Al Iverson said...

More importantly, what happens to Isam's? It's nice having a liquor store so close, though I wish they'd clean it up a little.

The North Coast said...

I was talking to Sam, the proprietor, just a couple of days ago and asking him what his plans were. He said he might take the space at the corner but he's not sure, depends on the rent. He says he's waiting for more information.

He wants to fix up the store a bit, but his plans to do that have been on hold for a couple of years, ever since the family that owned it then was ordered to sell it,to see what happened with the bldg. I can understand him not wanting to sink more money into the place until he knows where he is going to be going.

He's a nice guy and his store is handy to have close by.

The North Coast said...

I wonder where the nice salon that was there went.

Anonymous said...

Hi Laura,
I was just on the realty site for my old building and saw something very disturbing. My building was all one and two bedrooms. The original two bedrroms are remaining two bedrooms. Most of the original one bedrooms are being converted into two bedrooms without a dining room.

Here's what I cannot see. The one bedrooms on the middle entryways, which do not have garden apartments are being converted into three bedroom apartments. When I first saw this I intially thought they might be duplexes, but since there was no garden in these tiers that cannot be possible. A 700 sqare foot 2 bedroom two bath is ridiculously small. But a three bedroom, I shudder to think.

To your point about the housing slump and prices, I still think buyers tend to prefer the new developments, where they can pick and choose their colors and cabinetry vs. preowned that may require a larger post purchase investment, due to the taste of the original owner not to mention wear and tear.

I also suspect that developers can afford to drop their price more than the individual seller. Developers are pricing units for a profit margin that can be negotiated without fear of bankruptcy. Individual owners, as well as speculative investers, are hoping to make a small profit or at least break even on their intial outlay. Right now, I think the true burden of the housing slump rests on the shoulders of those trying to resell.

The North Coast said...

Margot, I toured the Herlo Brothers development on Greenleaf you lived in and yes, they were really, really small two bedrooms that looked to me like they had been made from what were originally one-bed apts. I have the floor plans and other lit for that development, and there are no three bedrooms, just two beds, the largest being the end units with the bays. The prices of the small two-bed units made me laugh, and I was appalled that the bathroom opened directly into the tiny living room but I could see that was the only way they could squeeze two bedrooms in. For THIS, they wanted $176,000, which I found laughable. I thought, here's one for the auction block in a couple of years.

The sick part is that the target market for a unit like this can't afford it without a really risky ARM mortgage. These places are for first time buyers,who mostly can't afford that price on the typical moderate-to-middle income, and I can't imagine more than one person living in the smaller ones.
The slump is definately causing individual owners the most pain, but you couldn't have told any of the buyers that this runup was unnatural and had the fingerprint of hysteria allover it, and that the prices made no sense. Buyers threw normal caution to the wind. I have been waiting for the prices to break since 2003, when they were at levels that gave me vertigo.

I thought, I can't afford to be had.I couldn't risk an adjustable mortgage with a balloon and I couldn't depend on reselling. I've seen too many boom-and-bust cycles in my life, including a couple of other real estate bubbles, and I've never seen anything like this- it was as bad as commodities.

I feel sorry for some individual buyers, but did they not know the risk they were taking when they bought just in order to resell at a profit? Before 1975, people bought to have a home they owned, not to speculate on, and housing did not increase in value much between 1950 and 1975. My mother's house, for example, cost the previous owner $19K in 1954. She paid $21,500 in 1971. It is now worth around $250K, and a comparable sold for about $350K at the peak. We had little asset inflation during the post WW2 years.

If you bought for home and bought no more than you could afford with conservative financing, and using a reasonable multiple of your income, you are OK. But if you bought to flip, yes, you are in trouble, and if you refinanced a place you have owned for years just to get the money for consumer goodies -another thing people never did in the past- you are in trouble.

Paradise said...

Laura? What can you afford? Can you pay 20% down on a $180,000 loan. Let me know, I've got the place for you....

The North Coast said...

Hell, no, I cannot pay 20% on $180K, Vannessa.

I'm looking to spend around $135K to $14OK, and I will be putting very little money down. I will moreover do ONLY a straight fixed mortgage, which I have lined up already.

I want my monthly nut, inclusive of mortgage, maintenance, heat, taxes, and insurance, to total no more than $1300 per month at the topside. The loan will NOT be for more than 3X my income, tops. And that's really a higher multiple than I like. That will leave ample swing for savings, and the big tax increase we're about to get rammed down our throats this fall.

No ARM loans, no balloons, no IO, no "teaser" rates of 1% that back-end you with a balloon payment of $20K or more at the first reset.

I am looking for a real deal, preferably a vintage that is unrehabbed and has all the vintage millwork intact. In other words, something I like as much as what I'm living in now.

I also think the current asking prices are OBSCENE. Everywhere. I have about 50 properties that I am interested in, in this nabe, Edgewater, Ravenswood, and Lakeview, and some have been on the market for 600 days. Do you think that a property is worth the price asked if it is on the market that long?

If you are thinking of buying, BE CAREFUL. I'll be writing more later on this.

Kheris said...

I was downtown this week and paying attention to the ads for new developments in Streeterville. Next to those $180K is a dream price, and the space provided is not much more than what you saw. My bet is on folks moving north to find better prices with more space. It may not pan out in every case, but it will make things interesting.

The North Coast said...

Kheris, Streeterville is in a totally different league. That area is a truly upper-bracket neighborhood in an incredible location, and it has always been substantially more expensive than surrounding areas. It is the most expensive neighborhood in Chicagoland, and it makes the north suburbs look like bargains. I wouldn't compare it even to Lincoln Park, which is expensive enough, but a bargain compared to downtown.

As far as I can tell, RP was always a little cheaper than the neighborhoods further south, even when this was a "good" neighborhood. It was less dense, more "suburban" in character, with less going on. The difference between then and now is that Rogers Park then had no "problems" and a retail mix of good stores that were suitable to service the neighborhood of middle range residents.

I still maintain that housing is too expensive in all income brackets and that people are paying too big a portion of their incomes for it. We now take being in hock to our eyeballs for granted, which is bad.