Tishman Speyer grabs $380M Bargain in Chicago

Crain's NY

Developer agrees to buy year-old, 45-story tower for less than the cost of construction; deal seen as stark warning for those considering building or financing new office towers.

Tishman Speyer Properties has agreed to purchase a new office tower in downtown Chicago for less than it cost to build it, according to sources. The developer will pay owner Mesirow Financial $380 million for its headquarters at 353 North Clark St., marking the first time in more than a decade that a building has been sold for below its cost of construction in Chicago.

The agreement came as an affiliate of Mesirow was running up against a deadline to pay off its construction loans on the building, according to people familiar with the transaction. Those sources say the price is a little less than the debt on the nearly 1.2-million-square-foot tower, which opened about a year ago.

The sale sidesteps an ugly foreclosure suit that might have been filed by Munich, Germany-based Hypo Real Estate Holding, which financed the project with a construction loan that comes due Monday.

The sale would wipe out tens of millions of dollars in equity invested in the 45-story tower, built by a venture led by veteran Chicago developer Richard Stein, a Mesirow senior managing director. Mr. Stein did not return calls requesting comment.

Chicago’s office market hasn't seen a new skyscraper sold for less than the construction cost since the collapse of the commercial real estate market in the 1990s, when billionaire investor Sam Zell scooped up 161 N. Clark St. and 1 N. Franklin St. at bargain prices.

Now, as developers start pushing plans for another round of new office buildings, the woes of 353 N. Clark could serve as a warning to investors and lenders that might back those future projects.

“A lender would be out of their mind to provide financing for new construction when prices are depressed as much as they are, and the (leasing) market is still in the early stages of recovery,” says Zaya Younan, chairman and chief executive of Woodland Hills, Calif.-based Younan Properties, which has a 1.6-million-square-foot office portfolio in Chicago.

Initially leasing at 353 N. Clark went well, with Mesirow and law firm Jenner & Block agreeing to take more than 60% of the building before construction started in 2007. But the leasing effort subsequently stalled at about 80% occupancy, according to real estate data provider CoStar Group Inc.

The price Tishman has agreed to pay for the building, about $324 a square foot, stands in sharp contrast to the record-breaking $503 a foot that a Southern California investment firm paid this summer for the nearby skyscraper at 300 N. LaSalle St. That building also was completed last year but it is 95% leased.

The Hypo loan has an outstanding balance of roughly $330 million and has been extended until Tishman closes on the purchase, sometime before the end of the year, sources say.

The project was also financed with a $44-million mezzanine loan from Chicago-based real estate firm Transwestern Investment Co.

Transwestern could recoup as much as 90% of its loan, which is similar to a second mortgage. A Transwestern representative declined to comment.

How much equity was used to finance the project could not be determined, but most of that money is probably lost. The project is a joint venture between Mesirow and Chicago-based Friedman Properties Ltd., which originally controlled the site.

Albert Friedman, CEO of Friedman Properties, did not return a call requesting comment.

The Mesirow venture also put up a multimillion-dollar letter of credit that would have become payable in the event of a loan default.

As part of the deal, Tishman is paying a couple million dollars to the development venture, sources say. And the venture avoids the costly expense of surrendering the letter of credit, sources add.

Tishman already is one of the largest landlords in downtown Chicago, with a portfolio that includes 10 and 30 S. Wacker Drive and Franklin Center in the West Loop. Tishman's financial partner in the deal for 353 N. Clark could not be determined.

A Tishman spokesman declines to comment. The deal was previously reported by Real Estate Finance & Investment, a trade publication.

Price Cuts Mount as Condos Linger in Chicago

Chicago Tribune

 

A trio of condo developments — one small, one medium and one large — announced price cuts recently as the market readjusts in a post-tax credit market and lenders show their nervousness about the summer selling season.

Price cuts in Chicago's condo market are nothing new, particularly downtown. Earlier this year, 565 Quincy, 200 North Dearborn, 222 E. Pearson and Metropolitan Tower all trimmed their advertised prices. Other buildings conducted auctions and then set new prices for the remaining units, based on the auctions.

The size and scope of the decreases, at Parkside of Old Town, The Columbian and Wabansia Row, vary. The constant, though, is lenders' efforts to jump-start stalled sales in new buildings."Every development has a different circumstance, depending on if it has a lender that's coming to reality," said @Properties agent George Schultz. "Every development is financed a different way. But the bottom line is the downward pressure on new construction has come to bear."

Developers and their bankers are hoping that as the economy slowly firms up, buyers will see the one-two combination of reduced prices and historically low mortgage interest rates as proof that it's a better time to own than rent or to move up to a bigger, and now more affordable, home.

"The mentality of the buyer walking through my door now is different than a year ago," said Matt Hollman, sales director at The Columbian. "A year ago they were all talking about how bad the market is. Now a third are talking about the bad market and two-thirds are saying it's the right time to buy at the right price. They're going to take the best deal."

Three sets of recently released data aren't likely to calm the nerves in sales centers. The first, from real estate site Trulia.com, calculated the price-to-rent ratio for major cities by comparing the average list price with the average rent on a two-bedroom apartment, condo and townhome. The Chicago area's price-to-rent ratio was 15, meaning it just eked by as being a city where it's less expensive to own a home than to rent. Had the ratio been 16, it would have been a better city for renters, depending on their situation.

Another piece of data, from a Campbell/Inside Mortgage Finance survey, found that nationally, home shopping activity nosedived in May, following the April 30 expiration of when buyers had to have sales contracts signed to qualify for a tax credit. Meanwhile, the U.S. Census Bureau reported that new home sales in May were down 32.7 percent from April and 18.3 percent lower than in May 2009.

Among the developments with recent price cuts is Parkside of Old Town, where prices were cut by up to 30 percent on 75 condos and up to 40 percent on 27 town homes. The development, on the site of the former Cabrini Green public housing complex, is one of the city's Plan for Transformation communities and offers a mix of market-rate, affordable housing and units set aside for returning Chicago Housing Authority residents. It has been beset by slow sales and financing issues.

In Bucktown, Wabansia Row has dropped the price by up to $100,000 on 11 new town homes. At The Columbian, a 46-story condo tower that overlooks Grant Park and was taken over earlier this year by Fidelity Investments, prices on 20 of the remaining 60 unsold condos have been cut by an average of 25 percent.

Nevertheless, Hollman said it's no fire sale of the project because the goal is to sell 20 units this year. It may not reassess the pricing structure on the other 40 units until next year.

Home shoppers may see more of that strategy, namely slashing prices on just enough units to pacify a project's investors, as the year goes by. The reason behind it is the other reality of Chicago's condo market. Anyone who wants a newly constructed condo next year is going to find them in short supply — and that will likely firm up prices.

Appraisal Research Counselors predicts that it will be at least two years and maybe more than three years before new development deals begin. In fact, the only project scheduled to deliver condos to the market in 2011 is the ultra-high-end Ritz Carlton Residences.

"This is a strategy that developers contemplate," said Gail Lissner, a vice president at Appraisal Research Counselors. "They fully realize that there is going to be no more new product added to the market and next year we'll have fewer units that are in competition."

Adds Schultz of @Properties: "Everyone wants to hold out as long as they can."