March 11, 2009 - Willis Tower - in Chicago?

The Willis Tower? In Chicago, It's a Possibility

The most closely watched leasing saga in the Chicago office market this year is moving into the final innings and it could end with a home run for North America's tallest building, the Sears Tower.

Willis Group Holdings Ltd., a London-based insurance broker, is considering leasing as much as 125,000 square feet of space in the Sears Tower as it moves to consolidate its Chicago-area offices in one location, according to several people familiar with the matter.

The deal could still collapse in today's turbulent market. But if it happens, it would provide a much-needed boost for the Sears Tower, which could face a looming increase in vacancy as some tenants have chosen not to renew leases; a situation that stems in part from the Sept. 11 attacks and the anxiety about locating in tall, iconic buildings.

Most recently, Ernst & Young, one of the tower's largest tenants, has decided it will move out rather than renew a lease for about 380,000 square feet that will expire in 2012. Some of Ernst & Young's space is already subleased. A spokeswoman for Ernst & Young says the decision to leave wasn't made because of security concerns, and one broker said the company's decision was largely driven by its desire to be in a new building.

The deal also would help Chicago tenants, landlords and others get a good peg on how far office rents have fallen during the recession. Net rents for existing Class A office buildings in the city's tony West Loop submarket have fallen to about $21 a square foot from about $25 at the end of 2007, according to brokers. Sears Tower rents have tended to be lower than that, partly because of the Sept. 11 factor.

Rental rates in the building are in the mid-teen to mid-$20 range on a net basis a square foot, says Mike Kazmierczak, senior vice president of U.S. Equities Asset Management LLC which is the leasing agent for the building. Brokers are speculating that Willis could pay as low as $15 a square foot because of its large size.

A Willis spokesman declined to comment. Brokers say that the insurance broker also has been eyeing the Citigroup Center at 500 West Madison or may decide to simply stay put and save money.

The 110-story Sears Tower was acquired in 2004 for about $840 million by a group that included New York-based real-estate investor Joseph Chetrit and Skokie, Ill.-based American Landmark Properties Ltd. Its vacancy rate, which includes office and retail space, has inched down to about 18% from 21.9% about one year ago, according to CoStar Group Inc.

The building's owners refinanced the property for $780 million in early 2007, the top of the market. The building's value has clearly fallen since then. An even more important issue is whether the property will keep generating enough cash to pay its debt service. Fitch Ratings doesn't believe the building is in danger of defaulting on any of its loans.

Also encouraging have been a string of recent leases. Law firm Schiff Hardin LLP and Bank of America Corp. decided last year to stay in their current space, together totaling about 400,000 square feet. Also, in recent weeks Williams Montgomery & John, a trial-lawyer firm, sealed a long-term lease for about 34,000 square feet on the building's 61st floor.

John Huston, executive vice president of American Landmark, maintains the building is in "excellent shape" financially. "We have funded all of our tenant improvements and we have financial reserves in place to continue to do so," Mr. Huston wrote in an email.

The building's large and flexible floor plates and mesmerizing views are all part of its draw. Its recognizable multilevel tower design is instantly recognizable to many. "You can almost see across [Lake Michigan] to Michigan," says C. Barry Montgomery, senior partner at the law firm that recently signed a 15-year lease in the building.

The building's landlords may be trying to seal the Willis deal by offering the company naming rights. The tower no longer contains the Sears headquarters, which moved to Hoffman Estates, Ill., from the building in the 1990s, according to Kim Freely, a spokeswoman for Sears Holdings Corp. Ms. Freely says Sears doesn't pay for its name to be on the tower and that Sears or the building's owner can change the tower's name.

Original Story - Wall Street Journal