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Forget the London loft. Manchester is upstaging the capital in converting historic buildings into stylish living spaces. This is partly thanks to the city's developers and architects, who could teach their cousins down south a thing or two about modern conversions. It is also stimulated by the city's abundance of magnificent warehouses developed by Victorian merchants for the commercial glory of Cottonopolis.

One of Manchester's largest, and certainly classiest, newly converted warehouses is aptly named The Grand. Although originally built in 1868 as a warehouse, for more than a century it served as the Grand Hotel. Located alongside the Law Courts and close to Piccadilly Station, the grade II-listed building sports classical stone facades bursting with carved ornamentation.

The building has now been refurbished, converted and slightly extended to create 116 apartments. The developer is London property finance company Baltic, but the designer is a Manchester practice, Ian Simpson Architects, which has built up such a strong reputation for conversions that it has opened an office in London.

In Simpson's design, the ornate stone facades have been cleaned and restored, and the five-storey block raised by a couple of floors. The two new storeys are unashamedly modern and clean-cut, with no attempt to mimic the classical stone facades below, in form or materials. The apartment interiors are likewise modern, with plain, white-painted, plastered walls, sleek modern kitchen fittings and white-tiled bathrooms. Not least, a new 726-space multistorey car park built by the developer directly behind the warehouse makes no attempt to disguise its utilitarian function.

This modern "honest" approach has become de rigueur in building conversions. As well as chiming perfectly with the current vogue for urban chic, it has an intellectual pedigree going back to William Morris' campaign against the Victorian fondness for fake restorations.

Even so, Morris' theories do not provide a carte blanche for modern interventions. Anyone who has walked through a historic facade into a modern interior knows that the culture clash can be disturbing. And if contemporary functional design and construction are so superior to that of the existing building, why bother keeping the obsolete structure at all?

Simpson's brand of modernism is in the Miesian tradition of sleek rectilinear forms in glass and metal – as far from The Grand's arched windows and baroque detailing as one can get. But the architect's approach scores highly in its well-judged balance of design, in which modern interventions have a self-confident presence yet are well-mannered enough to avoid confrontation with the grandiose stone facades below.

Rising two storeys above the existing stone parapet and a full three storeys above the heavy cornice, the roof extension is plainly visible from the street and is, if anything, out of proportion to the building below. Yet its design is elegant and discreet enough to compensate for the visual intrusion. The new upper floors are set back from the classical stone facade, and the topmost floor is a flush rectilinear facade in glass and dark grey, colour-coated steel with an undemonstratively flat roofline.

Beyond the rear wall of the stone block, vertical strips of modern glazing have also been inserted on each elevation, facing both side streets. These glazed strips, which enclose apartments added at the rear, are politely set back from the historic stone facade and connect up on the same plane as the new top-storey facade.

As Rachel Haugh, director of Ian Simpson Architects, explains: "We have used the device of the glazed roof element to wrap around the classical building and link it to the new car parking structure beyond."

The multistorey car park occupies a more prominent site than The Grand itself, as it faces the main London Road leading from the station to the city centre. Developed by Baltic as a public car park above a retail unit on the ground floor, it is a functional, WYSIWYG structure with large openings providing ventilation on each floor and contemporary facing materials.

At the same time, Simpson has raised the quality of car park design to produce an attractive building on the high street. The open-framed front facade is screened by banks of aerofoil-shaped aluminium louvres, while the side walls are faced in mosaic panels below and buff-coloured terracotta tiles above. The shop front at pavement level is entirely glazed. Moreover, the multistorey structure has been modulated to relate to the classical block on to which it backs. It rises to the same height and fills the same width as The Grand. More subtly, it has been given a plinth (in green mosaic) and recessed attic storeys, both of which are the same height as those on the classical building.

Inside The Grand, the original courtyard has been converted into a contemporary quasi-atrium. As with the exterior, the conversion has been carried out so that old and new are distinct yet subtly co-ordinated.

What first catches the eye in the courtyard is a stripped timber skeleton that once supported glazed walls and roof to the hotel ballroom. Although it no longer serves any function, its curving timbers form a bold, ready-made sculpture large enough to fill the base of the courtyard.

Beyond the timber skeleton rise the four original enclosing walls of the courtyard in buff-coloured brick. From these walls project various modern balconies and access decks in black-painted steel. On two sides are small private balconies reached from the apartments through french windows. On the other two sides are more elaborate access decks leading to other flats.

On the two top floors, access decks encircle the courtyard completely. And above these floats an elegant glass roof supported on a flat grid of laminated timber beams. The glass roof shields the courtyard from wind and rain. Unlike the roof of a modern atrium, it is open at the sides to admit natural ventilation – the courtyard is the only external environment for those flats on two sides with individual balconies.

The refurbished courtyard now has the character of the inner courtyards of traditional apartment blocks in central Europe. It is overlooked by a terrace for use by all residents.

When it came to carving up the old block into new flats, Baltic asked for a range of apartment sizes and prices, from compact single-bedroom flats selling for £50 000 to spacious apartments and penthouses with £300 000 price tags.

"When we started on the project, we wanted a bit of caution, because the residential market in Manchester city centre was very different then from what it is now," says Baltic director Robert Black. "The smaller apartments were more in the style that we were happy with, but we also thought that some of the apartments with good views at the front could be larger."

The differentiation between small and large flats has led to a complicated internal arrangement. The larger apartments, which line the front and wider side street, fill the depth of the block and are reached by the new access decks projecting into the courtyard. The cheaper single-bedroom flats, on the other hand, are stacked in double rows facing either the narrow side street or the courtyard. They are separated and reached by internal corridors, which connect to the access decks to form a racetrack-style circulation system on each floor.

If there is any weakness in the complicated internal arrangement, it is that three small internal flats on each floor have only the courtyard to look out on to. Although attractive to pass through, the courtyard could become claustrophobic as the only external view from a dwelling.

As the building had stood derelict for 10 years, all original internal plasterwork and detailing had been ruined, paving the way for a clean sheet of modern interiors. The only retained features to impinge on the apartment interiors were the lofty classical windows, and even these were replaced by identical timber frames with mouldings. The basic concept of the conversion has therefore been to arrange every living room and bedroom around at least one of these large windows, which confer a stately character to each room.

For the same reason, the original ceiling heights – as high as 5 m on the first floor – have been retained in the habitable rooms. But in the more compact new bathrooms, kitchens and narrow internal corridors, where such high headrooms would feel uncomfortable, false ceilings have been inserted.

"We have tried to create truly large apartments and express the full volumes of the spaces," says Haugh. "They are very different from loft apartments where bed-decks have been inserted in double-height spaces."

Baltic undertook one more leap of faith in the development project. "Against the advice of our lawyers and the guarded caution of our agents, we decided to pre-sell the apartments off plan," relates Black. "This had never been done before in Manchester. But we built show flats and put together an extravagant marketing campaign, and we managed to sell 30 units in the first weekend."

The conversion was finally completed last March, and all apartments except one have now been sold. Both the apartment block and the neighbouring car park are held up as models of enlightened urban regeneration by the city council. In both cases, carefully judged architectural design has contributed substantially to their success.