Downsizing companies unload headquarters

CHICAGO — CHICAGO -- Sears, Roebuck & Co. is about as proud of its 110-story headquarters, the world's tallest building, as it is of its famous catalog -- which it killed a couple of years ago.

Now, after six years of trying to get rid of its headquarters, the retailer is turning over the soaring black glass office tower to its mortgage lenders. Sears said last week that in exchange for getting out from under $850 million in debt -- twice what the building is worth -- it gets a $195 million fourth-quarter gain.


Sears isn't alone. Other big companies such as International Business Machines Corp. and Chevron Corp. have unloaded their headquarters this year, abandoning what once were LTC symbols of power but now are unaffordable white elephants.

As Corporate America fights to streamline, companies are selling offices at prestige addresses. In the process, they're wiping debt off balance sheets and getting cash to use in their businesses. For buyers, there are bargains to be had as the long-ailing office market starts to recover.


"It is very clear that many companies don't find value to holding property anymore," said Ivan Faggen, worldwide director of accounting firm Arthur Andersen's real estate services group. "They can reinvest that money into a business that returns more than real estate."

In Sears' case, it transferred ownership of its Sears Tower to a trust made up of a Boston pension fund partnership and Metropolitan Life Insurance Co., the tower's mortgage lenders.

Sears said the move saves it $75 million a year in interest expense. The company also said it will take a gain of $195 million, or 40 cents a share, in the fourth quarter.

"The agreement is a win-win for all parties involved -- the city, its residents, the tower and its tenants, the lenders and our shareholders," said Edward Brennan, Sears chairman and chief executive.

Although the 21-year-old building carried the Sears name, the retailer had been trying to sell the property since 1988. Sears has already vacated most of its space in the 4.5-million-square-foot building and has only about 200 employees on two floors.

In October, Chevron sold its 72-year-old headquarters building in San Francisco's financial district. An institutional investor with real estate holdings throughout the Pacific Rim bought the building.

Last spring, IBM sold its 43-story, 1-million-square-foot Manhattan skyscraper to an investor group that included Odyssey Partners LP and developer Edward J. Minskoff. The price was thought to be just under $300 million.

The sale came after IBM gagged on the second-largest annual loss in U.S. corporate history: $8.1 billion in 1993.


While Sears, Chevron and IBM are bagging the real estate business, plenty of investors are all too happy to pick up these big-name edifices.

"Clearly the view is that the office market is tightening," said Michael Van Konynenburg, a principal in the Los Angeles-based real estate investment banking firm Secured Capital Corp. "There's definitely more buyers today than there were just six months ago."

Property owners and lenders have largely written down the value of their investments in the 1990 real estate recession, giving buyers a clean slate.

Or at least in most cases. The lenders on the Sears building may take a loss on the transaction because the tower is worth about half as much as the mortgage.

In a sign of a revival in the office market, downtown vacancy rates continued to decline in the first half of 1994, according to a study by Oncor International, an organization of national commercial real estate brokerages, including Casey & Associates Inc. in Baltimore. As of June 30, the national downtown office vacancy rate stood at 16.9 percent, down from 18.1 percent at the end of 1993, and from 19 percent a year earlier, Oncor said.

Oncor surveys 60 major U.S. commercial real estate markets, as well as two Canadian and 11 European markets, for its study.


Falling vacancy rates means rising prices. For the second straight quarter, U.S. commercial real estate prices for all major property types rose, according to the quarterly study by National Real Estate Index.

The second-largest gain was recorded in the office property index, which rose 1.8 percent in the second quarter, its best performance this decade. The Emeryville, Calif.-based firm reports property price and rent trends in 55 markets every quarter.

Rents, meanwhile, have stabilized or improved. On average, office rents rose 1.8 percent to $20.70 a square foot in the second quarter in the first quarter, National Real Estate found. A year earlier, rents stood at $19.97 a square foot.

National Real Estate traced the gains to a combination of lower vacancy rates and virtually no construction of office space.

In addition, 23 million square feet more space was leased than vacated in the first half of the year, up from 13.3 million two years earlier. That's still paltry compared with the 40 million square feet leased in the first half of each year in the late 1980s.

"Office property," Arthur Andersen's Mr. Faggen said, "is still a high-risk, high-reward investment."


For more and more companies, it's just not a risk worth taking these days.