Capital Not Playing Favorites With Chicago Office
Investor interest in Chicago office runs the gamut from the top trophy Class-A buildings to value-add plays and residential/hotel conversions, according to our investment experts at Bisnow’s Chicago State of Office event last week, held at the Chicago Board of Trade Building (recently redone by GlenStar Properties and USAA Real Estate Co). CohnReznick partner Jason Burian moderated, grilling panelists on the recent foreign capital influx, development prospects, how Millennials affect office trades, and which neighborhoods are coming out on top.
GlenStar Properties principal Rand Diamond was our host (check out more snaps of our event and the CBOT building’s makeover here). Office vacancies in the East and Central Loop are coming down (and investor interest going up) as a result of Class-B and -C office buildings being converted to residential (in the East Loop) and hotel (in the Central Loop), like GlenStar's 400k SF conversion of the upper floors of 55 E Monroe to residential condos, Rand says. This reduction in inventory and increased demand from tenants looking for larger floor plates, more flexible lease terms and amenity-rich buildings have made the Central and East Loop attractive alternatives to the more expensive West Loop, he says.
Buyers ranging from domestic pension funds to offshore investors like Chicago because you can buy similar top notch product to the coasts at a healthy yield premium (think a 5.5% cap rate versus 5%), JLL international director of capital markets Bruce Miller says. And strong fundamentals have the value-add players feeling more comfortable taking a risk on vacancies. About $3.4B in downtown office sales last year (well above the 20-year average of $2B) has been aided by limited new supply, and we’re just seeing the tip of the iceberg in terms of foreign capital inflow (better start brushing up on your Mandarin), Bruce says.
Core deals have become so compressed that some investors are now taking a preferred equity piece in core-plus or light value-add deals to achieve a similar risk premium and yield, Zeller Realty Group (ZRG) CIO and principal Ari Glass says. Active on Michigan Avenue for 18 years and owner of 401 N Michigan for 12 years, ZRG is excited to see the market catching up, with their Wrigley reno, 360 N Michigan’s conversion, and Wirtz’s investment in 333 N Michigan, Ari says. He’s getting acclimated to the West Loop with the firm’s latest buy, 311 S Wacker, and is interested to see how far projects like 1K Fulton pull office’s center of gravity within the Loop.
Tishman Speyer managing director Patrick Kearney says the firm is focused on updating its older assets to speak to Millennial and tech sensibilities, while keeping more traditional law and financial services firms comfortable. The key is a beefed up amenity package similar to residential, he tells us. (You want Millennials? Two words: dogs and bikes.) He’s seeing deals trade for above ’06 and ’07 prices and predicts significant absorption in the next couple years as the economy adds jobs, tech booms, and other tenants rightsize. Downtown population growth has boded well for West Loop office owners, as prime office development sites west of the river get gobbled up by apartment developers, Patrick says.
