Chicago’s ice-cold office market is finally heating up. But don’t get too excited

Most buyers are still spooked by uncertainty around tax reassessment, experts said

The year’s two biggest office tower sales have been announced in recent weeks, but Chicago investment sales brokers don’t believe it’s a sign that the market is roaring back.

Earlier this year, investment sales of office buildings in the central business district dropped to a 20-year low, with only two sales recorded in the second quarter and six in the first quarter. The slowdown has been attributed to the uncertainty surrounding commercial property taxes under Cook County Assessor Fritz Kaegi. That uncertainty is causing some investors to be more cautious, particularly in parts of the city where it might not be as easy to pass real estate tax increases on to the tenant, said MB Real Estate’s Kevin Purcell.

“I hope it means that the market is back on the upswing, but the question of real estate taxes is still out there,” he said. “I think it’s really a case-by-case basis and the motivations of the sellers are different. Some have a number in mind and are not willing to move off of that number.”

In the third quarter of 2019, nine sales totaling $587 million closed in the central business district, exceeding last year’s third quarter tally of $491 million in sales, according to a report from MB Real Estate. But the year to date total of $873 million is far lower than the $2.8 billion recorded at this time last year.

Recently, San Francisco-based real estate investment firm Spear Street Capital worked out a deal with a venture of Piedmont Office Realty Trust to buy a 46-story office building at 500 W. Monroe St. in the West Loop for more than $400 million, making it the largest downtown office sale this year, Crain’s reported. Spear Street’s Ravij Patel confirmed his firm is buying the building, but he declined to provide further comment to The Real Deal.

Meanwhile, Boston-based Beacon Capital Partners agreed to purchase a 40-story tower at 190 S. LaSalle St. from Tishman Speyer for about $230 million, a source familiar with the deal told Crain’s.

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In both cases, it appears the sellers didn’t quite get the numbers they were hoping for, but they adjusted their expectations and moved forward with the sales. On the other side of the deal, buyers got a good price for stable, turnkey buildings. Piedmont initially hoped to sell 500 W. Monroe St. for between $470 million and $490 million and Tishman Speyer-owned 190 S. LaSalle St. was expected to go for at least $250 million.

“In these couple situations, I think the sellers were very motivated to transact, and in other situations there are groups that are more indifferent,” said Cushman and Wakefield broker Cody Hundertmark, who was not involved in either deal. “If pricing isn’t where [sellers] want it, they’ll refinance or just continue to hold the asset.”

Over the past several years, Piedmont invested $84 million in 500 W. Monroe St. and brought its occupancy rate up to 99 percent, with tenants including Motorola and GE Healthcare.

Old Post Office developer 601W Companies is under contract to acquire the 575,000-square-foot office building at 801 S. Canal St. for about $67 million, sources told Crain’s last week. The six-story building will become vacant when Northern Trust, which has occupied the building since 1990, moves out a year from now. A vacant building is likely more attractive to a group like New York-based 601W, which is known for aggressive repositionings and re-leasings, according to Hundertmark.

These three sales illustrate that it’s still possible to make deals, he said, and it’s even more reassuring that sophisticated buyers are continuing to acquire real estate and see opportunity in the market.

“If the buyers were groups that you hadn’t heard of, you wouldn’t be as reassured that the market is going to come back over time,” Hundertmark said. “It’s good to see prolific owners of real estate betting on Chicago right now. I think that’s what the market needs to see.”

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