06/06/2012

Chicago Retail Building Could Get Top Dollar

An Israeli investment firm on a hot streak is poised to turn a big profit on a luxury retail property in Chicago that it scooped up from an overleveraged developer last year.

IDB Group last week began marketing the 95,000-square-foot building, which is leased almost entirely to upscale clothing chain Barneys New York until 2024.

The six-story property, at 15 East Oak Street in the heart of the city’s affluent “Gold Coast,” is expected to fetch up to $160 million, or nearly $1,700/sf — which would be one of the highest prices ever paid for retail space in the city. That would eclipse the $117 million that IDB paid for it a little more than a year ago.

The three-year-old property, listed with CBRE, produced almost $9 million of net operating income last year, according to loan documents. So a trade at the estimated value would produce an initial annual yield of about 5.6%. A buyer would have to assume an $80 million mortgage, with a 5.2% coupon, that matures in 2021.

A neighboring property traded at an even lower capitalization rate in April — a deal that shattered the per-foot price record for Chicago retail space. The low yields reflect investors’ willingness to pay a premium for properties in ultra-affluent shopping districts amid strong sales for luxury goods.

The area, near Lake Michigan, is referred to as the Gold Coast. It includes the Midwest’s most-exclusive shopping destination, as well as high-end restaurants, four-star-hotels and historic homes built by the city’s elite in the 19th Century.

IDB’s property is at the corner of Rush Street. The surrounding Oak and Rush Street Gold Coast submarket is 99.4% occupied and home to such upscale stores as Hermes, Jimmy Choo, Kate Spade and Prada. One block west is the “Magnificent Mile,” a high-end shopping corridor along Michigan Avenue north of the Chicago River.

Barney’s has a lease on 90,100 sf until the summer of 2024. The remaining 4,600 sf is used by a Citibank branch, whose lease expires in 2019. Both leases have annual rent bumps.

A partnership led by Chicago developers Mark Hunt and Fred Latsko completed the building in 2009. When the $93 million construction loan matured the following year, the partnership was unable to pay off or refinance the mortgage. When lender Anglo Irish Bank moved to foreclose, the partnership tapped Jones Lang LaSalle to recapitalize or sell the property.

The brokerage came up with two options. An unidentified international institutional investor was willing to kick in $40 million of fresh equity to enable the partnership to refinance or pay down the debt while staying in the deal. But the partnership, which also faced debt pressures on other properties, took the other alternative — an outright sale to IDB, which was willing to pay cash and close within 30 days.

A separate partnership led by Latsko sold another Gold Coast retail property in April for an eye-popping $7,065/sf — by far the highest price ever paid for a retail property in the city and one of the highest ever in the nation, according to Real Capital Analytics. The 3,000-sf property, at 930 North Rush Street, was acquired by Acadia Realty, a REIT in White Plains, N.Y. Lululemon Athletica, an upscale athletic apparel company based in Vancouver, is leasing the entire building for seven more years. The $20.7 million purchase price translated into a 5.3% capitalization rate. Colliers International advised the seller, which had acquired the property in 2008 and redeveloped it the following year, spending a total of $10.25 million, according to Crain’s Chicago.

As for IDB, it has been on a tear lately. Two years ago, it acquired an 865,000-sf building in Midtown Manhattan from HSBC, which leased back about two-thirds of the space. It paid $330 million. IDB recently indicated it had received an offer of $725 million for the property, at 452 Fifth Avenue, between West 39th and West 40th Streets. But rather than sell, IDB is seeking to line up a $400 million mortgage.

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