New Tricks For Old Dogs
When the 1.6 million-sf office tower at 55 East Monroe Street in Chicago was completed in 1972, the 50-story skyscraper quickly gained a reputation as one of the city's premier business addresses. More than three decades later, however, the building has become technologically outdated, its office space outclassed by newly constructed competitors in the Loop and West Loop and along Michigan Avenue's Magnificent Mile.
Rather than give up on their old property, though, the current owners (GlenStar Properties LLC and investment partner Walton Street Capital LLC, who recently purchased the property for $235 million) are implementing a strategy of "repositioning" 55 East Monroe into what they hope will become one of the city's most appealing mixed-use office and residential complexes.
"Repositioning" involves taking what the real estate community euphemistically calls "newer" buildings—structures built in the '70s, '80s, or even 1990s that are starting to get long in the tooth—and revitalizing them into upscale office buildings, residential condos, or mixed-use developments.
"Fifty-five is starting a trend of 'newer' buildings being converted," says Michael F. Kaufman, AIA, a partner at Goettsch Partners, Chicago. The 60-person architecture firm (until recently, Lohan Caprile Goettsch) is part of the design team converting 55 East Monroe to mixed use by upgrading the lower floors to Class A office space and converting the upper floors into 250–350 condominiums.
With new construction posing a direct threat to many of these "newer" office buildings, their owners are being forced to take decisive action, says John Goodman, executive vice president of Studley Inc., a national commercial real estate firm focused on tenant representation. "If you don't reposition, there are so many [other] excellent repositioned options or brand-new spaces that you could sit with your 35-year-old unrenovated space for a tremendous amount of time and have very few [potential] tenants interested in leasing it. It's almost a question of having to reposition just to play the game."
The 55 East Monroe building in downtown Chicago looks modern, but its mechanical systems and infrastructure date back to 1972 and are nearing the end of their useful lives. The interior spaces are similarly outdated, so developers will upgrade some floors to Class A office space while others will be converted to condominiums.
Kaufman acknowledges that many developers of newly constructed office buildings have been successful in filling their space at the expense of these newer buildings, but says that "newer buildings can provide all the teledata, electrical, and cooling needs new buildings can provide, if they're properly designed."
Winning the repositioning game requires knowing which strategy to play in order to maximize the value of your property: Is it smarter to position your office building to compete in market sectors beyond strictly office space—residential, retail, mixed-use—or should you stay in the office building market? Let's take a look at both options.
Repositioning for a new market
In certain cities—Chicago is one of them—there is a trend toward repositioning these newer office buildings with new uses, such as condominiums or multiple uses.
In the case of 55 East Monroe, there was little hesitation on the owners' part in going for the condo market, based on the financial analysis. According to Studley's Goodman, the additional rent that might be generated by upgrading the property and keeping it as office space might be as little as $6 or $7 per square foot in markets like Cleveland and St. Louis, and perhaps $13/sf in Chicago. That might not be enough to make the project competitive in the marketplace.
Ken DeMuth, AIA, senior associate at Pappageorge/Haymes Ltd., a design team member, puts it this way: "When you've invested all that money and find out you can't really charge any more rent than you were already getting, the developer has a hard time creating an incentive for doing those kinds of changes," he says.
As a result, says DeMuth, "When a developer asks, 'Should I go after the office market or should I rehab and go after what seems to be a lucrative condominium market?' often the choice is to go condo."
While the financials seem weighted against repositioning a "newer" office building for office use, there's no guarantee that converting it to condominiums is a better investment. It's important to note, for example, that steel and glass office towers designed with an all-business attitude aren't always a natural fit for hearth and home.
From a structural point of view, the challenges of converting office floor plates to residential floor plans run the gamut from unusually deep interior spaces and scant natural light to lack of views or an austere business aesthetic. The 55 East Monroe building enjoys amazing Lake Michigan and city views on the higher floors, but had the vistas been less than ideal, the building might not be suitable for residential use.
"When you get below the 30th floor and you start falling below the sightline of a number of other buildings in the area, the view factor, which sells a lot of these dwelling units, drops very quickly and starts to make the choice to go condo less clear," says DeMuth. The lack of views is one of the primary reasons the building's lower floors will be retained for office use.
The building's fixed windows, with their five-foot-wide mullions, are being reworked to improve views, provide ventilation, and more readily suggest the building's partially residential nature.
Converting to residential use may call for reconfiguring the lobby. This task can become all the more challenging in a mixed-use building, where separate business and residential entrances, each with its own security requirements and elevators, have to be carved out of existing space.
Problems also arise when the surrounding business district is called upon to support the needs of new residents. In traditional downtowns, many shops and restaurants keep daytime hours. The sudden introduction of round-the-clock residents can change the rhythm and texture of the neighborhood.
"I think when you start getting a residential base in the downtown core, you'll find the restaurants and shops getting more interested in repeat business," says DeMuth. "I think the diversification of what's going on is positive and provides a cosmopolitan feel."
With 55 East Monroe still in the early planning stages, it will be several years before the first residents move in. Even so, without formal plans or even an accurate condo count, the developers are confident the building's repositioning as a mixed-use office+condo (possibly with a small retail component) is the best way to maximize its value.
Staying with office use
Some developers and building owners simply are not comfortable straying from the office niche and will only tackle a repositioning project where an office building ends up an office building. But which "newer" buildings are good candidates for Class A repositioning?
"The thing to watch is vacancy levels, but more important is the time to lease space," says Eric Bowles, director of global research, CoreNet Global, Atlanta, a membership organization serving the corporate real estate industry. "I don't have a set parameter, but when your space takes 18 to 24 months to lease or you have vacant space for longer periods of time, you really have to worry, especially if that time is substantially more than usual in the market," he says.
Having to deal with an existing tenant base also greatly affects the repositioning process. "When you have to rip out everything—extensive HVAC, wiring, electrical, plumbing—and replace all those major systems one floor at a time, it gets terribly expensive because you're having to work around existing tenants," says Bowles.
The top floors of 55 East Monroe (at center in photo) enjoy amazing water, parkland, and city views (such as this view from Chicago’s Millennium Park), making them ideal for residential use. Below the 30th floor, views become obstructed by neighboring buildings, so the developers are limiting the use of those floors to office space.
Studley Inc.'s Goodman says that, while repositioned buildings may only command an extra $6–7/sf in some cities, there will always be tenants looking for such space. "You can look across just about every industry sector and within that sector various tenants are going to want repositioned buildings versus new construction," says Goodman. "You don't hear many people saying they want to be in a 1970s building, but what you hear people saying is, they don't need to be in the fanciest, best new building in town. What they really mean is they don't need to pay a $10, $15, or higher premium."
Competing on price is generally the developer's best strategy when marketing a repositioned Class A building against new construction. Where these "newer" buildings can't compete against new construction is on floor space. "Developers are positioning their new buildings as providing higher efficiency floor plates because they're column free and long span and the depth-to-core has been maximized for planning principles," says Kaufman. Repositioned buildings can often match new construction feature for feature, but they usually can't compete on space. Tenants signing leases on repositioned office buildings are most often saving money at the expense of generous floor plates.