A burst of office sales in downtown Chicago in recent weeks not only fuels optimism in commercial real estate circles that major price resets could lead to more deals in the year ahead but serves as a stark reminder of just how far values have fallen in the city and throughout the country.
Brog Properties on Dec. 23 paid $18.5 million for the high-vacancy, 16-story building at 550 W. Washington Blvd., according to the California-based investor and online property records. A week later, two larger deals were completed on Dec. 30: Namdar Realty Group and Mason Asset Management paid about $85 million for the 57-story tower at 70 W. Madison St., while 601W Cos. and David Werner Real Estate Investments paid about $63 million for the 30-story tower at 303 E. Wacker Drive.
End-of-year sales flurries are nothing new, but the trio of deals within days of each other stands out after a slowdown in transactions in recent years across the United States that included one stretch of more than a year without a single sale of more than $50 million in downtown Chicago. The deals are significant for another reason: All three year-end sales were at major discounts to pricing the last time the buildings traded hands, collectively shedding about $500 million in value.
Today’s buyers are increasingly playing the long game, betting on a gradual recovery in leasing and property values in return for their investment. That includes Brog Properties, which bought 550 W. Washington in an all-cash deal at a fraction of the $111 million that MetLife previously paid in 2013.
“We have patient capital, and we’ll just wait until supply and demand are back in balance,” said the firm’s managing member, Andrew Brog. He said the firm’s investors are high-net-worth individuals and family offices.
“We believe in Chicago and we’re going to be here a long time,” Brog said. “Buying quality assets at this pricing is appealing.”
The purchase of 550 W. Washington, which went on the market for sale in May, was previously reported by Crain’s Chicago Business.
National trend
Heavily discounted acquisitions are part of a theme that has played out across the nation, as lenders appear to have hit a new level of anguish in their attempts to get financially stressed properties off their books.
The combination of depressed demand, stagnant leasing and the ongoing effects of flexible work has helped push the national office vacancy rate to a record high of nearly 14%, according to CoStar data. Tenants collectively handed back upward of 65 million square feet last year, boosting the total to more than 210 million square feet of move-outs since the start of 2020.
Those pandemic-induced factors have been exacerbated for a number of property owners across the country, and some — especially if they're facing maturing loan deadlines or mounting expenses — have been eager to offload underperforming properties, even if it means closing a deal at a deep discount to their initial investments.
Landlords such as Philadelphia-based Brandywine Realty Trust are having to accept the market's new pricing reality, especially for older, high-vacancy properties or those no longer considered worth the expense of keeping in their portfolios.
Many of the deals closing now have been at prices far lower than previous investments, Brandywine CEO Jerry Sweeney told CoStar News. However, the chance to free up some capital and get any troublesome properties off the real estate investment trust's books outweigh any haircuts it may take on valuations.
"We have put some options out for price discovery and, as we get bids in for properties, we take a hard look at them. I may not like the pricing, but the numbers tell you differently," Sweeney said.
In markets such as Nashville, Tennessee, for example, sellers have faced a challenging pricing environment as the region's office vacancy rate has more than doubled since 2020, according to CoStar data.
Private investment firm Wheelock Street Capital late last month finalized deals less than a week apart to offload the Philips Plaza office tower and a two-building office portfolio across a pair of Nashville transactions that represented a combined loss of about $120 million. While office landlords are eager for valuations to bounce back from pandemic-era lows, the dispositions underscore the deeply rooted challenges many will face in landing prices that come close to resembling their own initial investments.
In Denver, large firms such as Shorenstein Properties and TerraCap Management have handed high-vacancy properties back to their lenders as leasing activity remains far below pre-pandemic levels. That has meant lenders, many of which have no interest in becoming office landlords, have slashed pricing expectations to close deals and get the properties off their books.
"While most of the value reset in the office sector has already occurred, we expect there will be a bit more downward pressure in 2025," said Phil Mobley, CoStar's national director of office analytics. "One reason for this is that debt maturities are still an important factor. The so-called 'maturity wall' has turned out to be more of a slowly sloping ramp, with extensions and workouts allowing owners to avoid distress selling. However, the pressure has not gone away. More sales at deep discounts are likely before the trough."
While troublesome for sellers, deeply discounted valuations have opened the door for a broadening pool of buyers willing to bet on the office market's slow but gradual recovery.
Smaller, often locally based investment firms are scooping up properties in San Francisco, Los Angeles, New York, Dallas and Atlanta that prior to the widespread valuation drop would have been far beyond their financial reach. Tenants have also leveraged bargain pricing to become their own landlords, acquiring buildings to gain more control over their real estate portfolios and future growth plans.
Within the past month alone, companies such as moving giant U-Haul, Discount Tire and Tuff Shed have all closed deals to acquire their own office spaces, all of which were priced far below previous investments.
Chicago hunting
In Chicago, Brog Properties earlier in 2024 paid just under $2.6 million for a vintage, 10-story office building at 216 W. Jackson Blvd., a fraction of the $22.3 million that the property previously sold for in 2013.
Andrew Brog then went hunting for larger deals, a search that he said will keep going in the city after a continuation of pricing he sees as long-term bargains.
That includes the skyscraper at 70 W. Madison selling for far below the $374.6 million it last traded for in 2014 and the 303 E. Wacker tower taking a huge price cut from $182 million in 2018. Both of those price cuts came despite undergoing major upgrades to amenities in recent years.
Brog said his firm plans capital improvements as it looks to fill about 70% of the building at 550 W. Washington. Plans include upgrading fitness and conference rooms on the fifth floor while adding a tenant lounge on the same level.
The firm also plans to build out some vacant floors into move-in-ready spec suites.
“It’s a Class A building in a great location near the Ogilvie and Union Station trains stations,” Brog said. “We have a clean slate in a high-quality building.”
Brog said the firm plans to be “opportunistic” in seeking out additional office deals, including potentially finding an older building that can be converted into apartments.
“Chicago’s always going to be the hub of the Midwest,” he said. “We see Chicago as a vibrant city that’s just at the bottom of its [pricing] cycle. It’s going to get better.”