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A Chicago real estate investment firm paid $18 million for a 10-story office building in Evanston, betting that a dearth of space in the northern suburb will continue pushing up rents.

A venture of Steelbridge Capital bought the 127,000-square-foot building at 500 Davis St. for $18 million, or about $142 per square foot, according to Cook County records. Steelbridge’s investment partner in the April 13 deal is Bahrain-based fund manager the Family Office.

The sale price is about 21 percent above the $14.9 million the seller, distressed-property investor Sabal Financial Group, paid in February 2014, about five years after it went into foreclosure.

“We love Evanston,” said Gavin Campbell, a Steelbridge managing partner. “It has one of the lowest vacancy rates in the Chicago market, and certainly the lowest in the suburbs. It’s a 24-hour downtown, an urban infill market, which is where we like to buy. It’s on the Metra and Chicago el lines, which is important because you can access workers from the suburbs and from downtown.”

It is the first Chicago-area deal for Steelbridge since Campbell, a former Wicker Park apartment investor and LaSalle Investment Management managing director, founded the firm in 2006, he said. Steelbridge buys office and retail properties in Florida and focuses on buildings near affluent housing and where it’s difficult to develop new competing properties.

Campbell believes low vacancy in Evanston will keep rents rising enough to continue boosting office landlords’ revenue.

“The reason we can create value is that a lot of the (existing) rents are below market and the Evanston market is really on fire,” he said.

Evanston has only five large office buildings, which total just over 1.2 million square feet, 11.8 percent of which was vacant during the first quarter, said leasing broker Doug Shehan, a senior vice president at Jones Lang LaSalle.

Overall suburban vacancy was 18.9 percent in the first quarter, according to Chicago-based JLL. The lowest vacancy of six submarkets was 12.7 percent in North Cook County, which includes Evanston.

‘TREMENDOUS DEMAND’

Net asking rents in Evanston range from $18 to $20 per square feet, an all-time high, said Shehan, who is not involved with 500 Davis. Two years ago, net rents were around $15.

“Northwestern (University) has continued to absorb more space, and I think there is just tremendous demand in Evanston because of the access to public transportation,” Shehan said. “We’ve seen (rental) rates really being pushed. Evanston and the O’Hare market are the only suburban markets with access to the el, and that’s a huge differentiator.”

The largest tenant at 500 Davis is the American Massage Therapy Association, with about 18,000 square feet, Campbell said. Northwestern recently leased about 5,000 square feet in the building, which is about 15 percent vacant, he said.

Newport Beach, Calif.-based seller Sabal bought 500 Davis as part of a portfolio of distressed properties sold by Bethesda, Md.-based CWCapital Asset Management, a special servicer for troubled commercial mortgage-backed securities loans. CWCapital had seized the Evanston property after its prior owner defaulted on its mortgage
in 2009.

Sabal, partially controlled by Los Angeles-based Oaktree Capital Management, bought almost $5 billion in distressed debt and real estate during the downturn, said Sabal Chief Investment Officer Kevin McKenzie.

“Toward the end of the distressed cycle, as we started buying hard assets, we were identifying assets like 500 Davis where we could create value through leasing,” McKenzie said. “The special servicers are looking to mitigate loss. We’re a real estate operating company, so we’re looking to create value. It’s an attractive, institutional-grade, well-located building with good tenancy.”

The Evanston deal was Steelbridge’s first with Family Office, Campbell said.

The Middle Eastern fund manager previously bought another building that had been in CWCapital’s distressed portfolio in 2014. In a venture with Chicago-based Golub, it paid $39.5 million in November 2014 for the 11-story International Tower office building near O’Hare International Airport.