Crain’s Chicago Business

CEDARst sells Uptown building to Resource Innovation Office REIT

The most active real estate investor in Uptown sold its office building in the North Side neighborhood for more than $7 million, cashing in on some of the rising property values it has helped create.

Chicago-based Cedar Street sold the fully leased, three-story loft office building at 1025 W. Sunnyside Ave. for $7.25 million Nov. 22, the company said. It’s the first acquisition by Resource Innovation Office REIT, a real estate investment trust focused on buying creative office properties.

Cedar Street, known for its Flats apartment brand, bought the 27,852-square-foot building at Sunnyside and Broadway from the Salvation Army for $1.2 million in July 2012, according to Cook County property records. The firm’s total investment is just over $5 million, including upgrades to the building and leasing costs to fill the building with office and retail tenants, partner Will Murphy said.

The development firm plans to move its offices somewhere else in Uptown within the next year, making way for an existing tenant to expand, Murphy said.

“It’s not every day you see a REIT or any institutional buyer in Uptown,” he said. “We’re hoping that changes.”

It is the latest in a series of recent deals in which larger buyers have acquired loft-style offices, which were once dominated by small local investors.

In other recent deals, Spaulding & Slye Investments, which buys real estate for institutional investors and high-net-worth individuals, paid $35.3 million for a River North loft office building and a venture of Chicago-based firms R2 and Walton Street Capital paid $86 million for a portfolio of smaller office buildings here. Also this year, Irvine, Calif.-based Shopoff Realty Investments paid $37 million for an office building in River North and another in the West Loop.

The non-traded REIT that bought the Uptown building is sponsored by Philadelphia-based Resource Real Estate, which is looking to raise up to $1 billion from investors interested in investing in non-traditional offices, such as loft-style buildings with high ceilings and wide-open layouts.

The deal had a cap rate, or first-year rate of return, of around 7 percent, said Resource Innovation Office REIT Chief Investment Officer Martin Caverly. Cash flow from the building will allow the REIT to begin offering dividends as it seeks new investors, Caverly said.

“We have a large pipeline of deals to pursue as more cash flows into the REIT,” he said.

Although more investors are becoming interested in owning creative offices, rather than only downtown office towers and suburban buildings, the REIT believes it is getting into the niche early enough to capitalize on an increasing interest by companies in having nontraditional offices, Caverly said.

In secondary cities such as Portland, San Diego and Denver or less established neighborhoods such as Uptown in major cities, the REIT can buy buildings with long-term leases at a relatively high rate of return, he said.

“Some of the larger REITs are realizing this is a trend and they’re going after it,” Caverly said. “We already have real expertise in it. We’ve spent the last two years identifying where all of this stuff is and who the potential (sellers) are. If pricing stays favorable, we should be well positioned to buy some upside.”

The Uptown building is leased for an average of almost 10 years to retailers Mattress Firm and Sprint and office tenants including sports website FanSided and two social services organizations that serve the LGBT community, the Howard Brown Health Center and the Women’s Health Center. Howard Brown will expand into Cedar Street’s third-floor space after the developer moves out within the next year, Murphy said.

Although it started with a smaller deal, the REIT plans to focus primarily on deals of $20 million to $50 million, Caverly said.

Cedar Street has about 1,500 apartment units in operation or under development in Uptown and nearby Edgewater and Andersonville, Murphy said. The company also owns real estate in other Chicago neighborhoods, including River North and the Loop.

Earlier this year, Cedar Street sold a 435-unit portfolio of North Side apartments to Woodbury, N.Y.-based CLK Properties for about $67 million.

Crain’s Chicago Business | Ryan Ori