With the downtown property market ranging from torpid to downright depressed, a bit of news about the sector in September had a “man bites dog” importance.
Menashe Properties bought a 29-story office building at 230 W. Monroe St. The family-owned firm, based in Portland, Oregon, and making its first investment in Chicago, took the plunge as other property moguls talk about tax rates, high crime and the still-uncertain comeback from COVID-19 as reasons to shun deals here.
“Is office dead? No. Is Chicago dead? No. Am I a contrarian? Yes,” CEO Jordan Menashe said.
For him, the building allowed a cheap entry into a prestigious West Loop market. He aspires to be a “first mover” to attract tenants who have figured out post-pandemic office needs and want to relocate or expand.
Menashe said he checked out Chicago in his first visit to the city and found it to be “the polar opposite of what you hear about in the news.”
“It’s vibrant. It’s architecturally beautiful. You could feel the vibe,” he said. He was a follower of the late tycoon Sam Zell, remembered for an ability to profit from others’ failures.
In the case of 230 W. Monroe, it helps that Menashe got it in an all-cash short sale, or less than the property’s debt. He paid $45 million for the 707,000-square-foot office tower, when in 2014 it traded for $122 million. The seller was an affiliate of the Florida firm Accesso Partners.
It was the first sale of a downtown building in more than a year, since developer Michael Reschke entered a tripartite pact with Google and Gov. J.B. Pritzker to move state workers to 115 S. La Salle St. Google then got the keys to the former state government enclave at the Thompson Center, 100 W. Randolph St. It’s a deal many believe will lead downtown’s economic rally.
But there is still trouble. Real estate firm Cushman & Wakefield, in preliminary third-quarter data, said downtown office vacancies are 23.4%, up more than three percentage points from a year ago. Some companies have said they are bucking trends and expanding downtown leases, but Jeffrey Skender, senior director at Cushman, said for every firm in growth mode, five are contracting space.
Skender said he’s also concerned about a record amount of sublease space downtown. He said the total is expected to crest at 9 million square feet, equal to two uninhabited Willis Towers. “It’s very good space that’s out there … There are still tags on the furniture, and it’s unblemished space that sat vacant and unused for the last three years,” Skender said.
Companies on an expansion kick lately include the renewable energy firm RWE, which doubled its space at 353 N. Clark St. to 57,000 square feet. At the One North Wacker tower, owner Irvine Co. is spending $10 million on improvements and recorded new leases from the cloud communications provider Sinch and law firm BakerHostetler.
Demand continues, though, for space in the newest and most up-to-date buildings, typically called Class A in real estate circles. In time, that could send tenants to less pricey spaces such as at 230 W. Monroe, leading more investors to follow Menashe’s path.
“Basically, the smart money is waking up [to Chicago]. This is being led by high-net worth individuals and by family offices,” said Jaime Fink, senior managing director for capital markets at Jones Lang LaSalle.
Another thing that drew Menashe to Chicago is the city performs well in the grudging march back to the office rather than full-time working from home. The numbers have been slow to improve but, in data from building security firm Kastle, Chicago is a few notches higher in the return-to-work measurement than New York, Los Angeles and San Francisco.
Menashe expects employers to demand more office time. “Salesforce was remote forever until they weren’t. Zoom was remote forever until they weren’t,” he said.
The 230 W. Monroe building, at the northeast corner of Monroe and Franklin Street, is 60% occupied with Maxim Healthcare as the largest tenant. To keep what he has and attract other companies, Menashe plans to brighten the tower’s curb appeal and improve the lobby. Another key, he said, is to fill vacant ground-floor retail space. He’s aiming for a quality food-and-beverage outfit.
Tenants, he said, can expect improved amenities but not cut-rate rents. Menashe said as the market stabilizes, rents should hold firm and his tower can compete for tenants from other landlords who must pass along higher expenses.
As for what office buildings are really worth nowadays, Menashe said, “Buyers and sellers are still being educated about where prices need to be.”
Muddled as the picture is, it favors the bold and those who can pay cash.
