Edition: U.S. / Global

COMMERCIAL REAL ESTATE; In Chicago, Changing of the Guard at Sears Tower

Published: September 17, 2003

When Trizec Properties acquired a second mortgage on the 110-story Sears Tower in 1997, it looked as if the company had made a shrewd investment.

In exchange for its $70 million stake, Trizec (then known as the Trizec Hahn Corporation) was to gain control this year of the tower, the nation's tallest building, with its 3.5 million square feet of space and a top-floor observation deck that is one of this city's major tourist attractions.

But the Sept. 11 terrorist attacks, the weak economy and a glut of new office space coming on the market changed Trizec's perspective on the black aluminum-clad building, which is made up of nine steel-framed shafts of varying sizes that were built to withstand the heavy Chicago gusts.

So last month, Trizec, a publicly traded real estate investment trust that is based here, sold its interest in the property to MetLife for $9 million. The insurance company's first mortgage payment on the building is due in 2005. Analysts say the company will owe $840 million, a number MetLife will not confirm. MetLife is now the property's sole owner, but Trizec will continue to lease and manage the property.


With $3.5 billion in debt, Trizec is more heavily leveraged than most REIT's. Timothy C. Callahan, Trizec's chief executive for the last year, said the sale of the building dovetailed with the company's strategy of reducing its debt. Had Trizec held onto the Sears Tower, the company would have added hundreds of millions of dollars of debt to its balance sheet as soon as it took possession of the building, he said.

''For us,'' said Mr. Callahan, a former chief executive of Equity Office Properties, the nation's largest office REIT, ''that isn't necessarily a negative thing if we can point to value creation.'' But given that the Sears building was unlikely to appreciate in value before the mortgage had to be retired or refinanced, he said, ''we felt that the investors would view this negatively.''

Designed by Skidmore, Owings & Merrill as the headquarters of Sears, Roebuck & Company, the Sears Tower was the tallest building in the world from its completion in 1974 until 1996, when it yielded that distinction to the Petronas Towers in Kuala Lumpur, Malaysia, which are 33 feet taller.

In 1988, Sears, then undergoing financial difficulties, announced that it wanted to sell the tower. Unable to find a buyer, the company refinanced its debt on the property in a complex transaction that included a $600 million first mortgage from MetLife and a $215 million second mortgage from AEW Capital Partners, a Boston investment company.

But by 1994, the value of the building had tumbled to less than $500 million, and occupancy had slipped below 60 percent, forcing Sears to give up ownership. The property was placed in a trust, with AEW to gain control in 2003. Three years later, Trizec bought AEW's mortgage and paid an additional $40 million for the adjacent 1,100-car garage, a property the company still owns.

By 2001, the building's occupancy rate had climbed to 95 percent. After the World Trade Center was destroyed, however, there were fears that the Sears Tower was also a terrorist target, and since then, Trizec officials say, the building's occupancy rate has declined to 88 percent. The building has added a few small tenants, but can no longer charge a premium for its space.

Among the tenants that have either left, given up some of their space, or said they would leave or are considering leaving are Goldman Sachs (which is giving up 245,000 square feet, with eight years left on its lease); Universal Access Inc. (125,000 square feet); Unicare (151,000 square feet); Merrill Lynch (100,000 square feet); Fireman's Fund (87,000 square feet); and General Reinsurance (50,000 square feet).

Trizec and MetLife officials say that only General Reinsurance's departure can be directly attributed to security fears. They say, for example, that Goldman Sachs's relationship with its client, the Pritzker family, accounts for its decision to lease 200,000 square feet of space in a nearby 1.5-million-square-foot building, the Hyatt Center. That building is being developed by a partnership of the Pritzkers and Higgins Development Partners. A Goldman spokeswoman said that the investment firm decided to move to consolidate its two Chicago offices.

Mr. Callahan said that in contrast to many major cities, where construction cranes are scarce, downtown Chicago, particularly in the West Loop around the Sears Tower, is still undergoing a building boom. Aside from the Hyatt Center, which is expected to be completed in 2004, other buildings under construction include 111 South Wacker, with 1.1 million square feet; ABN AMRO, with 1.5 million square feet; and 1 South Dearborn, with 825,000 square feet. ''A lot is being delivered between now and 2005,'' Mr. Callahan said, ''and that will slow this market's recovery.''

Brokers' estimates of downtown Chicago vacancy rates at the end of the second quarter ranged from 15.4 percent to 15.9 percent.