CHICAGO | 108 North State (Block 37)

[Nowhereman1280]

Originally Posted by djlx2v2

any smart investor has to be thinking about insurance constantly, right? that's one of the most important considerations in major investments.

Yes and no. Its an expense to be taken into account, but its one of the smaller ones and replacement value is only part of the equation when it comes to how much you end up paying to insure a structure. The point is that the Cost approach is almost irrelevant to any sound investment decision since you cannot recover the cost to build the structure. The real value of a building is reliant on the sales comp approach (if it's speculative) or the income approach (if you like not losing all of your money every time a bubble bursts).

I've worked on about 100 major commercial and industrial deals in the past year or so and not once have we or our clients used the cost approach for anything other than getting an insurance quote.

[SamInTheLoop]

Originally Posted by Nowhereman1280

Well not this market. Replacement cost in such terrible conditions is used for only one thing: insurance. It might be a thought in the back of the minds of investors looking for a deal ("oh hey, not only does the math work, but this cost 4 times more to build"), but nothing more right now.

Well, this market is very complicated right now...you need to keep in mind how bi-or rather, trifurcated it really is. For many large institutional, private equity and REIT investors that are looking at super-core assets in the top 5-10 CBDs in the US, many are in fact considering replacement cost as a selling point. Not saying I'm always sold on that justification for buying and in some cases really paying-up for assets (the fact that it is believed to be below replacement cost, but many do consider it). Just to demonstrate how differentiated the current market is, I was going to point out a couple trophy office towers that sold in Chicago last year - Irvine Co's purchase of 71 S. Wacker and KBS' purchase of 300 N. LaSalle......and mention that these investors probably considered a below-replacement cost opportunity as a major selling point........but then I realized the problem with that.........I think these buildings sold for more than (probably much more than!) replacement cost! In fact, 300 N. LaSalle sold for an all-time Chicago office building record high price per sq ft. That tells you how remarkably differentiated this market still is - (and admittedly bad debt on certain assets plays a major role)........certain assets virtually can't be sold, no matter how low the price, why others - perceived very high-quality, lower-risk properties in highly desirable locations are selling above replacement cost and in some cases at record, or near-record high values!

[Nowhereman1280]

^^^ Again though, those properties are not selling because they have a high replacement cost. They are selling because they are well leased out and have a high value from an income-approach perspective. In other words, the value of the Hyatt building or 300 N LaSalle has almost nothing to do with how much the steel is worth and how many man hours went into it and everything to do with the fact that hundreds of millions, probably billions of dollars worth of legal obligations are attached to these properties. The value right now is all in the leases and the creditworthiness of the tenants. That's why you are seeing buildings occupied by companies like Kirkland and Ellis who we know aren't going bankrupt any time soon who are legally obligated to pay millions of dollars a month for probably 10 or 15 years selling for a high price.

If someone said you could buy something today for $1 billion and it would pay out $3 billion over the next 10 years, would you take it? The answer is you'd do the math and see if it makes your required rate of return. What you wouldn't do is care how much it cost to build (obviously with the caveat that the insurance payments might be slightly higher or lower based on that figure).

That's why no one is buying 108 N State, there is little value in something that cost $500,000,000 to build and is only like 25% occupied. As we've seen from the judicial sale, the market clearly believes the $200 million is outstanding debt to be in excess of any value in the building. This is why BOFA's foreclosure made no sense in the first place. If they just waited for Freed to close out his leasing of the property, they would have had a sporting shot at recovering their money. However, they could also be leasing the building in hopes of reaping a profit when the market recovers further. That is, however, unlikely as most major companies try not to get tangled up in projects that border on real estate development.

[SamInTheLoop]

^ I'm not saying that replacement cost is being used for valuation purposes. Clearly, in today's still overall risk-averse, safe income, core/super-core-preferred investment market, it's all about high credit NOI in place for a long period going forwar. However, the ability to purchase below, and even more so significantly below replacement cost is often used and considered by large investors as one (admittedly out of several) justification for an acquisition decision, as well as to, in some cases, put a premium on a bid that they otherwise would not, all things being equal. Clearly, in the case of Block 37, it's all about the severely underwater debt....

[Nowhereman1280]

I won't disagree that a high replacement value won't hurt things, but its rarely used as anything other than "oh and as a bonus, this would cost X to build".


I work on a team that handles all of the real estate globally for a $30 billion company and the only time we ever look at replacement value is in markets where there are NO comps or when we are considering BTS vs purchase or lease of an existing property. Granted this is a completely different end game since we are not looking at it as an investment, but you'd think that someone looking at an investment would be even less concerned about Cost-approach valuations than someone who is looking only to find the cheapest real estate solution available.

[spyguy]

The Eileen Fisher store is now open. By far the most expensive shop on State Street excluding parts of Macy's.


Eileen FisherStateEntrance by Racked National, on Flickr


EFBlock37 by Racked National, on Flickr

[ardecila]

I like the high-end feel of it. Eileen Fisher's signage strategy is very much in tune with Gensler's storefront design, and the simple materials used inside give much more weight to the clothes themselves. That's as opposed to, say, Anthropologie where the clothes are merely souvenirs of the unique experience the store provides.

I wonder if Eileen Fisher used Gensler?

[denizen467]

Originally Posted by ardecila

say, Anthropologie where the clothes are merely souvenirs of the unique experience the store provides.

O/T, but that's a clever characterization - applying to a lot of situations in the retail world.

[Godwindaniel]

That sounds feasible, but I think they'd need to improve the ROW to a three-track alignment in some locations in order for express service to work. I know I've been preaching this a lot lately, and I hate to sound like a broken record.

[i_am_hydrogen]

iamhydrogen/ flickr

[TheMaxMan]

Great photo.

[SamInTheLoop]

I really hope Bank of America is determined to move quickly with whatever their strategy is. This is not the sort of development that they are going to be successful with if they decide to sit on their hands for a few quarters and hope that the market comes back to them, boosting Block 37's value back to a level of their liking. That's not going to happen, as the market is not really appreciating new developments that are 40% leased right now, and will not for some time. The bank needs to either immediately bite the bullett and sell, or I think my actual hope would be that they immediately get serious about leasing the project up - now, and then sell in a year or a little more. How long can the already open retailers in the development survive with the relatively meager current foot traffic levels (and you can always positively spin it, but it is indeed relatively meager)? The Bank needs to strike some deals pronto for especially the majority of 4th and 3rd floor space, and get the spaces built out this year, as that is going to be crucial momentum for the project, and get traffic flowing vertically throughout the entire interior.

Tangentially we have some good overall State St retail news. DSW recently signed their lease at Sullivan Center, and it was reported in the local media (trying to remember where but I'm blanking at the moment.......may have been mentioned in a Trib article) that there is already a deal in a works for the recently vacated Loehmann's space, which would be great.......so it is great to see some leasing momentum building on the street, and hopefully this helps to get B of A to get its butt in gear on leasing Block 37.....no excuses for them now, as it's their project alone....

[SamInTheLoop]

Just another thought I had re: Block 37. Does anyone think that this god-forsaken block's sordid, and very much continuing redevelopment saga will have a negative impact - not from a real, rational, analytically-driven development decision-making perspective, but almost from a purely psychological, almost quasi-superstition standpoint - on whomever ends up eventually buying this from Bank of America (I like to call this goofy institution "B of A", as I understand they don't much care for being called that), or who that investor ends up attempting to partner with for the resi/hotel phases? I mean, can anyone even think of another prime redevelopment site in a major American city that has had such a series of continually, compoundingly bad outcomes over a comparatively long period of time even remotely approaching the magnitude that Block 37 has? It takes quite the imagination to even dream-up a similarly scaled history and series of steps involving such incompetence and bad luck - but let's face it - overwhelmingly it's been incompetence....both from government and the private sector

[ardecila]

What do you want? The site's aggravating/disappointing history is purely a result of the "too many cooks" problem. The mayor can look out his window and see the site, so naturally he wanted something impressive. Same for the executives of the city's most powerful department store. CTA eyed the property for a rail tunnel. ComEd already had thousands of miles of utility lines snaking under the site. The backers of the theater-district revival saw an opportunity to replace long-destroyed theaters and add to the district's offerings. And I'm just getting started.

Ineptitude on the part of Mills lost them the property and delayed the project's opening until after the bubble had already burst. Consequently, leasing has been sluggish at best, which took down Freed due to no real fault of their own.

The decision to postpone the hotel/residential tower into a second phase was also a poor one, because the financial collapse/credit crunch destroyed any hope of landing financing for the tower phase.

However, now that Block 37 is set in stone (black/white granite, to be specific) I think the opportunities for civic leaders to butt their heads in will go away. A developer needs to be found for the tower, but he doesn't need to worry about the city coming in and dictating any new terms. The foundation's already in the ground, so the footprint and height of the tower are locked in. The only question is the mix of uses, which is largely dependent on what kinds of access are available; a hotel needs some of the base for a lobby, while residential just needs enough for a desk, mailroom, and elevator hall. A blend of the two requires a second elevator core and an even greater chunk of the retail podium for two lobbies.

[pilsenarch]

it has been built to accommodate both a hotel and condo/apartments...

[the urban politician]

It baffles me that there have been no proposals to develop a rental tower at this site, especially since there are already so many proposals right now for other sites downtown.

[Alliance]

I dont understand why you'd go for this site though. Millennium Park Plaza I'd agree, but why mess with a shaky project in a still shaky economy?

[Nowhereman1280]

^^^ Well I think it's pretty clear that the whole foreclosure business has put the kabash on any future plans for this site for the time being. I mean what developer is going to be interested in a site that is in the middle of a messy lawsuit?

Now that things are settling down with the case, there could very well be talks going on or something, but any such talks would take months and we wouldn't hear about them for a while still if they just started after the foreclosure went through.

[SamInTheLoop]

^ I thought this was a closed case already. B of A has the title now, no? Case closed, and time to move forward with it....

[SamInTheLoop]

Originally Posted by Alliance

I dont understand why you'd go for this site though. Millennium Park Plaza I'd agree, but why mess with a shaky project in a still shaky economy?

I think they're completely different projects with a different target market. If the Millennium Park Plaza project ever comes together, that would be a much smaller number of units, and very, very high-end rental. A Block 37 apartment project would likely be mid-to-high end for new construction downtown rental, much larger - I would think they'd aim for at least 400-500 units. A closer comparison proposal in the same vicinity would be the proposed Lake/Wabash rental tower....