A Long Island investor agreed to acquire one of Chicago’s tallest skyscrapers at a fraction of its peak value after other buyers in recent years have been unable to finalize discounted deals for the 65-story office building.
Great Neck, New York-based Kohan Retail Investment Group is under contract to purchase the approximately 1.3 million-square-foot tower at 311 S. Wacker Drive, according to people familiar with the situation. The deal is preliminary and still could fall apart.
If the sale is completed, it would create a new owner at a significantly lower cost for a property that ranks No. 9 on Chicago’s list of tallest skyscrapers. It rises 961 feet, though it is in the shadow of the city’s tallest, the 1,451-foot-tall Willis Tower at 233 S. Wacker.
An exact sale price could not be determined, but it is believed to be well below the $70 million that Chicago investors John Murphy of Murphy Development Group and Gerald Kostelny of InSite Real Estate agreed to pay early this year before that deal fell apart.
The even lower price would represent a massive fall from the more than $302 million that Chicago-based Zeller Realty Group and China’s Cindat Capital Management paid during a roaring office market in 2014.
Kohan might seem like an unlikely buyer of a major office tower because the firm’s primary focus is on distressed shopping centers. But other firms have been lured into large office markets by historically low prices.
That includes another Great Neck-based venture known for retail investments — partners Namdar Realty Group and Mason Asset Management — buying the 57-story office tower at 70 W. Madison St. in Chicago at a steep discount early this year.
In New York, Kohan recently teamed up with Katan Realty Group and investor Ilya Mikhailov to buy a 25-story office tower at 345 Seventh Ave. in midtown Manhattan for $85 million, according to media reports and CoStar data, with plans for a residential conversion. Namdar was the seller in that deal.
It’s unclear whether Kohan has any partners on the Chicago acquisition or whether the firm is considering converting part or all of 311 S. Wacker into another use. The firm’s leader, Mehran Kohansieh, who also goes by the name Mike Kohan, did not respond to a request to comment from CoStar News.
Redevelopment considerations
The venture involving Murphy and Kostelny was considering redeveloping parts of the tower to apartments, a hotel or both.
They also had discussions with developer Hines, their partner on two development sites at 301 and 321 S. Wacker on each side of the 65-story tower, about potentially tearing down the high-vacancy structure to create a clean slate for a multi-tower, ground-up development. Had that long shot option happened, it would have represented the biggest voluntary demolition in world history.
Instead, the tower is headed toward a lower-priced sale that could leave the new owner with enough funds to make major improvements either to switch uses or to bring in new office tenants.
The deal involves several lenders who all stand to lose large sums from the approximately $215 million senior loan that Zeller and Cindat took out in a 2018 refinancing of the tower, and none of the previous buyers was able to gain signoff from all the lenders for a heavily discounted purchase, according to people familiar with the situation.
In the most recent deal, Murphy and Kostelny unsuccessfully tried to negotiate a lower price because of tenant defections, according to the people.
Murphy declined to comment to CoStar News on the breakdown of his deal. Kostelny did not respond to a request to comment.
Morgan Stanley declined to comment on the deal with Kohan. Zeller and Cindat did not respond to requests for a comment.
Kohan’s focus on financially troubled shopping malls throughout the country has led to complaints from officials and residents regarding property maintenance and unpaid taxes and bills, according to media reports.
Pandemic effect
The tower at 311 S. Wacker stands alongside other high-profile towers and the Chicago River, but it is among a number of office buildings that have struggled to compete with newer properties, particularly since the onset of COVID-19 led to remote work trends.
Before Murphy and Kostelny looked to buy 311 S. Wacker, another investor — Firenze Group, a low-profile firm based near Washington, D.C. — attempted to buy it for more than $300 million in early 2022, but the deal fell apart.
That was before higher borrowing costs, rising vacancy at 311 S. Wacker and a slowdown in deals nationally pushed down the value.
Designed by Kohn Pedersen Fox and completed in 1990, the tower features a crowned top that lights up at night.
It was developed by Lincoln Property when Kostelny was an executive there, meant to be the first of a three-tower development. But the other towers were never constructed, leaving a grassy plaza between it and the former Sears Tower and a surface parking lot on the opposite side of the tower.
For the record
The sellers are represented by JLL brokers Jaime Fink, Bruce Miller, Patrick Shields and Sam DiFrancesca.