Sule Aygoren Carranza is also managing editor of Real Estate Forum.

Carmel, IN—Looking for better returns than in traditional condo markets, Abacus Capital Group LLC has ventured into the Midwest. The company is currently selling units in its latest conversion project, the 186-unit Wentworth at WestClay, located within the Village of Westclay, a 680-acre, high-end, master-planned community here.

Abacus bought the property a year ago from its original developer, A.G. Spanos & Co., for nearly $15.2 million shortly after it was completed, according to the firm’s president and chief executive officer, Benjamin Friedman. It was brand-new and 70% leased at the time.

“We determined that the property’s highest and best use was to convert it to condos, and once we acquired it for conversion, we stopped the leasing,” he explains. “We wanted to keep the units fresh and be able to implement our upgrade program without disturbing too many residents at the time. We spent almost $2 million on a substantial upgrade program to the asset, upgrading its finishes and common areas to condo specifications.” While most investors look to the East and West Coasts for plays, what led a New York City-based real estate investment firm to head into the Midwest, a region that has overall experienced sluggish job growth and poor multifamily fundamentals? For Abacus, which does 75% of its business in the multifamily sector and the balance in condo conversions, specifically in Miami, New York and California, The Wentworth purchase marked its entry into the area, Friedman relates. In fact, the firm considers the Midwest to be a “third coast” for the US, and sees opportunities in cities with strong economic fundamentals and that offer value when compared with other options.

According to Friedman, it was market research that led it to Carmel specifically. “We have eight target fundamentals we utilize when we assess the economic feasibility of our assets,” he says. “We look at things from income levels and job projections to quality of school districts to the actual physical attributes of the project. Every deal that we do must have at least five of the eight fundamentals. Carmel, IN was one of the few areas that had eight for eight. It might not be a target market for some of the larger institutional areas, but the underlying fundamentals suggest extremely strong viability for both rentals as well as condominium projects.”

Unlike its regional counterparts, the executive relates that Carmel, and the greater Hamilton County, boasts the sixth highest per capita income in the US, as well as an excellent school system and a highly educated work force. Combined with the low cost of doing business in the area, prospects for employment expansion look good.

For the Wentworth property specifically, the firm is targeting four main customer profiles—empty nester baby boomers looking to downsize from single-family homes to maintenance-free, high-end product; first-time homebuyers that are priced out of the single-family market; single-parent households that like the school system but might be priced out of homes in the area and the investor segment, which Friedman points out is different from speculators. “Investor folks have the philosophy of buying the least expensive home in the most expensive market, for appreciation potential,” he explains. That tenant profile is consistent with most of Abacus’ projects, he adds.

Further, Friedman notes that the project offers great value for its location. According to the firm, average home prices within the Village of WestClay top $650,000 and are close to $2 million, in some cases, whereas units at Wentworth begin in the mid-$90,000 range.

Abacus likes Carmel so much that it’s looking at additional projects there, Friedman says. One is a ground-up condo community, with a different unit mix and higher price point, on a separate parcel within the Village of Wentworth. The firm is also considering projects Downtown, which is undergoing a new urbanist renaissance of sorts. Elsewhere in the Midwest, he relates that the company is looking at a high-end suburb outside of Chicago.

“Our demographics are going to be consistent. For any successful condominium project, you’ve got to have your end user in mind,” explains Friedman. “And to accurately assess the needs of that particular customer, you’ve got to understand the underlying fundamentals in each market.”

Yet for success in the Midwest, the executive concedes that investors must do their homework. “It’s all about doing a targeted, thorough analysis of the submarket,” he says. “There are pockets of the Midwest that have suffered population and job losses, but there are other parts of the Midwest that have the exact opposite fundamentals. Maybe therein lies the opportunity.

“We have actually had investors come to us from other states where they can’t believe the tremendous value we’re able to offer on our projects,” he adds. “In fact, if you look at the fundamentals at some of the coastal cities, I’d be concerned about the substantial supply overhangs that exist in some of the coastal markets, where there’s been a tremendous surge in new construction and conversion activity in condos. My question there is, under what pretense do the fundamentals support that potential overhang in supply, and what ramifications will that have?

The good news in the Midwest is that although it’s hit or miss, the condo market it still in its infancy, and there’s plenty of room to mature, , Friedman maintains. “It reminds me personally a lot of some of the markets 15 or 20 years ago, like Downtown Manhattan. In the early 90s, it had a very nascent residential market, and when developers and investors came in, a lot of people were questioning whether someone would want to live in a converted office building. History has proved that they were very smart in what they did,” he says. “I think that type of evolution of the condo business, the acceptance of that form of lifestyle, is matching up very well with the demographic trends of the US in terms of aging baby boomers and subsequent echo boomers buying homes. While I don’t project that tens of thousands of condo units will flood the downtowns of Midwestern cities as you’ve seen on the coasts, I think there’s a good business to be had in being very selective and doing targeted projects in a number of cities here.”

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