Chicago Office Market Dives, 80% Vacancy Sparks Sale

Key Takeaway

• Bixby Bridge Capital and Franklin Partners are set to buy the office space at 20 West Kinzie Street, Chicago, potentially below the $60 million loan value.
• This sale continues a trend of Chicago offices selling at significant discounts due to high vacancies influenced by remote work.
• The building's value drop is partly due to an 80% vacancy rate following WeWork's departure.

Chicago's Office Market Faces Steep Discounts

The potential sale of the office portion of 20 West Kinzie Street in Chicago's River North to Bixby Bridge Capital and Franklin Partners highlights a continuing trend of distress within the city's office real estate market. This deal, which is yet to be finalized, could see the property changing hands for significantly less than the $60 million loan secured by the current owner, Alter Group, in 2019. This situation is emblematic of a broader market challenge, where high interest rates and stringent lending standards are making transactions more difficult. Moreover, the fact that Bixby already owns the Kinzie Hotel, which occupies the first six floors of the building, introduces a unique dynamic to the deal, potentially giving them full control over the entire property.

The Impact of Remote Work on Office Values

The office real estate market in Chicago has been severely impacted by the shift towards remote work, a trend that has led to record-high office vacancies in 11 of the last 13 quarters. The potential sale of 20 West Kinzie Street at a steep discount is not an isolated incident but part of a worrying trend for property owners and investors. For instance, the downtown building at 300 West Adams Street sold for just $4 million, a staggering 90 percent drop from its 2012 appraisal of $38 million. Similarly, the building at 213 West Institute Place sold for $17 million, less than a third of its 2017 purchase price. These examples underscore the dramatic depreciation in office property values, exacerbated by the pandemic-induced acceleration of remote work.

Revitalization Efforts Amidst Market Challenges

Despite the daunting market conditions, the Bixby-Franklin venture sees an opportunity to revitalize the office space at 20 West Kinzie Street. Their plan to enhance amenities for both hotel guests and office tenants could breathe new life into the property. However, the building's value has been notably affected by the loss of its largest tenant, WeWork, contributing to an overall vacancy rate of 80 percent. This situation reflects the broader challenges facing the office real estate market, where filling vacant spaces has become increasingly difficult due to changing work habits and preferences.

A Delicate Balancing Act

The potential acquisition of 20 West Kinzie Street by Bixby Bridge Capital and Franklin Partners is a microcosm of the challenges and opportunities present in today's office real estate market. While the steep discounts on properties like these present unique investment opportunities, they also highlight the significant risks involved, particularly in a market still grappling with the effects of the pandemic on work habits. The venture's efforts to revitalize the property will be closely watched as a barometer for the potential recovery of the office market in Chicago and beyond.