Sterling Bay retools old buildings, reshapes neighborhoods
Sterling Bay retools old buildings, reshapes neighborhoods
The future of Oprah's studio. The arrival of Google in the West Loop. And the potential to transform the old Main Post Office, a ruin so monumental it straddles an expressway.
Each turnaround could improve a neighborhood. Combined, they could remake a stretch of the city.
And they're all being managed by a single company, real estate developer Sterling Bay, now armed with investors from China to Florida to New York and with enough confidence, some might say hubris, to tackle the long-vacant post office, which is nearly as large as the John Hancock Center.
"A huge percentage of people see (the old post office) as the gateway to Chicago every day, and it's pretty unsightly," said David Kahnweiler, chairman and chief executive of Colliers Chicago, a commercial real estate firm. "Clearly, it would be a big thing for Chicago if it can be redeveloped."
On Wednesday, Sterling Bay Cos. announced a partnership with J.P. Morgan Asset Management, which opens the door to "extensive financial resources" pouring into the developer's West Loop projects, said Andy Gloor, the developer's managing principal. Morgan manages $74 billion through its New York-based real estate investment arm. So far, the deal is limited to West Loop projects, but Gloor didn't rule out the possibility that Morgan could participate in projects like the post office. "Beyond the West Loop, it will be deal by deal," Gloor said.
Retooling what previous generations allowed to crumble is Sterling Bay's expertise. Most of the buildings the firm buys are vacant. The firm's leaders, Gloor and Scott Goodman, have targeted the West Loop, acquiring nearly a quarter-billion dollars worth of property there and spending hundreds of millions more creating loft-style outposts for some of the world's top tech companies, including Uber, Twitter, Google and Ideo.
Their ambitions have triggered resistance from area meatpackers and even some residents, who argue that gentrification is attracting speculators who are driving up rents.
"Everybody wants to be there," said Larry Krueger, managing director of Wanxiang America Real Estate Group, a Sterling Bay investor. "It's to the point that prices have gotten to much higher levels, and it's getting harder and harder" to find good deals.
With Sterling Bay now seeking to raise $500 million to buy and fix up more buildings, their profile is rising.
"I do a lot of traveling to New York and Miami, and everyone asks me, 'Who are these Sterling Bay guys? Where did these guys come from?'" said David Goldberg, a commercial real estate broker and director at Conlon Commercial, based in the West Loop.
A profit in minutes
The son of a plumbing contractor, Goodman, 56, founded the firm with Craig Golden, 56, a friend from Evanston Township High School. They borrowed the firm's name from Goodman's defunct former employer, slapping the address of Goodman's dad's plumbing company on the bottom of leftover Sterling Bay letterhead.
Goodman and Golden then borrowed $20,000 from Goodman's parents and bought a five-flat with a storefront at 3851 N. Southport Ave. for $93,000 in 1987. It took them 10 months to get a bank loan to rehab it. They sold it for $265,000 in 1989, according to property records.
Tenants leaving "in the middle of the night" caused them to jettison residential fix-ups and focus exclusively on industrial and commercial properties. Even that didn't go well initially: Copper thieves targeted their first industrial building.
Goodman and Golden began snapping up buildings owned by closing retailers, such as Saxon Paints and Chernin's Shoes; or worse, buildings that had been abandoned because of structural or environmental problems.
"They always have to have an issue, or you can't create something better," Golden said. "That's how we made money."
Goodman and Golden once turned a profit in minutes. How? They had the seller of a building in an office at the title company and buyers for the same building down the hall in another office — both parties oblivious to the existence of the other and the role Sterling Bay was playing as the middleman, Golden said.
They've also slipped up at times. After Goodman and Golden bought 612 S. Clinton St., a buyer arrived "very quickly" and paid them almost double.
"And we didn't know why," Goodman said. "And this young (real estate) broker came up and said, 'The reason why, you idiots, is because the main fiber (optic line) for Chicago runs right down Clinton.'"
Goodman and Golden made that tech-savvy broker, Gloor, 43, a partner. His contacts and reputation have been critical to Sterling Bay's success, said broker and investor Sean Conlon, who sold a West Loop building to them.
"We're unfortunately in a business where buyers and sellers are often trying to find ways not to pay other people," Conlon said. "Andy Gloor is famous for paying brokers in the business in a timely manner, and often paying them more than they thought they were going to get. This engenders serious loyalty and gives them a first look at good tenants entering the marketplace."
A founder departs
In 2007, Sterling Bay decided to join the market run-up, spending more than $30 million that year acquiring two office buildings just west of the Loop. One of them, a 12-story, Gothic-style building at 300 W. Adams St. purchased from real estate investor Sam Zell, would nearly sink them about three years later.
To pay for it all, Goodman and Gloor set out to raise money for the first time from people other than friends or family to buy more and bigger buildings.
Meanwhile, Golden decided he wanted no part in the empire-building. After leaving Sterling Bay in 2007, he opened music venues, including Thalia Hall in Pilsen and SPACE (Society for the Preservation of Art & Culture in Evanston), and restaurants, including the Michelin-rated Longman & Eagle.
"I like picking out the light bulbs, figuring out where the AC goes, picking out paint colors," Golden said. "Doing deals is less appealing to me than taking on projects of great interest."
The recession caught up to Goodman and Gloor in 2010-11. Seeing an impending financial disaster at 300 W. Adams, Goodman and Gloor persuaded the Jacobsohn family of Boca Raton, Fla., and Wanxiang America Real Estate Group, owned by Chinese billionaire auto-parts-maker Lu Guanqiu, to help them buy back their high-interest-rate mortgage and obtain better terms elsewhere.
"We felt that they were just being dragged down by a very difficult recession for a property that should have been performing better," said Krueger of Wanxiang. "And it was only a matter of time, once we recapitalized it. And it ultimately sold for the projected profit we all went into it expecting."
Sterling Bay sold 300 W. Adams for about $51 million in 2012, reaping an estimated $16 million profit.
"We had a lot of confidence in them, that what they were planning to do there was eventually going to happen," said Gary Koolik, a member of the Jacobsohn family, who manages his family's investments in Sterling Bay. "And we had no problem going along with them for that ride."
Here's how they did it — and would continue to do it.
"We pushed rents up to $27 (per square foot)," Gloor said. "We put in all new windows, all new elevators, all new lobby, all new bathrooms. We made it like a tech office, which is what most of the product is that we do now. And it worked."
Knowing a new "L" station was coming to the West Loop, Sterling Bay nailed down its strategy: It would buy commercial or industrial buildings west of the Loop; if necessary, skin them down to their concrete pillars and floors; and refashion them into light-filled, loft-style office space.
Wherever possible, high ceilings would be retained, as would vintage details such as iron wheels and terra cotta exteriors. Luxuries, such as roof decks, would be added. The aesthetic would prove enticing for tech companies, whose founders put in long hours and want their offices to feel like homes.
"I'm absolutely insanely impressed at the niche they identified," Conlon said. "They were doing high-tech office space when it seemed kind of novel or idiosyncratic. They're now the go-to guys when any high-tech company wants unique space."
Crowns and Google
Sterling Bay will go wherever the deal makes sense, from a golf course community in Utah to the Chicago suburbs.
"It's opportunistic," Gloor said. "You don't know what deals your relationships will bring you. If you look at our core competency, it's mostly West Loop office, but there are special situations that come about."
In one case, one of their attorneys approached them about taking over the faltering Burr Ridge Medical Center development, now the Loyola Center for Health at Burr Ridge. After persuading Loyola to lease the entire 104,000-square-foot building and for a longer term, Sterling Bay sold the health center to Duke Realty for nearly $48 million in 2012.
The sale yielded more than money.
It cemented a relationship with one of Chicago's richest, most influential families, the Crowns, who own Rockefeller Center (with Tishman Speyer) and the Aspen Skiing Co., and hold large stakes in General Dynamics and JPMorgan Chase. (Steve Crown's son Keating Crown is now one of nine principals at Sterling Bay, having joined in 2012.)
"Scott had presented a number of deals to us years ago," Steve Crown said. "The first couple, we didn't actually do. Not every deal he came to us with we were anxious to invest in. Then he came to us with a deal to do a low-rise, three-story medical office building in Burr Ridge. … We liked it and felt it was a good place to put our toe in the water with Sterling Bay and Scott."
Pitching projects one by one to potential investors worked until they had Google in their sights. Time was of the essence because Gloor and Goodman knew the impending announcement would touch off a scramble for nearby properties.
So they changed the way they did business, raising $95 million for a fund that they could tap as opportunities arose. Among the investors: the Crowns, led by Steve and Bill Crown; Wanxiang; and the Jacobsohn family of Florida. Sterling Bay and the families declined to disclose amounts or other investors.
Crown said his family invested with the expectation that Sterling Bay's vision for a post-industrial West Loop would come to fruition.
"Google was a major factor in validating their vision," he said. "It set the tone for others. Mass follows class." And Crown said further gentrification is inevitable: "The meatpacking district in New York is years or so ahead of where we are today. … The meatpackers (in the West Loop) are shrinking in numbers. All of them eventually will vacate."
A fight and a dream
That is unlikely to occur without a fight.
Area meatpackers and food businesses, led by the Randolph/Fulton Market Association, have recently begun targeting Goodman for his involvement with a competing group, the West Central Association, whose board includes many real estate industry executives.
In an April 8 letter to 27th Ward Ald. Walter Burnett, the West Central Association called on city officials to loosen rules governing what can and can't be built in parts of the West Loop. Among their proposals was to eliminate a planned manufacturing district, one of the meatpackers' greatest protections from residential encroachment, east of Ogden Avenue.
Roger Romanelli, executive director of the Randolph/Fulton Market Association, said, "Our association, the community, worked very closely with Sterling Bay to find a zoning-change solution on the Google building that would bring significant new density to the community. And now our reward seems to be Sterling Bay wants to eliminate the manufacturing district. We're asking for a written statement on this from Sterling Bay."
Though praising Sterling Bay for "single-handedly" bringing life to the neighborhood, Burnett is reluctant to grant further zoning changes that would allow for taller buildings or condos.
"If they want a zoning change, they have four community organizations to visit," Burnett said. "They have to have meetings. It's not an easy thing to get a zoning change in that community. … I'm hoping that they will purchase buildings in other parts of my ward, like further west."
Sterling Bay's attention, however, is directed east — to a post office redevelopment it now controls. Its partner, Monaco-based multimillionaire Bill Davies, is unpredictable, has a thick accent and is rarely in town. Jack George, a Chicago-based attorney for Davies, declined to comment, referring all questions to Sterling Bay.
So far, no money has exchanged hands. A joint venture agreement appointing Sterling Bay as the project's developer is done, but the transfer of the property into a new corporation is not.
Once that is complete, interior demolition and asbestos cleanup will begin. But nothing palpable will occur until Sterling Bay lands a tenant. One high-profile lead, a new headquarters for suburban Walgreen Co., is far from certain, according to sources. Walgreen and its real estate representative, Jones Lang LaSalle, declined to comment.
Why take the risk?
"Honestly for at least five or six guys in our office, the post office has always been our dream project," Goodman said. "It's such an iconic building. We love the bones of it. It's a unique animal."
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