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CHICAGO-Despite double-digit Downtown vacancy rates, it appears to be a seller’s market for office properties. UBS Tower at 1 N. Wacker Dr. and 311 S. Wacker Dr., which total 2.6 million sf, were the latest properties to change hands at an average of $265 per sf.

Along with two Central Loop properties being sold by Metropolitan Life by year’s end, brokers report strong interest in Downtown office buildings. However, not everyone is prepared to jump in.

Parkway Properties, Inc. president and chief executive officer Steven Rogers says his Jackson, MS-based REIT is staying on the sidelines in Chicago because of the 7.5% capitalization rates the recently-marketed assets have been commanding. Parkway Properties made its first—and so far, only—acquisition in July 2001, buying 233 N. Michigan Ave. at a 9.5% capitalization. It has since sold off 70% of its $173.5-million investment to New York City-based Investcorp.

Parkway Properties took a pass on another 1-million-sf Illinois Center office building, 111 E. Wacker Dr., declining to buy in at a cap rate less than the REIT achieved at 233 N. Michigan Ave. Going-in cap rates have become frothier in the past year, and a sales package for the two Metropolitan Life assets is among the offerings that sit on Rogers’ desk.

“We’re just not participating,” Rogers says. “We make a bid, and we get slaughtered.”

However, Rogers can understand the rationale for players in today’s office market.

“I think the reason you’re seeing so much activity is that people are saying, there’s some good, stable assets out there, and they’re a great alternative to the more generic investments, such as the S&P and market at large,” Rogers says in a recent conference call. “People are saying 7.5% caps are better than 1% money-market funds and the 1.7% dividend pay-out of the S&P.”

Rogers adds much of the activity is being fueled by the low cost of borrowing, sending “debt-heavy” buyers into the market.

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