Debt-free office buildings can give Chicago landlords an edge

Office building 311 South Wacker was dealt a blow last month when Monroe Capital, one of three departing tenants, announced it was relocating just half a mile north, to 155 North Wacker. That building’s high-end amenities were not the only draw. 

155 North Wacker is also debt-free, meaning landlord Morgan Stanley can offer attractive lease terms in a competitive market without worrying about fulfilling the requirements of a lender. 

As work-from-home policies suppress demand for available office space, and interest rates increase the cost of carrying debt, office building owners who are debt free can have a leg up when courting tenants. 

“[155 North Wacker] has been giving a lot of flexibility to tenants and prospects with the amount of concession dollars that they put out,” said Eric Feinberg, co-head of Savill’s Chicago regional office and member of the team Monroe hired. 

The concessions are unrestricted as well, meaning tenants can spend them on expenses like termination fees from prior leases. Lenders typically dictate terms for concessions, Feinberg said. 

155 North Wacker is one of two debt-free office buildings in the Chicago area to sign new tenants within the past year. 

“That has been a selling point for some of these office buildings. They will stress that they have no debt,” said Chris Cummins, JLL’s Managing Director for Chicago. “Because of our market, a lot of landlords are refinancing, and it’s challenging to refinance. Obviously there have been buildings that have gone back to the lender, and tenants can be concerned about who will eventually own it and whether it will be operated the same way.”

The move may also help building owners hold onto assets longer while waiting for tenants or the ideal time to sell. 

“You’re not reporting to a lender, so the owner has more flexibility on the type of deals they want to do,” Cummins said.

But holding onto a debt-free asset is a delicate endeavor, said Transwestern Executive Vice President Eric Myers. The owner still has to make enough income to cover property taxes. 

“They’re not going to fill up all the space with crazy deals, but they are at least going to sign enough tenants to cover the tax bill,” he said. 

Meyers is the leasing broker for the NBC Tower at 455 North Cityfront Plaza which is a debt free building owned by Metropolis Investment Holdings. It recently lost law firm Crowell & Moring to riverfront skyscraper 300 North LaSalle. 

Although debt-free building owners tend to treat tenants well and make significant investments into building improvements, they can sometimes have trouble competing with short term owners with loans, Meyers said.

Those owners tend to forego building improvements in favor of aggressive lease incentives and lower rents. Getting leased up at any cost can make the building more attractive to a prospective buyer. And sometimes the buyer will offer credits to sellers for such efforts, Meyers said. 

In other cases, building improvements pay off.

Transportation asset management firm Sasser Family Companies recently signed a lease to move its headquarters to a debt-free complex in suburban Chicago, called Oak Brook Pointe.

The move contradicted the ongoing trend of suburban office buildings losing tenants and plummeting in value. Vacancy rates remain close to 30 percent, with buildings selling for as little as $7 per square foot. 

Marketing materials for the Oak Brook building highlight owner Principal Asset Management’s ability to invest in the property’s amenities.

“Because the building is owned debt free, Principal Asset Management’s real estate team was able to allocate resources to make substantial capital improvements in the building and stay in front of the flight to quality trend,” said CBRE’s Jeff Mann in a Feb. 26 release about the lease.

Back downtown, the State Teachers Retirement System of Ohio paid off a $150 million loan balance on an office building it owns at 77 West Wacker Drive this August.

“We are working to lease available space consistent with our 25 years of ownership history,” a spokesperson for the retirement system said. 

So far, no new leases have been announced since the debt was paid off. 

Foregoing debt is not always a silver bullet, Feinberg said.

“You’ve got to make sure you know that the building is marketed correctly, and that you’re competitive on a total concession package and on a total rental rate package,” he said.

Editor’s note: This story was updated to correct Chris Cummins’ surname.

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