Blackstone's Willis Tower Buy Set A Record, But Is It Really A Bargain?
Investors woke up Monday March 16, 2015 to the Wall Street Journal having broken the news that The Blackstone Group LP (NYSE: BX) had indeed followed through on reports from last week by spending $1.3 billion to buy Chicago's landmark 110-story Willis Tower.
When Benzinga originally reported on this story last week, sources close to the deal had anticipated a purchase price of $1.5 billion for the second tallest building in the U.S. formerly known as Sears Tower when it opened to the public in 1973.
The Blackstone company news release on March 16, confirmed that a definitive agreement had been reached to buy the 3.8 million square foot office building, including its observation tower, retail space, and antenna assets on behalf of its flagship Blackstone Real Estate Fund VII (BREP VII).
Multiple Cash Flows
Eastdil Secured, L.L.C., hired by Willis to market the property, had put together a sales book highlighting the revenue streams that could be generated by Willis Tower, including:
- Skydeck Chicago – $28.8 million, (plus naming rights upside)
- Broadcast Antennas – $11.1 million
- Office/Retail/Restaurants – $48.7 million
Additionally, the office tower was currently reported to be only 84 percent occupied, which also reduces the associated parking revenues.
Sum Of The Parts
A little back-of-the-envelope arithmetic shows that only about 55 percent of the $88.6 million in revenues is attributable to the office space, along with 11 restaurants, and retail, including: a bank, post-office and fitness center.
The Willis Tower complex occupies an entire city block in Chicago and reportedly contains 4.56 million gross square feet, of which 3.8 million SF are considered leasable. Based upon the reported sales price of $1.3 billion, that would equate to $342 per leasable square foot for the 42 year-old office tower.
However, by allocating 45 percent of the purchase price to the valuable Skydeck tourist attraction and broadcast antennas, the actual price for the office space drops down to only $188 per square foot — say $200/SF as a round number.
According to the WSJ report, Blackstone has budgeted ~$150 million for property upgrades, "largely in investments geared toward boosting it as a tourist and entertainment destination, said people familiar with Blackstone's plans."
Increasing the cash flow from the tourist and entertainment venues appears to be high on the list for the new owners, but arguably is a separate business entirely from the office space.
Flexible Leasing Strategies
While Blackstone will certainly spend tens of millions more on building maintenance and upgrades relating to the office space, it appears that the firm will have quite a bit of flexibility in how to market the vacant office tower space.
On one hand, some existing suites could be re-let to budget driven tenants with relatively minor tenant finish costs for BREP VII. On the other hand, for the right tenants, Blackstone can offer to gut and build-out floor after floor of stunning office space to try to lure tenants who are in the market for upscale space — but are still budget conscious.
Buy It, Fix It, Sell It
Certainly, the $1.3 billion price set a new record for an office property outside of New York. However, Blackstone is reportedly buying the Willis Tower complex for between a 6 to 7 percent cap-rate based upon the existing 16 percent vacant rent-roll.
With such a low initial cost basis for the office space, it appears that Blackstone should be able to generate impressive returns over time — at lease rates much lower than the newer towers that have been added to the Chicago skyline over the past decade or so.
Notably, 60-story 300 N. LaSalle St., which was built in 2009 and sold last year for $652/SF.
Looking five to 10 years down the road — depending upon market conditions — Blackstone could either structure a sale of a stabilized asset like Willis Tower to an internal Blackstone core real estate fund, or sell it on the open market.
Image credit: Rinaldo Wurglitsch, Flickr
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