World’s Biggest White Elephant? : Selling Its Tower May Be Sears’ Toughest Sales Job

So there’s this great place for sale. Big, sturdy, dynamic. Prime location, on the edge of the Loop financial district. The view, on a clear day, spectacular. It’s got 110 floors, 76,000 tons of steel framework, 109 elevators and--start hoarding the Windex--16,000 bronze-tinted panes of glass.

Interested? The owner reportedly wants a cool $1 billion, maybe $1.2 billion, the biggest price tag ever on a single building. But, then again, they don’t make them like this any more.

And with good reason. Awesome as it is, the 16-year-old Sears Tower, at 1,454 feet the crown jewel of Chicago’s brawny, architecturally splendid skyline, could be a black-coated white elephant as a marketable commodity, the world’s tallest fixer-upper.

The sale is part of an extensive corporate overhaul at Sears, Roebuck & Co., the giant retailer that has been hit by sagging sales. As part of the overhaul, Sears said Monday that it would shift its 6,000-employee merchandise group out of its landmark headquarters and into a lower-cost facility in a Chicago suburb.

But that move, to begin in 1992, will leave about half of the Tower vacant. And that, say real estate experts, effectively undermines the building’s sales value.

Analysts are openly predicting that Sears, which now terms itself the king of the everyday price discounters, may have to lop $200 million to $300 million or more off its asking price to lure a buyer--although they may do some fiddling with a final deal to make it look more profitable on paper than it really is.

“Everybody’s opinion is that they shot themselves in the foot,” said Harvey Camins, vice chairman of Frain, Camins & Swartchild, a leading commercial real estate broker in the Chicago area.

Local news reports indicate that as many as six different financial groups led by American or Canadian investors have submitted bids for the building--all below the $1-billion mark. Sears has refused to comment on the sale while negotiations are under way.

Secretive Process

In selling its flagship, Sears has set in motion a complicated, super-secretive process that is nothing like selling ladies’ lingerie, socket wrenches, paint or even the house next door.

There is no multiple listing service for the world’s tallest building. Acting through its adviser on the sale, the New York investment banking firm of Goldman, Sachs & Co., Sears is believed to have put together a list of no more than 100 pension funds, insurance firms, investment companies and other entrepreneurs capable of financing a deal so large.

By spring, real estate industry sources said, that list had been whittled down to fewer than 60 consortiums, which were sent a prospectus as thick as a Sears catalogue. The book was closely guarded because it contained detailed information on the leases of dozens of tenants now in the building, as well as confidential engineering and financial reports and other data.

Roof Doesn’t Leak

The building is in good shape. It is sturdy, the roof does not leak and that nagging problem of a few years ago, when windows popped out of their frames and crashed onto the pavement hundreds of feet below, has been fixed.

Although important, structural considerations take a back seat to rent revenue projections in most large real estate sales these days. Industry analysts say that most bids were probably derived solely from information in the Sears book.

If the Sears sale follows the pattern of similar transactions, the eventual buyers may not even set foot in the building until they take possession. And not until an agreement in principle has been reached will the prospective buyer send in engineers, consultants, architects and lawyers to verify the information that they relied on in devising a bid.

Although any such process is time-consuming, it could be streamlined in the case of the Tower simply because so few investors have the wherewithal--not to mention the good credit and the large amounts of cash Sears is expected to seek up front--to purchase something so expensive.

Huge and Outdated

In a sense, the Tower is an apt metaphor for the century-old company that is now trying to unload it--huge, clunky and, though impressive, a bit outdated. Inside, there’s 3.6 million square feet of office and commercial space, enough to cover about 64 football fields.

The Tower was designed to fit the unique needs of Sears. It is broad at the bottom, where offices are filled almost exclusively by the merchandise group that buys the appliances, hardware, dry goods and other items for Sears stores and catalogue outlets.

The more compact upper half of the building is leased to law firms, consultants, architects and other prestige tenants, who pay top dollar for what is considered prime space in the Chicago rental market.

Although Sears will leave a corps of top corporate executives in the building, it plans to start vacating about 1.8 million square feet by 1992--about half the space in the building and more than half of what comes on the rental market in the entire central business district of Chicago in an average year.

Possible Office Glut

The resulting office glut would make it hard for any new owner to find tenants, but that’s only part of the problem.

The areas now occupied by Sears employees are, from a rental standpoint, the least desirable in the building. The floors are open and cavernous--many are more than an acre in size--and better suited to clerical operations or even, ironically, department store display space than to the more intimate atmosphere preferred by tony clientele willing to pay high rents for great views and a chic address.

Industry experts agree that whoever buys the building will have to do extensive and expensive remodeling to lure renters.

“It is a complicated sale because, at $1 billion, it is less per square foot substantially than many of the sales that have occurred throughout the United States to date,” said Howard Ecker, an office relocation expert here. “But . . . there are very few companies in the world (that) are willing to put $1 billion into one asset that is (16) years old, that was built for a specific use, that may be obsolete today.”

Real estate taxes could be another obstacle, and not just for the new owner. Whatever the final selling price, the value of the property will jump dramatically on tax rolls. And, in the world of commercial real estate, taxes and other expenses are customarily passed on to the tenants.

Tax pass-throughs could add as much as $500,000 to the annual rent bills of some of the largest existing tenants, according to Larry Debb, executive vice president of Chicago-based Mesirow Realty Brokerage. That could scare off prospective tenants as well as make present ones reluctant to renew their leases, Debb cautioned.

To overcome these problems, analysts predict that the new owners would have to spend tens of millions of dollars to renovate the space now occupied by Sears as well as offer steep discounts off base rents, which typically run from $25 to $30 a square foot a year before the add-ons. Barry Rosen, the president of Frain, Camins & Swartchild, estimated that such costs could hit $250 million.

“It didn’t seem to me like there was a systematic approach to all the problems of relocation, of reducing work staff . . . of selling the building or getting the highest price,” Debb said of Sears. “I don’t think anyone looked at the whole picture.”

Staff writer Larry Green and researcher Tracy Shryer contributed to this story.

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