Rather than overpaying for its 1.07-million-sf acquisition, its first in this market, officials of the Jackson, MS-based REIT are proud purchasers, explaining why they got a better deal Wednesday during a tour of the building for analysts and investors.

"We actually looked at it and evaluated (111 E. Wacker), and we think this building is a better value," says Parkway CEO Steven G. Rogers.

During its underwriting of both properties, Parkway verified $13.5 million in net operating income for 111 E. Wacker Dr., $16.7 million on 233 N. Michigan Ave. While Parkway bought its Two Illinois Center at a 9.5% capitalization rate, Pivotal Group would be buying in at a 9% to 9.3% cap rate if the reported $145 million to $150 million range proves true. In addition, previous owner Tishman-Speyer poured in $70 million of capital improvements before selling 233 N. Michigan Ave.

"This building has great bones," Rogers says.

In addition, the seller guaranteed the more than three years remaining on Internet consultant MarchFirst, Inc.'s lease of the now-vacant top four floors, totaling 138,000 sf. Although the building is 89% occupied now, Parkway hopes to raise that to 95% by the end of 2002.

A 9.5% initial cap rate and 12.2% unleveraged internal rate of return "is probably where the market is Downtown today," Rogers says. "It's not a home run, but a good solid deal."

Parkway Properties also took advantage of favorable interest rates, in its case securing a 7.35% interest rate on a $106-million mortgage with Deutsche Banc Alex Brown. While asking $18.50 per sf for the office space, the retail space in the concourse has proven to offer an unexpected bonus, with lease rates hitting $70 per sf.

Like Parkway, Pivotal Group's purchase would be its first in the Chicago market, and more specifically, a 21-million-sf East Loop submarket that may be overlooked as most of the attention has been focused on the more commuter-friendly West Loop.

"The story here is bigger than 233 N. Michigan," says former director of investor relations Will Flatt, who has relocated to Chicago to oversee the 30-story building's operation as vice president and asset manager. "Illinois Center is one of the largest mixed-use urban developments in the country."

Hoping to capitalize on the "New Urbanism" trend that Chicago exemplifies with its first influx of new residents in five decades, Parkway points to the 3,340 hotel rooms, 4,169 multifamily units with another 5,000 scheduled to come on line in the next 10 years as reasons to like the city's third-largest submarket.

While CB Richard Ellis reports the East Loop had the highest office vacancy rate of the Downtown submarkets at 11.1% overall, it also had the greatest net absorption at 120,914 sf. While the West Loop has the lowest vacancy rate at 6.8%, there was negative absorption of 235,391 sf with nearly 3.4 million sf of space under construction. There is no new office space under construction in the East Loop.

Instant Insights /

No Buyer's Remorse Over Two Illinois Center

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