The transfer is becoming a more common tale as office landlords grapple with the rise of remote work, which has fueled a space-shedding trend among companies that has pushed office vacancy to an all-time high. Higher interest rates over the past year have made it difficult for owners to pay off maturing loans, prompting a run of foreclosure lawsuits and landlords surrendering properties to their lenders. The value of distressed office properties nationwide at the end of June was $24.8 billion, marking the first time since 2018 that neither retail or hotel properties were the biggest contributors to commercial property distress, according to data from research firm MSCI Real Assets.
Triangle Plaza stands out from the crowd, however, in that it has almost no vacancy and is located in one of the most popular office submarkets in the Chicago suburbs. The 14-story towers are a combined 92% occupied, according to a statement last month from Chicago-based Glenstar announcing it had been retained by Värde to manage the 638,928-square-foot property. The largest tenants include heavy equipment manufacturer Komatsu, which moved its North American headquarters there in 2020, as well as Old National Bank and supplemental insurance provider Combined Insurance.
It’s unclear what prompted Alliance to throw in the towel on its leasehold interest, and an Alliance spokesman did not respond to a request for comment. But many office buildings across the Chicago suburbs are worth far less today than they were before the COVID-19 pandemic, given the severely weakened demand and higher borrowing costs.
The leasehold interest itself may be a factor. Alliance, which is an affiliate of Honolulu-based real estate firm Shidler Group, split up ownership of the Triangle Plaza buildings from the land beneath them, with the building venture making ground lease payments to the land venture. The tactic has been used several times on Chicago-area office properties affiliated with Shidler Group, including in recent years on downtown office buildings at 300 W. Adams St. and 111 W. Washington St. — both of which have seen the value of their leasehold interests plummet since 2020. Some investors use the ground-lease tactic as a way to borrow more against a property, because the cost of debt on the building and land separately may be less than it would be if they are combined.
But the building venture is also on the hook for ground-lease payments regardless of how the property is performing. With that fixed cost and other headwinds facing the local office sector, the Triangle Plaza leasehold interest is likely worth far less today than it was when Alliance bought the buildings.
Alliance has lost its equity in the building venture with the property transfer to Värde, though a separate Shidler Group affiliate still owns the land and stands to receive ground-lease payments from the lender.
It’s unclear whether Värde will look to sell the leasehold interest or hold onto the buildings, and a Värde spokeswoman declined to comment. Newmark leasing agent John Norris, who oversees leasing at Triangle Plaza, said in the Glenstar statement that the property “has proven to be a highly successful asset, attracting many significant tenants. We look forward to continuing this success with a new, well capitalized owner.”
Triangle Plaza was previously home to the headquarters of Wilson Sporting Goods before it moved its main office downtown in 2017. The property’s previous owner, Sam Zell’s Equity Commonwealth, back-filled much of the space Wilson left behind before selling the buildings to Alliance for 49% more than it had paid for them in 2010. It was the last Chicago-area office asset owned by Equity Commonwealth, which was selling much of its portfolio before the pandemic.
Office buildings near O’Hare have outperformed those in other parts of the suburbs in recent years. The vacancy rate in the O’Hare office submarket at the end of June was 23.6%, according to data from brokerage Jones Lang LaSalle. That was up from just 15% five years ago, but substantially lower than the 28.9% average for all suburbs today.
CoStar News first reported that Alliance had transferred control of the property to Värde Partners.
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