https://www.bisnow.com/chicago/news/...move-in-112258
It is only Tuesday, but it has already been a bad week for Chicago’s Loop office market. Commercial finance research firm Trepp reports the lenders of two significant office buildings have either taken possession of the asset or are on the verge of doing so.
According to Trepp, in November 2021 a $258M loan for Brookfield Asset Management-owned 175 West Jackson Blvd. fell delinquent and was sent to special servicing. This week, citing March servicing data, it reported the 1.4M SF office building’s lender had taken control. And after releasing a warning in December on a $100M loan for 135 South LaSalle St., Trepp now reports the special servicer for the 1.3M SF tower states the most likely outcome is a deed in lieu of foreclosure.
The properties’ troubles could signal a wider problem within Chicago’s Central Business District. Although downtown landlords have so far largely avoided a wave of foreclosures tied to the pandemic, the rise of hybrid work schedules over the past two years has office users rethinking their office strategy, with many now considering either shrinking their footprint or trading up into new spaces more enticing to workers currently at home. As tenants flood into new Class-A office towers in the West Loop, River North and especially Fulton Market, older buildings may find it tough to compete and keep their loans afloat, a pattern seen in other U.S. cities.
About 30% of U.S. office properties, with a total estimated value of $1.1T, face obsolescence as hybrid work entrenches itself into workplace culture.
Last year, 135 South LaSalle lost anchor tenant Bank of America, which occupied more than 800K SF, to a new trophy building at 110 North Wacker Drive. AmTrust Realty, the owner of 135 South LaSalle, plans to spend up to $100M to refurbish and upgrade a 4.7M SF portfolio of downtown Chicago buildings but decided to leave 135 South LaSalle out of the renewal effort, according to a December report in Crain’s Chicago Business.
Brookfield Asset Management bought 175 West Jackson in 2018 for $305M, according to Cook County property records. Once known as the Insurance Exchange Building, it was constructed in 1912 and designed by famed architect Daniel Burnham. It is home to the regional headquarters of the Securities and Exchange Commission and several financial firms, but ownership struggled to fill its floors and service the debt. In 2021, occupancy was 65%, Trepp reported.
Brookfield and LNR Partners, the special servicer for 175 West Jackson, didn't return calls seeking comment.
175 West Jackson isn't a relic. Clayco and the Lamar Johnson Collaborative completed a $100M modernization in 2002, led by architect Lucien Lagrange, that transformed the 22nd floor into a penthouse amenity suite, complete with a full rooftop deck. Tenants have also kept signing deals, including software tech firm WellRight, which last fall agreed to lease 17K SF on the 14th floor, and digital freight broker Loadsmart, which just moved its headquarters from New York to 34K SF in 175 West Jackson.
But it wasn’t sufficient. Due to decreased occupancy and net cash flow, the property’s troubled loan had already hit the watchlist last summer, according to commercial data research firm Reonomy, citing a report from the servicer. The loan was more than 90 days delinquent as of January 2022, with an outstanding balance of $138.7M.
Other Chicago office properties have undergone similar distress. The Civic Opera House Building at 20 North Wacker Drive was hit with a $195M foreclosure lawsuit late last year after the pandemic damaged many of its office tenants, according to a report in Crain’s Chicago Business. In addition, the former owner of 401 South State St, a historic, 487K SF office building, lost control of that property in 2020 after facing a foreclosure lawsuit.
Contact Brian Rogal at
brian.rogal@bisnow.com
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https://www.bisnow.com/national/news...c-world-112245
Office occupancy continues to rise week-over-week, but at less than 40% of pre-pandemic levels in 10 of the country's largest markets, office owners aren't sleeping soundly just yet. And a new study might have them catching even fewer winks.
As much as 70% of U.S. office buildings face a loss in value in the near future, including roughly 30% of the nation's inventory, or about $1.1T worth at current valuations, facing complete obsolescence, according to a new study by real estate consultancy Zisler Capital Associates.
While that means 30% are safe, another 40% of the office building inventory is marginal, the study says. Many of those properties will need to be sold at prices low enough to justify the capital improvements necessary to bring them up to the energy efficiency and health standards of the near future.
Government energy efficiency standards are getting stricter, but so are tenant demands for healthier and more energy-efficient office environments, the study says. The coronavirus pandemic has helped accelerate the demand for better office space but is only part of the equation.
"While waiting for the pandemic to end, many investors don't recognize that obsolescence is devouring billions from office building values," Zisler Capital co-founder Randall Zisler, who authored the study, said in a statement.
If investors act now, they may be able to avoid this "tsunami" that is impacting office properties worldwide, Zisler added, noting that the UK has already barred leasing of offices that don't meet energy efficiency standards by 2023.
“We’re not saying bulldozers are arriving en masse,” Zisler said. “But you’re going to see a repricing and, in some cases, reuse of these buildings.”
Obsolescence already has created a green premium of 6% for leases in sustainable buildings, Zisler said. And tenants are now willing to pay a health premium, significantly pushing rental rates up over other office space.
Tenants are already leaving older office buildings in favor of newer projects, and the shift has left owners of some aging office buildings with large vacancies and insufficient cash flow to stay current on their debt.
"The problems going forward are going to come from primarily markets that have sizable amounts of dated properties that are not particularly desirable to big drivers of demand these days," Trepp Senior Managing Director Manus Clancy told Bisnow. "You’ll see episodes in New York, Chicago and other places where big buildings that back loans with nine-figure balances become distressed."
Contact Dees Stribling at
dees.stribling@bisnow.com
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