Three staggering announcements highlighted downtown Chicago’s office sector during the second and early third quarter as investors jockeyed to get a piece of a market that has been the beneficiary of the tech boom. The CBD office vacancy rate is now at its lowest level in five years — 14.1 percent — aided by downtown net absorption of 592,328 square feet during the second quarter, the most in nearly seven years, according to CBRE Group. Asking rents in the city have risen 3.9 percent over the past year.
There have been seven sales of more than $300 million since October 2013, including the deal that will come to define downtown Chicago for a long time to come — the disposition of 300 N. LaSalle St. to Newport Beach, Calif.-based The Irvine Company for $850 million in May. The purchase price equals $654 per square foot for the 60-story trophy tower. To put that figure into context, consider that KBS Realty Advisors LLC paid a then-record $503 per square foot for the building in 2010 to Hines Interests LP.
So why did 300 N. LaSalle fetch a record price? There are a few reasons. First, the tower is 97 percent leased to strong credit tenants including Kirkland & Ellis and Boston Consulting Group. Second, the coveted office building also houses the dining spot for the city’s power brokers, Chicago Cut Steakhouse. Third, the tower is located in River North, Chicago’s premier office market and the heart of the tech corridor.
A Sterling Second Quarter
One of the most creative developers of this era, Sterling Bay Cos. continues to transform the West Loop into a formidable rival to River North. First came Sterling Bay’s second-quarter blockbuster announcement that it would be teaming up with British developer Bill Davies on a $500 million redevelopment of the old main post office building.
Designed by the firm of Graham, Anderson, Probst & White in 1921, the nine-story structure is familiar to filmgoers because of its imposing presence in the Batman and Transformers films. Davis will contribute the building as his equity in a 2.7 million-square-foot office and retail redevelopment likely to cost $500 million.
Walgreens is reportedly interested in taking the space. The giant drugstore chain is considering a move from Deerfield, Ill., a northern Chicago suburb, to downtown.
More recently, Sterling Bay announced a joint venture with J.P. Morgan Asset Management. Under terms of the deal, the global real estate advisor with $74 billion of assets under management will co-invest and co-develop properties with the developer.
The deal will allow the firm more liquidity as it undertakes a series of visionary projects, including 1K Fulton — the redevelopment of a cold storage warehouse at 1000 W. Fulton Market that is the future home of Google Inc. — and the conversion of Harpo Studios into a mixed-use development.
Building Equity
Investors who elect not to buy product have the option of acquiring a strong local firm. The big M&A deal downtown during the third quarter has been CBRE Group’s purchase of U.S. Equities Realty LLC. Founded in 1978, U.S. Equities leases and manages 17 million square feet of property in Chicago.
U.S. Equities has enormous cachet downtown because of its portfolio of Class A leasing and management assignments, including Willis Tower, Union Station and Millennium Park.
As the flight to quality continues in Chicago, CBRE clearly wanted a stake at the high end of the market as well as a roster of the city’s best agency leasing talent. U.S. Equities has approximately 400 professionals in Chicago who will continue to service their clients in the same capacity with the combined firm.
Looking at The Big Picture
I see no sign of this trend abating, at least for the near term, as long as we continue to see the level of expansion within Chicago’s elite and entrepreneurial business community.
There were three new leases and one expansion of more than 100,000 square feet during the second quarter, including a 318,000-square-foot deal by investment firm William Blair & Co. at 150 N. Riverside, the new 53-story tower at the Chicago River.
Even older buildings are scoring large leases. Law firm Seyfarth Shaw LLP signed a 200,000-square-foot lease at the Willis Tower and is exiting 300,000 square feet at the Citadel Center at 131 S. Dearborn St.
Outside of law firms, the most interesting activity is still within the high-flying tech community. Take, for example, a firm like kCura Corp., a maker of legal software. In 2009, it leased 8,000 square feet downtown. The company now occupies 133,609 square feet.
Over a four-year period, kCura has expanded four times, the latest of which is a 50,000-square-foot expansion at its home at 231 S. LaSalle St. That’s not surprising when you consider that the company has grown its staff by 226 percent since 2010.
The new hires include executives in human resources and sales, software architects who specialize in big data and data security, and account managers who work with colleges and universities that use kCura’s software in the classroom.
This surge in absorption and new construction has filtered down to growth within real estate firms. Contractors sealed $8.5 billion in new development deals in Chicago in 2013, the highest level since 2008, according to McGraw-Hill Construction.
As an example of the torrid pace of growth on the construction side, Clayco Inc. went from 25 employees locally in 2010 to 325 employees in 2013 as Clayco’s Chicago-area revenue reached $320 million in 2013. Now that’s what you call supersize growth.
— Richard Gatto, Executive Vice President of The Alter Group. This article originally appeared in the August 2014 issue of Heartland Real Estate Business.