KBS REIT III has acquired 500 West Madison, also referred to as Citigroup Center, an iconic, 1.5 million-square-foot mixed-use tower in Chicago, for $425 million plus closing costs.
The acquisition marks the largest purchase in KBS REIT III’s history and brings its total acquisition volume to $1.26 billion.

“KBS saw 500 West Madison as an investment that encompasses everything KBS REIT III looks for. A lot of 500 West Madison’s appeal has to do with its location—the West Loop has become a true epicenter of urban renewal, new development and adaptive reuse,” Ken Robertson, KBS’ regional president, toldCommercial Property Executive. “It boasts extraordinary views and fantastic amenities that will only get better. It also holds a great advantage in its transit orientation. These facts and more give us an opportunity to create an exceptional work environment for office tenants.”

Arguably, one of the centerpieces of Chicago’s commercial infrastructure, 500 West Madison is one of the most well-located transit-oriented office building in the entire Chicago CBD. The property provides unmatched access to suburban trains, city trains, buses and expressways, which put it at the nexus of Chicago’s transit network.

According to Robertson, the company’s philosophy is to buy great real estate assets in very dynamic submarkets. To that end, this transaction was a perfect fit.

“Chicago is a vibrant market filled with a prized talent pool, attractive lifestyle and a great business culture of innovation, especially in key districts such as the areas around 500 West Madison,” he said. “KBS is looking to buy in Top CBD’s across the America, like Chicago and the West Loop submarket. These areas are a big focus for KBS.”

KBS will spend $66.4 million in renovations and improvements to the property over the next few years. Many industry analysts believe KBS made the move at the right time.

“As we see the office property development and redevelopment dynamics of downtown Chicago, it is obvious that it continues to move further west,” Robert Sevim, Studley’s executive managing director, told CPE. “Buildings like 500 West Madison are therefore going to substantiate the practicality of its location and continue to have a place on the pedestal of a ‘top downtown location,’ being able to support companies who continue to focus on accommodating the commuting preferences of their employee base, who are now relying increasingly on public transportation, whether by commuter rail or CTA.”

With the acquisition of 500 West Madison, KBS is making its second big bet in the downtown Chicago market, having acquired 300 North LaSalle in 2010 (the company sought to divest 49 percent of it last year.) It was the first noteworthy office building acquisition in downtown Chicago made post-recession and it did very well.

“With regards to 500 West Madison, it is making a another big bet in downtown Chicago, but I would argue that its acquisition in 2010 of 300 North LaSalle did not require the same calculated ‘market bet’ that is true of its acquisition of 500 West Madison, which will seek to capitalize on the strength of the West Loop submarket dynamics in which the building resides and less so on the ‘in-place’ dynamics that were true of the 300 North LaSalle acquisition when the downtown Chicago market was only starting to find its way on the recovery trail,” Sevim said. “In essence, 500 West Madison presents more of an ‘opportunity’ asset purchase than a ‘core’ asset purchase when compared to their 300 North LaSalle acquisition.”

The acquisition is the latest in a series of high-quality 2013 KBS REIT III purchases and the largest since the REIT commenced operation in 2011. Most recently, KBS REIT III’s acquired 201 Spear St., a 246,563-square-foot, waterfront Class A office tower in San Francisco’s South Financial District for $121 million.