Crain's Chicago Business

June 19, 2006

AON MULLS CONDOS

Aon Center's owner is weighing a residential conversion of the top floors of the trophy tower overlooking Grant Park, in what is becoming a familiar formula for hard-pressed office landlords: If you can't lease it, turn it into ritzy condos.
A fixture on the Chicago skyline since 1973, the former Standard Oil Building ? later known as the Amoco Building ? would be the most prominent example on a growing list of towers considering converting some of their vacant space to other uses. While the John Hancock Center is reviewing hotel proposals, IBM Plaza and 55 E. Monroe St. are studying residential plans; 900 N. Michigan Ave. is already marketing 48 condos made out of vacant offices.

The trend reflects economic forces at work throughout the downtown real estate market, but especially near the lakefront.

"With office demand waning and moving westward, landlords are clearly reassessing and asking themselves if residential or hotel or even student housing is more profitable," says Louis D'Angelo, president of Metropolitan Properties of Chicago LLC. The development firm is converting into condos the offices at 310 S. Michigan Ave., the blue-globe-topped former headquarters of Encyclopaedia Britannica Inc.

At Aon Center, 200 E. Randolph St., executives with suburban Atlanta-based Wells Real Estate Funds Inc. are considering converting as many as seven vacant floors of the 80-story tower, more than one-tenth of the 2.5-million-square-foot structure, sources say. Some of that space has been on the market for up to six years. Much of it was vacated after London-based BP PLC acquired Amoco Corp. in 1998.

"Wells is looking at the current trends in residential conversion, but at this point, we have no plans in place," says a spokesman, who declines further comment.

While the building vacancy rate is nearly 19%, BP is paying rent until 2013 on some of the vacant space, giving Wells a financial cushion.

The building was renamed as part of insurance brokerage Aon Corp.'s move there in 2001. Two years later, an investment trust sponsored by Wells bought the building, paying nearly $463 million, according to research firm CoStar Group Inc.
But Wells is bracing for the departure in 2009 of Kirkland & Ellis LLP, which has nearly 15% of the structure, primarily between the 53rd and 61st floors. While the prominent law firm is moving to a new tower, its lease runs until 2011.

How much space might be converted and the timing of the project have not been determined, sources say. A conversion would raise touchy building management questions, such as how to accommodate the differing needs of condo residents and office tenants, and delicate architectural issues, such as possibly altering the tower's austere facade with new windows or even recessed terraces.

Any residential conversion plan would have risks, amid worries that high-priced housing demand is cooling due to rising interest rates and soaring construction costs. Even so, it might still be better than the less costly alternative of finding new office tenants.

The East Loop "market is always the weakest, the softest, the slowest," says tenant representative Alain LeCoque, managing principal with New York real estate firm Newmark Knight Frank.

Gail Lissner, vice-president with Chicago consulting firm Appraisal Research Counselors, adds, "This is a location that only gets better and better by the moment for residential."