The sale last week of a downtown Chicago office building is the latest indication that big investors are betting heavily that the Windy City will become an increasingly important technology hub to rival San Francisco and New York.
One South Wacker, a 40-story glass tower built in 1982, sold last week for $344 million to John Hancock Real Estate, a unit of Manulife Real Estate in Toronto. The price represented a significant gain for the seller, private-equity firm Harbor Group International LLC, which paid $221 million for the building in December 2012.
Even taking into account the $40 million that Harbor Group spent on capital improvements, the deal illustrates how fast values are rising for office properties in Chicago—which some are dubbing Silicon Prairie.
“Chicago has a lot of attributes that investors are looking for…a host of Fortune 500 companies and a 24-7 urban landscape,” but with lower costs, said Jed Reagan, a senior research analyst at Green Street Advisors, a real-estate research firm.
He added that Chicago’s economic fundamentals aren’t as strong as New York or San Francisco, but “vacancies are falling and landlords are able to push rents.” The mayor’s office has also been making an effort to attract and retain tech firms and increase the profile of its economy—trends that have commercial real estate buyers more confident in the city’s future, he said.
That could explain why prices for office properties in Chicago are currently appreciating faster than other major cities. According to Real Capital Analytics, the average price a square foot for office properties in Chicago rose 73% as of April when compared with 2012, which was a cyclical bottom for the city. During that same period, average prices rose 65% in metro New York, 21% in San Francisco and 37% in Boston.
Still, while Chicago prices are rising fast, they’re relatively low when compared with other major cities. Real Capital’s data shows that Chicago office properties are fetching about $258 a square foot this year compared with $651 in New York, $421 in San Francisco and $304 in Boston.
It is those differentials, however, that have convinced some investors that Chicago prices still have room to grow.
“We continue to be attracted to the strong economic fundamentals that are emerging in Chicago,” said Ted Willcocks, Global Head of Asset Management at Manulife, adding that his firm expects more companies to relocate to Chicago in the years ahead.
John Hancock and Manulife are betting big on their convictions. Even before last week’s purchase of One South Wacker, John Hancock made several other major Chicago purchases. In 2012, the company paid $102 million for 150 North Michigan Ave., a diamond-shaped building that is a landmark. A year later, it paid $214.5 million for 200 South Wacker Drive and this past September, it acquired 55 West Monroe St. for $244 million.
But the biggest recent transaction in Chicago involved Blackstone Group LP, which in March struck a deal to purchase the Willis Tower (formerly the Sears Tower) for $1.3 billion in what would be the highest price ever paid for a U.S. office tower outside of New York. On a per-square-foot basis, its price was about $340, a fraction of what trophy towers fetch in New York.
“Pricing has gotten so aggressive in coastal markets, now demand has started to shift out to markets like Chicago that offer some of those attributes but you can pick up office buildings at a discount,” said Green Street’s Mr. Reagan.
Harbor Group, the private-equity firm that sold One South Wacker, specializes in buying real-estate assets, repositioning the properties to add value, then exiting within three or five years. In the case of One South Wacker, Harbor Group President T. Richard Litton Jr. said the business plan called for the company to turn the building, which has a large number of law firms and finance companies, into one that would also get the attention of growing technology companies. The improvements included installing a new entry atrium winter garden, a brighter lobby with concierge station, a fitness center, creating open space and adding conference facilities.
“Those amenities helped to drive tenant demand,” said Mr. Litton, noting that the building’s occupancy rate rose from 80% at the end of 2012 when it purchased the building to the current rate of 86%.
Some of the technology tenants include Rise Interactive, Invenergy LLC, Big Time Software and Owner IQ Inc., according to a Harbor spokesman. “The technology facet is the one of the most interesting aspects of this transaction…and how it translates into value for owners,” said Mr. Litton.