In a dramatic sign of the East Loop's transformation, Walton Street Capital LLC is close to a deal to buy 55 E. Monroe St., exploring a residential conversion of the top floors of the bulky 50-story office tower.
Hurt by tenant defections, the 1.6-million-square-foot structure is likely to be one of the few pieces of downtown real estate to lose value in recent years. Purchased for $ 292.5 million three years ago by a group of German investors, Walton Street's price is in the low $ 240 million range, sources said.
Walton Street does not have a binding contract to buy the building and is not committed to a residential conversion, even if it makes the deal. But a rival bidder, Chicago developer Golub & Co., was also considering a residential play, sources said.
But the sharp loss in value as an office building and the tentative residential conversion plan reflects two powerful forces sweeping through the real estate market between Michigan Avenue and State Street, a condo boom amid lukewarm demand for office space.
"It's sheer economics," said residential marketing consultant Garry Benson, a partner with Chicago-based Garrison Partners.
A new condominium along Wabash St. in the East Loop can sell for at least $ 350 a square foot, more than the newest office building, he noted.
"The best way to make a profit is residential," he said.
Ira Schulman, a principal with Chicago-based Walton Street, declined comment.
55 E. Monroe is owned by a venture that includes Citigroup Asset Management, which represents German investors in the deal. In 2002, the venture bought the building from a venture that included New York's Tishman Speyer Properties LP, which retained an ownership stake and continues to manage the building.
The venture, expecting to take a big hit, put the building up for sale in December, hiring real estate firm Jones Lang LaSalle Inc. A Tishman spokesman could not be reached for comment.
Walton Street, with over $ 4 billion in investments, is better known for its office and hotel deals. The firm, cofounded by longtime Chicago real estate executive Neil Bluhm, may plan to team up with a residential developer, some real estate industry experts said.
A residential plan for the 32-year-old structure comes after the building's second largest tenant, law firm Seyfarth Shaw announced it would move to Bank One Center, 131 S. Dearborn St. after its lease expires in December 2006.
But amid the weak demand for office space in the East Loop, occupancy in the building has steadily declined since the deal with the Citgroup Inc. unit. In 2002, the occupancy was nearly 93 percent, but fell to 89 percent in 2003 and to 79 percent in September, according to a report by credit firm Fitch Ratings.
Seyfarth accounted for 14.4 percent of the building, or about 231,000 square feet, according to a 2003 loan document. Most of the law firm's space is located above the 42nd floor. Another upper-floor tenant, Chicago litigation firm Johnson and Bell Ltd., with about 50,000 square feet, said last month it plans to move to 33 W. Monroe St.
Unlike other residential conversions of office buildings in the East Loop, such as the former Britannica Centre, 310 S. Michigan Ave., announced last year, 55 E. Monroe is hardly antiquated. Its largest tenant is energy engineering firm Sargent & Lundy LLC, which has nearly a quarter of the building under a lease that expires in 2012.
Although located a block from Millennium Park, making the building attractive to home shoppers could be challenging, particularly in the suddenly competitive residential market in the East Loop, Benson said. "It's such a sterile lobby, you'd have to create a whole new image."
But the upper-floors have one key advantage, he added. "Unobstructed lake views, in perpetuity."
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