Icons can become tarnished over time. But if you own-one of the world's most recognizable buildings in the third-largest city in the United States and you want to turn over a new lease on life for the property, you have a big job ahead of you.
But that's just what John Hancock Financial Services, owner of Chicagoland's John Hancock Center, has done. After nearly two years and $22.5 million of redevelopment, "Big John" is back.
Fresh plantings and the final installation of pavers last month signal the end of the bricks and mortar work and the beginning of an ongoing effort to reposition and renew the building in the minds of potential office tenants, local citizens and tourists the world over. Already, the new highly visible Michigan Avenue retail frontage has attracted Paul St, art to 27,000 sq. ft., The Cheesecake Factory with 15,500 sq. ft. (opening in August), L'Appetito with 3,000 sq. ft. and Aveda Environmental Lifestyle Esthetique with 1,000 sq. ft. First Chicago is renewing for 10,000 sq. ft., and final negotiations are underway for much of the remaining retail space.
"We thought we would be able to attract major tenants like Paul Stuart only by having tremendous exposure with the Michigan Avenue frontage," says Camille Julmy, vice chairman of Chicago-based U.S. Equities Realty Inc., which manages and leases the building. Julmy estimates that the frontage adds a premium of 10% to 15% to lease rates, but there are few opportunities left in the next six months for large retailers. Julmy estimates ground floor rents on the avenue at $125 to $200 per sq. ft., and sales of $400 to $800 per sq. ft. depending on store size. "We've been able to get $150 for relatively big spaces. The rents are very solid," says Julmy.
The John Hancock Center story gives credence to the value of marketing. "Value in property is not just from cashflows. It is in the perception of the property not by just the tenants, but by the public in general, by the lending public and by the investing public as well," says Bob Wislow, chairman of U.S. Equities.
Wislow and the U.S. Equities team replaced CB Commercial on the job soon after the initial $18 million redevelopment plan was approved by the city. He then did the unthinkable - he sold Hancock on a refined plan that added $4.5 million to the price tag. The new recommendations centered on creating a separate entrance for the office component off Chestnut Street, dropping the elevators down from the second floor mezzanine level to the ground floor Michigan Avenue level for office workers, and reworking the public plaza to better address the prime Michigan Avenue retail frontage.
"They were doing a plaza and lobby renovation, but they weren't using those funds to reposition the building," says Wislow. "If you're going to invest those funds in today's highly competittve world you have to have the biggest impact from the funds."
The bottom line? "Considering the additional money we asked for, looking at how we performed in excess of the most aggressive pro formas that were put together with the previous budget, we've got to be close to 100% ROI, annual return," says Wislow. "We'll be putting all of that extra money [$4.5 million] back in [Hancock's] pocket in about a year and a half."
"We had to reintroduce this building at every level. It has been an effort in time and money akin to bringing a new building on to the market," says Katherine Scott, executive vice resident at U.S. Equities and CEO of John Hancoc Center. "We have created for the owner tremendous value potential for the building by reorienting the first and second floors toward real high-end Michigan Avenue retail," says Scott. "The retail will make the building more appealing for office tenants over time, which is extremely important."
It's been hard work, but leasing velocity has been high. Last year, Scott and Sharon Valko, senior vice president of U.S. Equities and director of leasing, did more than 300,000 sq. ft. in office deals in the Hancock last year, with each deal averaging only 3,500 sq. ft. By creating a new tenant-relations program, emphasis was placed on keeping existing tenants happy. For weeks, Valko, Scott, Wislow and others met with every office tenant to go over the redevelopment plans. "The easiest way to get new people is to keep your existing tenants happy and never forget about them. We spent two years getting to know 95% of our tenants," says Valko. As Wislow puts it, "You have to sell the sizzle before the bacon's ready." Waiting until the redevelopment was completed was not a viable option in the overall repositioning program.
"This building was dark for so long that I think many people thought it had seen its days," says Valko. "The brokers weren't coming here. They felt Hancock wasn't ready to be aggressive. We had a lot of education to do." And it's not just a case of filling empty space with cheap rents. On the contrary, Hancock saw an increased return on those 1994 office lease deals. "We achieved better economics at the end of 1994 than we did at the beginning of 1994, and we are seeking ever-better economics in 1995," says Scott. "It's not just that we're filling up, it's that the economics of the deals we are doing are getting better as well."
The next major focus may be shifting skyward - the 94th-floor observatory. U.S. Equities is now working with Hancock on plans to upgrade this area, which was recently voted as the best view in town by Chicagoans in a recent Chicago Tribune poll. The approximate 400,000 visitors per year represents a prime captive opportunity for creating a new retail component. "We believe the potential is just tremendous," says Julmy.