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How Dayton Street Partners Is Feasting On Smaller Infill Real Estate

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Adaptive reuse can be broken down into two camps: high-profile repositionings like Londonhouse, and smaller infill projects that fill immediate tenant demand in a market. Dayton Street Partners has made a science, and profits, of the latter.

A rendering for 1500 West Carroll, Chicago
A rendering of 1500 West Carroll

Dayton Street Executive Vice President Michael Schack said his firm remains disciplined in its strategy of finding infill office and industrial assets in highly desirable submarkets. Dayton Street wants to be a low-cost provider in the market and the assets it is interested in can be acquired at lower price points than what other developers are paying, and repositioned quickly to meet tenant demand and command market rates.

But the competition for value-add assets has increased in the last three or four years as investors turn their attentions from a dwindling number of core opportunities to non-core assets that can be repositioned. Prices have increased, and Dayton Street has backed away from several opportunities because the pricing did not make economic sense.

Schack said the assets Dayton Street does acquire allow it to penetrate its target markets quicker and more efficiently. One of its higher-profile repositionings is a five-story building at 1500 West Carroll in Fulton West. Dayton Street is adapting the building into 40K SF of loft office space. Prospective tenants seeking a Fulton Market address are looking west, as tech tenant demand pushes rents in the heart of the submarket to some of the highest in Chicago. Schack said rents at 1500 West Carroll are under $30/SF, compared to $40/SF elsewhere in the market.

And interest is growing: Schack said that Dayton Street has two floors at 1500 West Carroll fully leased, talks to lease up a third floor are ongoing and Schack expects the building to be 50% leased within a month.

6012 Monroe Court in Morton Grove, IL.
6012 Monroe Court in Morton Grove

Dayton Street's $2M in capital improvements to a industrial facility at 6123-6227 Monroe Court in Morton Grove are almost complete. The firm bought the 206K SF multi-tenant warehouse last year for $6M. Schack said the property is fully leased but the improvements — interior and exterior renovations, a new roof and lighting, upgrades to the loading docks and 1.5 acres of secured parking and trailer storage — will allow Dayton Street to re-lease the building at market rents. Dayton Street has interest in space from multiple prospective tenants.

Schack said the Fed's interest rate hikes, and its pressure on banks to tighten lending, has not impacted Dayton Street's ability to structure deals. The firm's primary lenders remain local lenders and pension funds, and Schack said Dayton Street is underwriting interest rate increases during hold periods to account for future hikes.

920 West Pershing Road, Chicago
920 West Pershing Road

Those hold periods are on an asset-by-asset basis. Some are longer term. Others, like a warehouse at 920 West Pershing Road in Bridgeport, were quickly sold once Dayton Street completed renovations and locked in tenants.

Schack said Dayton Street has kicked the tires on some Class-C assets in the central business district, but considers the submarket to be a secondary priority. Schack believes much of the value-add office product in the CBD is obsolete and will be adapted into another asset class like multifamily or retail, sectors that are not part of Dayton Street's strategy.

To learn more from Michael Schack and our other expert panelists, attend Bisnow's Chicago Repositioning & Adaptive Reuse 2017 event, 7 a.m. July 26 at the Loews Hotel Chicago. Register here.