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Fulton Market Was A Standout In A Slow Year For Office Sales

The downtown office market spent much of last year slowly crawling out of the wreckage left by the pandemic in 2020. But a blockbuster sale reported at the end of December showed at least some investors are ready to bet the coming years will see a comeback, at least for top trophy properties.

According to a report in the Wall Street Journal, a venture put together by New York-based Oak Hill Advisors is set to pay about $1B for a controlling interest in Bank of America Tower, a 55-story, 1.5M SF skyscraper at 110 North Wacker Drive, opened in 2020 by Chicago-based Riverside Investment & Development and Dallas-based Howard Hughes Corp. Except for the roughly $1.3B paid for Willis Tower in 2015 by the Blackstone Group, that would be the most ever paid for a downtown property.

210 North Carpenter

It won’t be the only blockbuster sale completed in the past year, and it doesn’t necessarily point the way to a full recovery of the downtown investment market. Only a handful of significant deals were signed each quarter, and most buyers stuck to well-leased trophies in the West Loop or relatively new projects in Fulton Market, where landlords continued securing leases throughout the year even as properties in other submarkets struggled.  

“Fulton Market witnessed its best-ever quarter for leasing, as new development, and Class-A buildings across Downtown remain largely unaffected by the pandemic, enjoying high occupancy rates and commanding record-high rents,” a Q4 report by Savills stated.

Tenants signed up for 2.7M SF last quarter, Savills found, the most in seven quarters and nearly reaching the amount leased in Q4 2019, just before the pandemic hit.

That is the good news. But vacancy still stood at 23.8%, far above the pre-pandemic average, and while Class-A buildings did better at 18.4%, Class-B properties were at more than 27%.

And according to Kastle Systems, a security company that tracks card swipes around the U.S., just after Thanksgiving, Chicago seemed stuck at 35.2% average occupancy, compared to the national average of 40.6%.

Even so, Bank of America Tower was able to keep securing leases in 2021. Cooley, a Palo Alto, California-based law firm, signed a new lease for 30K SF in the building in September and plans to move in during Q2 2022. Along with anchor tenants like Bank of America and other law firms, such as Morgan Lewis, it is now more than 85% occupied, according to the Wall Street Journal.

Fulton Market looked like it was in big trouble when the pandemic swept Chicago in 2020. Office developers were just putting the finishing touches on millions of SF, most of which sat empty that year, sending vacancy in the new submarket to more than 33% in early 2021. Vacancy is still elevated but now stands at 26.2%, and Fulton Market was the only downtown submarket to see positive absorption last year, according to a Q4 report by MB Real Estate.     

Investors seem to like the neighborhood’s long-term prospects. Other than the state of Illinois purchasing 555 West Monroe St. for $73M to fulfill its plan to consolidate several government offices in the city, there was only one significant downtown office sale in Q1, according to Colliers International. That was New York-based Vista Property Group’s $32M purchase from MAB Capital Management of 400 and 401 North Morgan St., a pair of Fulton Market sites with a total of 83K SF of leasable space, along with a plot of vacant land.

The property is one block north of 1KFulton, the 531K SF old cold storage building at 1000 West Fulton St. transformed by Sterling Bay in 2015 into a gleaming regional headquarters for Google. Vista plans to hold onto its vacant land on Morgan Street and wait for the right redevelopment opportunity.

Downtown Chicago's leasing activity

“They believe the land around the property will eventually get filled,” Greenstone Partners CEO Danny Spitz told Bisnow.

Greenstone represented Vista in the transaction.

Q2 also saw only one significant sales transaction, and it was also in Fulton Market. American Realty Advisors sold 1KFulton, which it bought in 2016 for $257M, to Office Properties Income Trust for $355M, or $668 per SF. The Newton, Massachusetts-based trust says it focuses on buildings primarily leased to single tenants and those with high credit quality characteristics.

In 2020, during the worst of the pandemic, Sterling Bay sold its 110 North Carpenter St. in Fulton Market for $412.5M to Pittsburgh-based Normandy Properties. Best known as the headquarters of McDonald's Corp., the 575K SF building was 2020’s most lucrative Chicago sale. And the developer proved in last year’s Q3 that Fulton Market is still closely watched by investors. The developer sold 210 North Carpenter St., a 12-story, 206K SF building completed in 2019, to Frankfurt, Germany-based Deka Immobilien for $169M. It is fully leased to six tenants, including Google, which uses 132K SF for its cloud division.

It isn't the German investor’s first foray in the neighborhood. In 2020, it also bought 905 West Fulton Market, the 98K SF headquarters of Mondelez International, for $86M, or about $877 per SF, then the most ever for a Chicago office property.   

And even with the office investment market staying sluggish in Q4, Fulton Market continued setting new records. Fulton Street Cos. and Huizenga Capital Management sold their 1100 West Fulton, a five-story build-to-suit office and retail project completed in 2020 and fully occupied by furniture company Herman Miller, to Zagame Corp. Although a relatively small property, the $41.75M price tag translates to $920 per SF, besting the sale of 905 Fulton Market.

The end of the year also brought signs office investors may be ready to start acquiring properties not considered best-in-class. Vancouver-based Onni Group is set to pay $188M for 225 West Randolph St., an 853K SF Class-B property in the West Loop owned by RBS Securities, Kushner Cos. and Gellert Global Group, according to Colliers. The buyer could spend an additional $154M to upgrade the property, which could see a big vacancy after AT&T’s 670K SF lease expires later this year, if it secures a tax break from the Chicago City Council, according to Crain’s Chicago Business.