Developer Sets Chicago Record With Purchase
The site of Old Navys flagship State Street store in Chicago, which opened almost 13 years ago amid hype of a revival of the historic retail strip, has been sold to a New York real estate firm thats making a high-priced bet that the street has arrived.
Georgetown Co., which developed the Frank Gehry-designed headquarters for Barry Dillers IAC/InterActive Corp. in New York in 2007, paid $23 million in cash for the Old Navy building at 35 N. State St. The price, about $511 a foot for the 45,000-square-foot structure, is the most ever paid on a per-square-foot basis for State Street retail space.
The deal, which closed late last month, comes as the State Street retail market seemingly has hit rock bottom, with the foreclosure sale of Block 37 scheduled for later this week. After opening in November 2009, the 280,000-square-foot mall remains 60% vacant.
To justify the sky-high price, Georgetown executives must maximize their profits by replacing the existing three-story building with a high-rise when Old Navys lease runs out in six years, observers say. The store signaled a rebirth of State Street development when it opened two years after the streets lifeless pedestrian mall was removed in 1996.
Yet even as Block 37 struggles to attract tenants, the sale is a sign developers already are looking ahead to the next wave of development.
“Maybe you couldnt build a tower today, but in four to five years, my instinct is absolutely you could,” said Stanley Nitzberg, a principal in Oakbrook Terrace, Ill.-based retail real estate firm Mid-America Real Estate Corp.
Georgetown President Adam Flatto says the company has no specific plans but confirms that development is an option for the parcel, on the southeast corner of State and Washington streets, across from Block 37 and Macys.
“It was an aggressive price that we paid, and we paid the price because we felt the site had the kind of long-term value that we are seeking,” said Mr. Flatto, also a director of Howard Hughes Corp., the development spinoff of General Growth Properties Inc. whose holdings include the mall owners headquarters, at 110 N. Wacker Dr.
In real estate circles, Georgetown is best known as the master developer of the $1.5-billion Easton Town Center in Columbus, Ohio, which opened in 1999 and includes more than 7 million square feet of retail, office, hotel and residential space. The firm was founded in 1978 by developer Marshall Rose, who is married to actress Candice Bergen.
Any high-rise plan would face significant hurdles, including winning over construction lenders who are expected to remain skeptical of new projects for many years. Georgetown has other options for the building, including hiking up the rent by renewing Old Navys lease or dividing up the space and bringing in several smaller retailers.
“The location is right on the 50-yard line of State Street,” said Ariel Schuster, an executive vice-president at New York-based brokerage Robert K. Futterman & Associates, who represented Georgetown.
The sellers of the Old Navy site are a group of Recycled Paper Greetings Inc. executives, including Michael Keiser, a co-founder of the Chicago-based company, which was sold off in 2005.
The group gained control of the site in 1995, paying $1.03 million and assuming a $3.7-million loan issued to the previous owners, property records show. The group then signed a lease with Old Navy, a unit of San Francisco-based Gap Inc., which paid to build the store.
A pack of apparel retailers catering to young women, such as Forever 21, Zara and H&M, eventually followed Old Navy to State Street.
“We knew it would work one day,” said Mr. Keiser, now a prominent golf course developer.
When the Old Navy store was constructed, its low height caused controversy and prompted a predecessor to the Chicago Loop Alliance to issue guidelines recommending taller structures along State Street, notes Ty Tabing, executive director of the downtown business group.
“Density is something that is good for downtown, whether its dorms or housing of offices above ground-floor retail,” he said.
Also giving the propertys value a boost is Minneapolis-based Target Corp.s plan to open a “City Target” store in the landmark former Carson Pirie Scott building, a block south of Old Navy.
By pushing up the price to $23 million, Georgetown is likely to see a first-year return of less than 5%, based on estimates of Old Navys rent. Thats well below the 8% typical for retail real estate investments these days and an indication of how Georgetown has acquired the site with eyes on an ambitious project. The sale also is encouraging to neighboring landlords.
“That means the rest of State Street becomes more valuable,” said Joseph Sitt, CEO of New York-based Thor Equities, which owns the Palmer House Hilton, at 17 E. Monroe St., and several other State Street properties.
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