Low valuations on office complexes reflect suburban market struggles

In the latest suburban Chicago office transactions that reflect the sector’s gloomy outlook, a big Lincolnshire complex was scooped up by a local investor at a discount, and another one is heading to the auction block as its landlord was hit by a foreclosure lawsuit.

Michael Sahli, a real estate broker and investor, bought the 318,000-square-foot office building at 2 Overlook Point in Lincolnshire for about $2.9 million, or just $9 per square foot, and Vancouver-based landlord Adventus Realty Trust is set to let go of the four-building Oak Brook Office Center complex at auction, with bids starting at $5.5 million, Crain’s reported. 

The astoundingly low valuations of the properties reflect a suburban office market in shambles, as remote work continues to hinder demand for space. Pandemic-fueled remote work, along with more recent challenges like jumping interest rates and banking fallouts, led to record-high vacancy rates in the asset class last quarter.

Given the office sector’s struggles, a handful of developers that have acquired office properties have proposed razing or repurposing them for residential or industrial use. For Sahli, an industrial play at 2 Overlook is off the table. Instead, Salhi is in talks with Lincolnshire officials to convert the building into medical offices or residential units. 

“The good thing is (village officials are) understanding that there is so much vacant office space, and they are (open to) adaptive reuse, which is great,” Salhi told the outlet.

Salhi bought the property from Twenty Lake Holdings, which paid $4.4 million for the site in 2019.

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Meanwhile, Frontline is marketing the Oak Brook Office Center on behalf of a court-appointed receiver overseeing the property, which is owned by a venture of Adventus Realty Trust. Last year, a foreclosure lawsuit was filed against Adventus, alleging it defaulted on its $24 million loan tied to the complex. The loan was used to help finance the venture’s $33 million purchase of the property in 2013.

The property generates $228,000 of annual net operating income and is just under 33 percent leased. That’s down from around 90 percent leased when Adventus first bought the property. Then it dipped into the mid-70s in 2017, and was delivered a big blow last year when writing utensil maker Sanford’s lease expired without a renewal. It had been the property’s largest tenant.

— Quinn Donoghue