Shaya Prager takes on the Windy City

Few players have pounced harder on office buildings decimated by the pandemic than Shaya Prager, whose Opal Holdings dropped more than $2 billion into that very market in the past two years — $1.8 billion of it on suburban complexes labeled as “dying.” 

The New York firm spent $671 million to buy four remote office parks in Midwestern suburbs, three of them in Chicago and the other outside Minnesota’s Twin Cities, snapping up deals at discounts as institutional investors retreat from the asset class. Prager and his business partner, Katherine Cartagena, are focused on the middle of the nation because it’s been out of favor with investors and offering less competition than high-growth Sunbelt markets.

Prager and Cartagena, who has played an integral role in securing financing through Prana Equities, her investment vehicle, have made their way onto the speed dials of brokers representing sellers thanks to their ability to close even as the cost of borrowed money has surged, in some cases blowing up big office deals. 

“They’ve been a go-to because you know they’re going to perform,” said Dan Deuter, a Chicago broker with Cushman & Wakefield who represented three Midwest landlords in recent sales to Opal. “It’s a bit of a contrarian mindset — go where others are fearful — and as a result, they’re buying ultra-high-quality assets at higher yields.”

Opal and Cartagena were appealing enough that after Deuter’s team sold them the Highland Landmark II property in the Chicago suburb of Downers Grove, Cushman was quick to inquire about their interest in off-market deals for the freshly renovated Shuman office building in the Chicago suburb of Naperville and the five-building, 1.7 million-square-foot Normandale Lake Office Park in Minnesota. Opal bought both, paying $73 million and $366 million, respectively.

“We are long-term believers in Chicago’s downtown and suburban office markets,” Cartagena said in a statement.

Prager didn’t return multiple requests for comment. Neither did Harvey Feldheim, another of Opal’s founders. Its other co-founder, Shulamit Prager, declined to comment to The Real Deal when contacted by phone. No one from the firm has been quoted in any of the dozens of reports from media outlets and brokerages on their acquisitions in the last two years.

Risky business?

While the counterintuitive strategy could pay off, it comes with substantial risk. Opal and Cartagena have centered their flurry of purchases in a Chicago market experiencing near-record office vacancies in both the suburbs, at 27 percent, and downtown, at 19.2 percent, according to JLL. Office tenants have shed more space than they’ve added in each of the market areas so far this year.

In addition, decisions by three major companies this year to relocate their headquarters away from the Chicago area — Boeing, Citadel and Caterpillar, the last of which leases space in the suburban Deerfield complex Opal just bought for $180 million — have put the city’s real estate players on edge, prompting questions about whether the nation’s third-largest metropolitan area has lost some of its cachet as a global business center. It’s unclear how Caterpillar’s real estate needs in the Chicago area will change with the move, and the company didn’t return a request for comment.

Furthermore, office values have shifted during the pandemic, and that’s still in progress. Opal bought half its Midwest suburban deals at discounts from what the sellers paid, even though each property was more than 90 percent leased.

Hawaii-based James Campbell’s sale of the 281,000-square-foot Downers Grove office west of Chicago to Prager’s company for $52 million this year, or $185 per square foot, marked a $10 million loss from its 2014 purchase price. Leasing commissions and upgrades of the building cost the seller $12 million more during its ownership, underscoring the newfound risk in the suburban market.

Leverage, ground leases

Opal and Cartagena’s borrowing strategy also relies on leverage and ground leases, increasing the potential upside — as well as the risk of disputes in the event that property values slide.

Cartagena has taken on $294 million of senior debt, all financed by UMB Bank, on the four Chicago-area properties she and Opal bought. In each case, she issued decades-long leases of the buildings to Prager’s firm, with Cartagena keeping control of the ground while giving Opal rental revenue, public records show.

Prager used the agreements to borrow $402 million — exceeding the debt taken on by Cartagena’s initial loans from UMB, which will be paid back through the ground lease rent Opal pays her — against Opal’s leasehold interest in each of the properties. The Caterpillar offices will yield a $4.8 million ground lease rent payment to Cartagena from Opal in the first year of a 99-year term, with 2 percent annual rate hikes, public records show.

Across the four deals, Cartagena borrowed at least $59 million against the Chicago properties on loans subordinate to those on Prager’s ground leases. UMB Bank declined to comment. The total debt adds up to more than the almost $1.1 billion that Cartagena and Prager spent to acquire their four Chicago properties.

Ground leases are fertile ground for clashes. Rent resets normally kick in every 20 years. While they often provide issuers such as Cartagena a bargain price, sliding property values can hit them hard.

Still, Prager has been selective: Opal’s purchasing criteria consists of Class A buildings close to fully leased that cost at least $50 million, Cushman’s Deuter said. Limiting the downside, the properties have been recently renovated and have amenities employers are finding increasingly necessary to lure workers back to the office, and Cartagena and Opal plan to spend more upgrading their suburban amenities, a Prana spokesman said, without disclosing an amount of money.

“As long as your properties are best-in-class, even if you do have a vacated tenant,  there’s definitely risk, but you’re sitting pretty,” said Colliers broker David Florent.

Log in to look

Florent’s leasing efforts led to a turnaround of the Shuman, the 354,000-square-foot suburban Chicago building that Cartagena and Opal bought in April for $73 million, or $206 per square foot, after its renovation by local landlords Franklin Partners and Bixby Bridge Capital. The venture took it to 91 percent leased during the pandemic from completely empty.

Real estate investment is hardly Prager’s only interest. He studied the Torah at the Mir Yerushalayim in Jerusalem, the largest yeshiva in the world, and has run a landscaping and property management business called Cutting Edge Preservation as well as a medical waste service called Med Waste Management. 

A Prager family member said the CEO — who lives in Lakewood, New Jersey, a town of about 100,000 people, almost 70 percent of them Orthodox Jews — is rooted in his community’s belief that staying out of the public eye is key to success. Opal’s own website requires company login credentials to view its portfolio, a rarity among Class A office investors in major U.S. markets, many of whom use the sites to tout images of their buildings and talk up their attractiveness.

Cartagena, a St. John’s University graduate who studied real estate development, finance and investments for an NYU master’s degree, has worked in luxury residential real estate with her family’s business, according to her LinkedIn profile. That same profile calls her a commercial real estate debt equity and structured capital specialist and ground lease expert.

Opal hasn’t limited its expansion to the middle of the country. Its pandemic bullishness started in early 2020 with purchases for $311 million of a six-building complex in suburban Florham Park, New Jersey, and the $124.5 million acquisition of a 680,000-square-foot building in a northern suburb of Philadelphia. That was followed by the $140 million purchase of a 471,000-square-foot, IBM-anchored building in Iselin, New Jersey, and a $55 million purchase of a 260,000-square-foot building in Fairfax, Virginia, a Washington, D.C., suburb.

Last year, Opal spent $288 million on two office deals to buy the tallest building in Fort Worth, Texas, and the third-tallest in Orange County, California, a 20-story, 435,000-square-foot asset in the city of Orange, while also doubling down on New Jersey with a $254 million, four-building office purchase in Iselin. 

The firm is on the hunt for more on the West Coast, said Kevin Shannon, a Newmark broker based in Los Angeles who represented Pacific Oak Strategic Advisors in its $151 million sale of Orange’s City Tower to Opal, its first purchase in California.

“They’ve made a big splash,” Shannon said.  “They’re probably as active as anyone in the country. Being a contrarian investor has historically been rewarded, and buying suburban multi-tenant office is a contrarian play right now.”

While Opal’s largest deal was the $415 million purchase of a Wacker Drive tower in downtown Chicago, the priciest office deal in the city since 2018, it was a rare pickup for the firm in a major city’s central business district. If anything, Opal is more likely to pursue deals where others aren’t — in the suburbs.

“They’re in the most well-positioned assets, so their risk factor goes down a bit,” said Florent, the Colliers broker.