A sale in that price range would be among the largest suburban office property deals in years, one that would stand out while the rise of remote work hammers demand for workspace and keeps suburban office vacancy at a record high. It would also complete a lucrative flip for the owners less than three years after they paid just less than $129 million for the property, according to DuPage County records.
The 620,000-square-foot building—also known as Esplanade II—shows the widening gap between the highest- and lowest-quality office buildings in the suburbs. The former group has landed an outsized share of leasing activity during the public health crisis, while the latter has struggled as companies prioritize buildings that will help get employees to show up rather than work from home.
KORE and BentallGreenOak recently proved the resiliency of 3500 Lacey as one of the top suburban performers after their largest tenant, supply chain management company Havi Group, signed a deal to move its headquarters from Downers Grove to the Fulton Market District downtown. Havi executed an option to terminate its lease for 27% of the Downers Grove office building at the end of August 2022, sending KORE on a hunt to backfill the space amid weak demand.
But it didn’t take long. The owners earlier this year signed a 133,077-square-foot lease with Health Care Service Corp. to take almost all of the space Havi is leaving behind. The Blue Cross & Blue Shield of Illinois parent company is moving its suburban office to the building from another Downers Grove property.
With its new anchor tenant locked up on a long-term deal, the 30-year-old building is now nearly 97% leased, according to the Cushman flyer, or back to where it was when the KORE venture bought the property. The building has 11 tenants today with a weighted average lease term of eight years, a measure of tenants’ remaining lease commitments to the property.
The financial terms of HCSC’s deal were not disclosed, but the lease likely maintains or grows the building’s operating profit. The property generated nearly $8.9 million net cash flow in 2021 compared with $3.9 million in debt service, according to Bloomberg data tied to the owners’ $86 million loan on the property. The mortgage was packaged with other loans and sold off to commercial mortgage-backed securities investors, making much of the building’s finances public.
KORE and BentallGreenOak are in the process of renovating the 3500 Lacey building, which sits on 20 acres next to Morton Arboretum. The owners are spending around $4 million updating the building’s lobby and fitness center, according to the marketing flyer.
The building has a track record of bouncing back from tenant departures dating back to Sara Lee’s 2012 relocation of its Hillshire Brands spinoff from the building to the West Loop. The company had previously occupied 80% of the building, but the property was back to 86% leased just two years later with new tenants including Havi Group, investment manager Invesco and sports nutrition company Glanbia Performance Nutrition.
KORE has demonstrated its confidence in the suburban Chicago office market despite the pandemic headwinds. The firm paid nearly $7 million last year for Rosemont Corporate Center near O’Hare International Airport, a nearly vacant property it is betting it can lease up.
A KORE Investments spokesman did not respond to a request for comment.
Other investors have made large bets on suburban offices’ post-COVID future. A New York real estate firm paid $190 million earlier this month for the 164-acre Kemper Lakes Business Center in Lake Zurich—the highest price paid for a suburban Chicago office property in 17 years—while another New York investor recently paid $178 million for the Corporate 500 office complex in Deerfield, best known as Caterpillar’s headquarters. Those deals were the only sales of more than $160 million for multi-tenant suburban office properties in the area in the past five years, according to research firm MSCI Real Assets.
Those sales also closed despite financial hardship for other suburban office landlords that have lost big tenants. The owner of the four-building Oak Brook Office Center recently stopped making monthly payments on its $24 million CMBS loan tied to the property after its largest tenant’s lease expired. And the owner of the Central Park of Lisle complex had its nearly $94 million CMBS loan placed on a delinquency watch list after its largest tenant shed most of its space, Bloomberg data show.
Cushman brokers Dan Deuter and Paul Lundstedt are marketing 3500 Lacey on behalf of KORE and BentallGreenOak.