Jones Lang LaSalle
Trizec deal displays a slow market
REIT leasing lags behind strong sales
By Susan Diesenhouse
Tribune staff reporter
Published June 6, 2006
Chicago office buildings might be racking up record sale prices this year, but lackluster leasing that lags behind that of other major markets showed up Monday in the sale of Trizec Properties Inc.
New York-based Brookfield Properties Corp. and Blackstone Group, a private equity firm, said they are buying the Chicago-based REIT and its Canadian subsidiary in a deal valued at about $8.9 billion, including assumption of $4.1 billion in debt.
Trizec owns 61 office buildings, including four in Chicago, with 36 million square feet of space. Brookfield will assume ownership of Trizec's properties in New York, Washington, and downtown Los Angeles, while the four Chicago buildings will be taken over by Blackstone. The equity firm also will take over the Trizec properties in Houston, Atlanta and Dallas.
"Brookfield wants a competitive edge by adding properties in the strong markets of New York and Washington, and in resurgent downtown Los Angeles," said Morningstar Inc. senior equity analyst Arthur Oduma. "These markets outpace Chicago in terms of sales values, leasing activity and vacancy rates."
Executives on both sides of the transaction declined to comment.
Leasing performance varies widely across the country. For instance, vacancy rates in Brookfield's favored markets are 6.7 percent in Washington and 7.7 percent in New York, compared to about 18 percent in Chicago, according to Oduma. Brookfield is a major landlord in lower Manhattan.
Chicago's commercial property market "is a tale of two cities," said Tony Smaniotto, a senior vice president at CB Richard Ellis. "Sales are huge, but leasing isn't great."
Brokers expect about $4.5 billion in office sales this year in Chicago, compared to about $3.3 billion last year and $2.8 billion in 2004. The marquee deal of the year is expected to be the sale of the new tower at 1 S. Dearborn St., which is under agreement for $426 a square foot.
The bifurcation of the Chicago office market in part reflects the fact that each property is unique. A well-located tower that is fully leased to a creditworthy tenant at strong rental rates can command a high sale price because it has an assured income stream.
Meanwhile, the rising cost of construction means an existing tower would be very costly to replace. There is an enormous amount of capital searching for good investments, and real estate has become a favored asset class in recent years.
"We believe the portfolio was overvalued by about 40 percent of our fair value estimate," Oduma said.
Despite a rich price, Brookfield is investing a relatively small amount of its own cash, about $450 million, with institutional investors providing the rest, and it will collect management fees on the new properties, Oduma said. Furthermore, he said, while the price might seem high, it suits investors who are willing to settle for a modest 6 percent return rather than the 9 percent expected in the past.
Trizec's Chicago buildings are 2 N. LaSalle in the Central Loop and 10 S. Riverside Plaza, 120 S. Riverside Plaza and 550 W. Washington Blvd., all in the West Loop.
According to Jones Lang LaSalle Inc., the building on North LaSalle is 2 percent vacant, 10 S. Riverside Plaza is 14 percent vacant, 120 S. Riverside is fully leased, and 550 W. Washington is 37 percent vacant. The buildings total 2.4 million square feet.
While Chicago real estate fundamentals "aren't great," said Bruce Miller, a managing director at Jones Lang LaSalle, "we're starting to see positive absorption whetting investors' appetite."
"The Chicago [leasing] market is slowly getting better, although it's lagging the rest of the U.S.," said Raymond Torto, chief strategist at Torto Wheaton Research, a subsidiary of CB Richard Ellis. "The vacancy rate is coming down a little, but a lot of new supply, mostly Class A offices, is coming on the market."
Under the agreement, Brookfield will buy all outstanding shares of Trizec not owned by Trizec Canada for $29.01 a share in cash, an 18 percent premium over the stock's closing price Friday. Brookfield will acquire all the shares of Trizec Canada for $30.97 in cash, a 30 percent premium.
Monday, Trizec stock jumped $4.08, or 16.6 percent, to close at $28.68 on the New York Stock Exchange, giving it a market capitalization of about $4.5 billion.
"Trizec has an opportunity to liquefy its holdings at a premium to the public market capitalization," said Earl Webb, chief executive of investment for Jones Lang LaSalle. "They can trade these assets without coming under the influence of the broader stock market."
Trizec sold
Brookfield Properties Corp. will acquire Chicago-based Trizec Properties and its Canadian arm for $4.8 billion in a commercial property deal that creates one of North America's largest landlords.
Trizec Properties Inc.
What it does: A real estate investment trust that owns and manages 61 office properties totaling about 36 million square feet.
President and CEO: Timothy Callahan
Corporate headquarters: 10 S. Riverside Plaza
Office properties: Concentrated in Atlanta, Chicago*, Dallas, Houston, Los Angeles, New York and Washington
Prominent properties in Chicago: 10 and 120 South Riverside Plaza
* The four office buildings owned in Chicago will be taken by the private equity partner, Blackstone Group.
Source: Trizec.com
sdiesenhouse@tribune.com
Trizec deal displays a slow market
REIT leasing lags behind strong sales
By Susan Diesenhouse
Tribune staff reporter
Published June 6, 2006
Chicago office buildings might be racking up record sale prices this year, but lackluster leasing that lags behind that of other major markets showed up Monday in the sale of Trizec Properties Inc.
New York-based Brookfield Properties Corp. and Blackstone Group, a private equity firm, said they are buying the Chicago-based REIT and its Canadian subsidiary in a deal valued at about $8.9 billion, including assumption of $4.1 billion in debt.
Trizec owns 61 office buildings, including four in Chicago, with 36 million square feet of space. Brookfield will assume ownership of Trizec's properties in New York, Washington, and downtown Los Angeles, while the four Chicago buildings will be taken over by Blackstone. The equity firm also will take over the Trizec properties in Houston, Atlanta and Dallas.
"Brookfield wants a competitive edge by adding properties in the strong markets of New York and Washington, and in resurgent downtown Los Angeles," said Morningstar Inc. senior equity analyst Arthur Oduma. "These markets outpace Chicago in terms of sales values, leasing activity and vacancy rates."
Executives on both sides of the transaction declined to comment.
Leasing performance varies widely across the country. For instance, vacancy rates in Brookfield's favored markets are 6.7 percent in Washington and 7.7 percent in New York, compared to about 18 percent in Chicago, according to Oduma. Brookfield is a major landlord in lower Manhattan.
Chicago's commercial property market "is a tale of two cities," said Tony Smaniotto, a senior vice president at CB Richard Ellis. "Sales are huge, but leasing isn't great."
Brokers expect about $4.5 billion in office sales this year in Chicago, compared to about $3.3 billion last year and $2.8 billion in 2004. The marquee deal of the year is expected to be the sale of the new tower at 1 S. Dearborn St., which is under agreement for $426 a square foot.
The bifurcation of the Chicago office market in part reflects the fact that each property is unique. A well-located tower that is fully leased to a creditworthy tenant at strong rental rates can command a high sale price because it has an assured income stream.
Meanwhile, the rising cost of construction means an existing tower would be very costly to replace. There is an enormous amount of capital searching for good investments, and real estate has become a favored asset class in recent years.
"We believe the portfolio was overvalued by about 40 percent of our fair value estimate," Oduma said.
Despite a rich price, Brookfield is investing a relatively small amount of its own cash, about $450 million, with institutional investors providing the rest, and it will collect management fees on the new properties, Oduma said. Furthermore, he said, while the price might seem high, it suits investors who are willing to settle for a modest 6 percent return rather than the 9 percent expected in the past.
Trizec's Chicago buildings are 2 N. LaSalle in the Central Loop and 10 S. Riverside Plaza, 120 S. Riverside Plaza and 550 W. Washington Blvd., all in the West Loop.
According to Jones Lang LaSalle Inc., the building on North LaSalle is 2 percent vacant, 10 S. Riverside Plaza is 14 percent vacant, 120 S. Riverside is fully leased, and 550 W. Washington is 37 percent vacant. The buildings total 2.4 million square feet.
While Chicago real estate fundamentals "aren't great," said Bruce Miller, a managing director at Jones Lang LaSalle, "we're starting to see positive absorption whetting investors' appetite."
"The Chicago [leasing] market is slowly getting better, although it's lagging the rest of the U.S.," said Raymond Torto, chief strategist at Torto Wheaton Research, a subsidiary of CB Richard Ellis. "The vacancy rate is coming down a little, but a lot of new supply, mostly Class A offices, is coming on the market."
Under the agreement, Brookfield will buy all outstanding shares of Trizec not owned by Trizec Canada for $29.01 a share in cash, an 18 percent premium over the stock's closing price Friday. Brookfield will acquire all the shares of Trizec Canada for $30.97 in cash, a 30 percent premium.
Monday, Trizec stock jumped $4.08, or 16.6 percent, to close at $28.68 on the New York Stock Exchange, giving it a market capitalization of about $4.5 billion.
"Trizec has an opportunity to liquefy its holdings at a premium to the public market capitalization," said Earl Webb, chief executive of investment for Jones Lang LaSalle. "They can trade these assets without coming under the influence of the broader stock market."
Trizec sold
Brookfield Properties Corp. will acquire Chicago-based Trizec Properties and its Canadian arm for $4.8 billion in a commercial property deal that creates one of North America's largest landlords.
Trizec Properties Inc.
What it does: A real estate investment trust that owns and manages 61 office properties totaling about 36 million square feet.
President and CEO: Timothy Callahan
Corporate headquarters: 10 S. Riverside Plaza
Office properties: Concentrated in Atlanta, Chicago*, Dallas, Houston, Los Angeles, New York and Washington
Prominent properties in Chicago: 10 and 120 South Riverside Plaza
* The four office buildings owned in Chicago will be taken by the private equity partner, Blackstone Group.
Source: Trizec.com
sdiesenhouse@tribune.com
posted by Jones Lang LaSalle NJ News Blog at 4:27 PM
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