McDonald's Illinois Headquarters Being Sold for $430 Million, Good News for Chicago CRE?

So far this year has been tough for sales of office space. However, there have been some recent signs of life, including Facebook’s (NASDAQ: FB) purchase of REI’s headquarters in Bellevue, Washington, for $390 million. Now, in what could be one of the biggest commercial real estate transactions in Chicago in recent years, the 580,000-square-foot headquarters of McDonald’s Corporation (NYSE: MCD) may be sold for over $430 million. The headquarters is located at 110 N. Carpenter in Chicago’s central business district.

The Chicago-based developer Sterling Bay owns the property, which is the former location of Oprah Winfrey’s Harpo Studios. Sterling Bay worked with famed architectural firm Gensler to build a nine-story LEED-certified building with a retail level. McDonald’s first moved into the building in 2018. Sterling Bay put the property on market earlier this year with Jones Lang LaSalle.

The sale of the McDonald’s headquarters will set a new record in the area. McDonald’s will continue to lease the majority of the building through 2033. In addition to office space, the building also houses its Hamburger University training center and a large ground-floor international restaurant as well as other retail tenants.

It might be a surprise to some people that McDonald’s doesn’t own its headquarters. Savvy investors know that McDonald’s is as much a real estate company as it is a hamburger seller. The company’s business model includes owning most of the real estate that both its corporate-owned and franchised restaurants sit on. In fact, it brought in $7.5 billion of rental income in 2019.

A booming area

The long lease of the McDonald’s headquarters may have only been one reason that it appealed to the buyers, a venture from Pittsburgh. Once a manufacturing district, the Fulton Market area is now very popular with tech companies. The neighborhood features a variety of older warehouses repurposed into office space as well as newer builds.

Last year, Google, the search engine arm of Alphabet (NASDAQ: GOOGL) expanded into a second location in the area at 210 N. Carpenter St. Google leased both that location and its other Fulton Market office from Sterling Bay. ServiceNow (NASDAQ: NOW) has a large office in the area, as does Glassdoor. It’s not just tech; earlier this year, German brokerage Deka Immobilien paid $86 million for the new offices of snack food maker Mondelez International (NASDAQ: MLDZ).

The sale of 101 N. Carpenter won’t be the only Fulton Market payday Sterling Bay will receive this year. It sold 1330 W. Fulton Street to German real estate firm Commerz Real for $175 million. While Sterling Bay may hold the record for the highest price in the area, a new record for the highest cost per square foot could be set by developer Fulton Street Company, which has listed 1100 W. Fulton for over $40 million. A 15,000-square-foot meatpacking facility was transformed into a 45,0000-square-foot building that is leased to furniture company Herman Miller (NASDAQ: MLHR) for the next 15 years.

A lesson for investors

The Fulton Market area is a study in how a neighborhood becomes trendy. The formerly gritty meatpacking district began to evolve over a decade ago. In addition to office buildings, the Fulton Market neighborhood also contains luxury apartments and fine dining.

At the start of this decade, the hippest employer in the area would have been Oprah Winfrey whose show taped there until 2011. As happens with many neighborhoods, the grittiness of the Fulton Market was part of its appeal. Its brick warehouses and large spaces first lured art galleries and artists. However, as a Curbed story from last year points out, it was Google’s incursion into the neighborhood that fueled Fulton Market’s rapid ascent. While massive developers like Sterling Bay earned the lion’s share of the profits, smaller developers like Fulton Street Company have also capitalized on the area’s growth.

The trick for any commercial real estate investor or developer investing in a neighborhood like Fulton Market is to find the sweet spot of investing and improving before prices get too high. There are plenty of neighborhoods like these across the country, especially in rapidly growing secondary or even tertiary cities. The next Fulton Market awaits.