Local commercial sales approaching record high

It’s been a big year for Chicago commercial real estate deals.

Investors spent $16.3 billion on local commercial properties during the first nine months of the year, the most for that period since 2007, according to data from Real Capital Analytics, a New York-based research firm.

Deal volume year-to-date through the third quarter was 32 percent higher than during the same period last year and will reverse a two-year downward trend for local commercial property sales, Real Capital data show.

The sales of office, retail, apartment, industrial and hotel properties are approaching their highest collective mark since 2015, when the market—helped by a $1.3 billion sale of Willis Tower—notched a record high $23.3 billion in deals.

It’s an illustration that investor appetite in the market hasn’t been fully satiated for the current real estate cycle and that landlords continue to cash out as prices have surpassed their pre-recession highs.

One factor in the sales spike is a series of corporate mergers. Thirty-five Chicago-area properties changed hands when Nesta Investment Holdings bought out Global Logistics Properties in January, and 35 more industrial properties were part of a merger between San Francisco-based Prologis and Denver-based DCT Industrial Trust, according to Real Capital. Brookfield Property Partners’ acquisition of Chicago-based GGP also brought some big local malls under new ownership, including Water Tower Place, Northbrook Court and Oakbrook Center.

But Chicago deals also grew because investors are generally finding better returns on their money in the area compared to expensive coastal markets, said Real Capital Senior Vice President Jim Costello.

“There is a yield opportunity that these investors are chasing in Chicago that’s just not as attractive in some of these other cities,” he said.

That’s especially true for office sales, which were up 78 percent year-over-year through the third quarter to almost $5.3 billion.

Boosting that figure is a run of big trophy property sales: Developer Sterling Bay paid $510 million in February for the Groupon headquarters building at 600 W. Chicago Ave. and $680 million in April for Prudential Plaza. Brookfield paid $305 million in April for the office building at 175 W. Jackson Blvd., and billionaire Morningstar founder Joe Mansueto paid $255 million for the Wrigley Building over the summer.

Even as massive new office towers have flooded the market with supply over the past two years, deep-pocketed real estate investment firms see the healthy demand that has kept pace and prices they can justify, says Cody Hundertmark, an investment sales broker in Chicago at Cushman & Wakefield.

“The margin of error here is just wider” than in coastal markets, he said. “People wouldn’t be willing to come here unless you had a good story line, and the demand story line is front and center in everybody’s mind. You’re hard-pressed to find good product with much vacancy.”

Vacancy is almost non-existent in the industrial sector, which saw sales surge by 48 percent to nearly $4.4 billion this year through September, according to Real Capital.

With the rise of e-commerce fueling demand for big warehouses and supply chain distribution centers, investors have bet heavily on a Chicago area industrial market that touted a vacancy rate of 6.4 percent at the end of the third quarter, a 17-year low, according to Colliers International.