A developer focused on Chicago’s Fulton Market district has landed $233 million in construction financing for a new office building, a rare feat nationally and a project that's expected to be the first of its kind to break ground in Chicago in more than a year.
Chicago-based Fulton St. Cos. on Wednesday closed on the construction debt, with plans to start building a 400,000-square-foot office structure at 919 W. Fulton within days, founder and CEO Alex Najem told CoStar News. The 11-story building is set to become headquarters for Chicago-based real estate investor Harrison Street Real Estate Capital.
The debt is a combined $233 million from Bank OZK and Manulife Investment Management, according to Keith Largay, one of the JLL brokers who arranged the financing for the developer.
Launching what is estimated to be an approximately $300 million office development at a time of historically low demand nationally can be seen as risky by some lenders, reflected in the low liquidity available for this type of construction. It has been more than a year since the last downtown Chicago office sale of more than $50 million.
Fulton St. is making a big bet that new buildings in top locations will continue to outperform an overall sluggish office leasing market and that capital markets will improve enough to sell or refinance 919 W. Fulton soon after it’s built.
Najem said, however, that with tenants seeking higher-quality buildings to bring workers back to the office, he expects to benefit from a dearth of new space when construction is completed in 2025.
“Most people think it’s an insane deal to do, but I’d rather do it now than having started it three years ago and coming into a market where you can’t sell or refinance anything,” Najem said. “We’ll probably be the only office building being built in Chicago over the next two years.”
Fulton St.’s financing deal is a rare example of a proposed office building lining up an anchor tenant and construction debt, as many lenders back away entirely from providing loans for office acquisitions or developments.
Even with a big tenant on board, the project once envisioned for a late 2022 start was slowed by rising interest rates, a pause in office investments by many institutional investors and other market challenges.
“The deal actually died for about a month, but we had multiple people involved who wanted to get it done, people who wanted to find solutions,” Najem said. “We definitely picked the right people to work with.”
Chicago-based JDL Development previously has been reported as the firm's development partner, with SNK Capital as the equity investor. That is the investment firm of Shanna Khan, daughter of Jacksonville Jaguars and Flex-N-Gate owner Shahid Khan.
Office developments aren’t entirely unheard of in thriving pockets of the country, including Fulton Market, which a recent CoStar analysis found was the nation's fastest-growing urban office market over a five-year period.
As recently as last summer, Sterling Bay broke ground on a 24-story office tower at 360 N. Green St. in Fulton Market that is now 70% leased, with Boston Consulting Group and law firm Greenberg Traurig set to move there by early 2025.
The former meatpacking district also has been filled with construction cranes putting up residential and hotel towers in recent years. That includes The Row Fulton Market, Related Midwest’s 495-foot-tall apartment tower that became the area’s tallest when it was recently completed.
Office tenants in the neighborhood west of the Loop business district include the global headquarters of McDonald’s and Mondelez International, as well as the Midwest headquarters of Google.
“If you’re going to build an office building right now, you’ve got to build it in the best location,” Najem said.
The financing news came the same day as another major loan on a Chicago real estate project, a $700 million loan for the suburban Oakbrook Center mall.
Landing a Big Tenant
Harrison Street, an investor in properties such as student and senior housing, self-storage and life sciences buildings throughout the country, is now based in the River Point tower a few blocks east of the Fulton site. It leases 50,877 square feet in River Point, according to CoStar data.
Harrison Street’s interest in the Fulton Market property emerged publicly in August 2022, a few months into interest-rate increases that have slowed real estate investments nationally.
The firm has leased 112,000 square feet at 919 W. Fulton, down from an initially expected 150,000, Najem said. Fulton St. also has signed Gibsons Restaurant Group to a 15,500-square-foot lease on the ground floor, he said.
Fulton St.’s plans for the project have changed over the past year, dropping 100,000 square feet of planned office space to a new total of 400,000, Najem said.
The firm has shelved a plan to combine the Lake Street Lofts apartment building at 910 W. Lake St. into the ground-up project and convert that space into offices, instead deciding to keep it as a residential building amid higher demand for apartments and lower office demand, Najem said. The building still could be converted to offices in a later construction phase, he added.
During the lengthy delay in finalizing construction financing, Fulton St. said it also had to fend off other landlords trying to convince Harrison Street to go to their buildings.
“For the last year, it’s been a battle against other developers,” Najem said. “Everybody was going after Harrison Street while we were still trying to get the lease signed. Harrison Street has been very loyal. They stayed dedicated to the project even though they could have gone anywhere.”
Largay described financing developments nationally as "extremely challenging, particularly in the office sector." He said 919 W. Fulton is likely to be one of the few office developments of its size to break ground this year.
The Fulton St. project overcame those challenges because of the tenants in hand, the strength of Fulton Market as a live-work-play area, a flight to quality by tenants and the confidence of the project's partners, Largay said.
"It was still really, really hard," Largay said. "It will require all of those elements to get another building launched anywhere in the country."
Fulton St. is led by Najem, Ross Babel and Howard Blair.
The firm's projects in the neighborhood include redeveloping several loft buildings, a 12-story office tower the firm completed last year at 1045 W. Fulton and a larger project it also plans in a joint venture with JDL in the 1200 block of West Fulton. It seeks city approval to develop about 1,000 apartments.
For the Record
The financing was arranged by JLL brokers Largay, Phil Galligan and Tara Hagerty.