Blackstone Group LP has struck a deal to purchase the Willis Tower in Chicago for $1.3 billion in what would be the highest price ever paid for a U.S. office tower outside of New York, according to executives of the private-equity firm. The deal for the formerly named Sears Tower, reached over the weekend, would be one of the highest-profile towers bought by Blackstone, which is better known for leveraged buyouts of chains like Hilton Worldwide Holdings Inc. than for individual property purchases. Blackstone plans to invest heavily in the retail portion of the building and in upgrading the observation deck, the executives said, in hopes the deck will become a cash cow like those of other skyscrapers. The company hopes "to really make this more of a comprehensive tourist attraction" as well as an office building, said Jonathan Gray, Blackstone's head of real estate. The trade for the flashy tower also illustrates how private-equity firms like Blackstone are finding a dwindling number of bargains in the property sector. For years, the company and its peers had been scooping up distressed portfolios of retail properties, hotels and single-family homes meant to be rented out, often well below what the last owner paid. But the property market has recovered dramatically, particularly in major cities. While commercial property values fell nearly 40% between 2007 and mid-2009, they have now risen 14% above their 2007 peaks, according to the Green Street Advisors commercial property price index. In the process, the billions of dollars worth of property that struggled under weighty debt payments has largely disappeared from the market, having been sold or restructured over the past half decade. In the U.S., "there's not much in the way of distress left, which makes buying tougher," Mr. Gray said at an investor conference last June. It also makes it particularly hard to find Blackstone's bread and butter: properties cheaper than what the last owner paid. The Willis Tower sale marks a big profit for the current owners, New York investors Joseph Chetrit and Joseph Moinian and Skokie, Ill.-based American Landmark Properties. They paid $841 million for the tower in 2004. The owners had boosted the building's income by striking deals with tenants such as United Airlines and insurer Willis Group Holdings, which leased the naming rights in 2009. In addition, they redid the observation deck, adding glass boxes so visitors can look down from its peak. The owners settled on Blackstone, known for its "speed and agility, which makes them a formidable competitor for any large-scale offering," said Douglas Harmon, senior managing director at Eastdil Secured, a real-estate services firm that advised the sellers. Still, the building's price is by no means sky-high. On a per-square-foot basis, its price, about $340, is a fraction of what trophy towers fetch in major cities. The property's initial annual income is between 6% and 7% of its purchase price, said a person familiar with the matter, a rich level by New York or San Francisco standards. There, income generally runs between 4% and 5% of a price for a top-quality tower. To boost returns further, Blackstone plans to invest as much as $150 million in the building, largely in investments geared toward boosting it as a tourist and entertainment destination, said people familiar with Blackstone's plans. Such a move has become increasingly common for investors like Blackstone who target so-called opportunistic purchases. "What people are doing is not looking at the building for what it is right now but looking at the building for what it could be," said Alexander Goldfarb, a real-estate analyst at Sandler O'Neill + Partners. "There's a lot more creativity going on with space." The company plans to revamp the observation deck again, taking cues from the growing popularity of such decks, which experts attribute to rising tourism and changing cultural preferences. The king is the Empire State Building, which took in nearly 40% of the building's total revenue from 4.3 million visitors, totaling $82 million in income after expenses. Today, the Willis Tower gets more than $25 million from 1.6 million visitors, according to loan documents and people familiar with the matter, an amount that has been rising in recent years. At the same time, Blackstone's bet is in part on the Chicago office market, which has been gradually improving and drawing tenants from the suburbs. The tower is roughly one-fifth vacant, giving it some room to grow. Still, the Chicago market is known to be relatively stagnant over the long term. "It's just a really tough market," said Mr. Goldfarb, adding that local developers are quick to put up buildings and lure tenants from others. "There's still a lot of open area to develop." marketwatch