Gallagher headquarters in suburban Chicago sold to New York investor

At around $50 a square foot, the selling price is a fraction of the roughly $84 million Piedmont (then known as Wells REIT) paid for the property in a sale-leaseback deal it struck. in 2006 with Gallagher, according to research firm Real Capital Analytics. The building was then 87% leased and the insurance broker agreed to lease more than 60% of the building until an expiry date in 2018.

Piedmont received nearly 12 years of net operating profit from the building during this transaction, although the total operating profit is unclear. But Gallagher eventually moved its headquarters in 2017 to a refurbished office building in nearby Rolling Meadows.

Piedmont then set out to revamp 2 Pierce Place in hopes of leasing it to new users as demand for suburban office space increased in 2018 and 2019. It is unclear how much the REIT spent to renovate the building, which was purpose-built for Gallagher in 1991. and is part of the 300-acre Hamilton Lakes Business Park – and a Piedmont spokesperson could not be reached. But a source close to the property estimated it to be between $5 million and $10 million. Piedmont had no debt on the property, according to DuPage County property records.

Then came the pandemic. Demand for office space has shrunk and Piedmont has been left with a building that is now more than 60% vacant, according to real estate information firm CoStar Group. With fierce competition from renovated buildings in nearby Schaumburg and the rise of remote working driving suburban office vacancy to an all-time high, Piedmont has now opted to cut its losses and sold the property for less than 30% of what he originally paid.

The deal reflects uncertainty over the future of suburban office demand following the public health crisis.

Sovereign is betting on an office building with over 300,000 square feet of available office space after a two-year period in which companies collectively vacated more than 2.8 million square feet of office space in the suburbs, according to data from Jones Lang LaSalle. In a pair of recent big moves, Allstate reached a deal to sell its longtime Northbrook headquarters campus for redevelopment, and UnitedHealth Group subsidiary Optum plans to vacate a 300,000+ office building. square feet at 1600 McConnor Parkway in Schaumburg.

Adding to the challenge at 2 Pierce Place: The northwest suburban submarket had the highest office vacancy rate among the six suburban areas tracked by JLL, at 34%. This number includes several large, outdated suburban properties left behind by businesses that moved downtown or elsewhere in the area.

Sovereign, however, knows the market it is entering. Since 2013, the company has owned the 11- and 13-story office buildings at 1700 and 1900 E. Golf Road near Schaumburg. He attracted new tenants to these buildings after renovating them and tried to make a big profit in 2018, but the properties were never exchanged.

Now he’s upped his suburban Chicago office bet amid a much uglier rental landscape. A company spokesperson had no comment.

One advantage Sovereign might look to exploit to gain tenants in the Pierce Place building is its location just outside the Cook County border. Property taxes in many commercial buildings in Cook County are trending higher after assessor Fritz Kaegi implemented a different approach to property valuation than his predecessor. Office landlords typically pass property tax bills on to tenants, which means Sovereign may be able to offer lower rents than some of its nearby competitors.

For Piedmont, the sale completes a cash out of the Chicago office market that it has orchestrated over the past decade. Since 2015, the REIT has sold approximately $1.2 billion of office properties in the Chicago area, led by the 2015 sale of Downtown Aon and the 2019 sale of the office building located at 500 W. Monroe St.

Chicago-area office property sales in 2021 rose 35% year-over-year to $3.1 billion, according to Real Capital Analytics. This figure was slightly higher than the total volume of office sales in 2019, according to data from Real Capital.

Among the biggest suburban office deals completed last year were the Corporate 500 complex in the northern suburb of Deerfield, for which a New York investor paid nearly $180 million; a set of four office buildings in the western suburb of Downers Grove that New York-based RMC Group is buying for nearly $100 million; and the Edens Corporate Center in Northbrook, which a Chicago-based BA Investment Advisors firm bought in August for nearly $23 million.

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