Financial distress from COVID-19 hits Chicago Loop office owners

This heats up what has been a relatively slow burn of loan distress on local office buildings since March 2020. Big foreclosure lawsuits last year hit owners of the Civic Opera Building and the office portion of 208 S LaSalle St., while landlords at 300 W. Adams St. and 65 E. Wacker Place simply surrendered their deeds to their lenders late last year rather than face a legal battle at about their loan.

Today, more and more landlords are beginning to consider the possibility of handing over the keys or facing foreclosure if the demand for office space does not increase significantly and rapidly. At least a half-dozen major downtown office buildings aren’t generating enough free cash flow to cover their debt payments, and many more are now much closer to that distinction than they realize. were two years ago, according to Crain’s analysis of the Chicago office building. loans that have been repackaged and sold as bonds.

While most of these owners continue to pay their mortgages and hope that demand will stabilize soon, some will likely have to invest a lot of money in updating their properties or give generous concessions to obtain leases – a daunting investment. while corporate appetite for offices remains uncertain.

This is good news for those looking for workspace, with some financially stressed homeowners picking up bargains. But it’s also a signal that broader financial carnage is approaching for local office owners, as is a massive reset in downtown real estate values.

“The big question is, ‘Is the pool of tenants growing or shrinking?’ “, says Bart Johnson, who leads the commercial real estate group at Rosemont-based lender Wintrust Financial. “It’s definitely a cycle, and we’re not at the bottom yet.”

Some owners have reason to believe that the worst is behind them. But offices, which are usually the last sector of commercial real estate to feel the financial pressure of a downturn due to their long-term leases, are finally starting to see the repercussions of COVID. Driven primarily by office properties, the national delinquency rate on loans that were bundled and sold to commercial mortgage-backed securities investors rose in December for the first time in 18 months, data from Trepp, a New York-based research and consulting firm. solidify.

Chicago played a key role in the recent jump, according to Trepp data, with property owners at 135 S. LaSalle St., 175 W. Jackson Blvd. and 181 W. Madison St.—whose loans total more than $600 million combined—missing mortgage payments.

The Madison Street property is caught up in the recent Chapter 11 bankruptcy filing of its owner, Chinese conglomerate HNA Group, which did not respond to a request for comment. New York-based AmTrust Realty and Toronto-based Brookfield Properties, which own the LaSalle Street and Jackson Boulevard properties, respectively, have both said in recent statements or messages to local brokers that their defaults were intentional to begin negotiations on the restructuring of their loans. A source familiar with AmTrust’s strategy, however, told Crain’s in December that the company would most likely divest ownership through a deed in lieu of foreclosure.

A snapshot of Chicago office buildings with CMBS loans — which makes their financial statements publicly available — reveals more pandemic pain, especially among older buildings.

After recently losing one of its biggest tenants, the 10-story vintage building at 216 W. Jackson Blvd. generated approximately $467,000 in free cash flow in the first nine months of 2021, or approximately 60% of what the owner, a Chicago-based Marc Realty business, owed in debt service on its $16.5 million building-related loan, according to Bloomberg data. In 2019, free cash flow was nearly double debt service. Marc Realty did not respond to a request for comment.

In another instance, the net cash flow generated by the 23-story building at 200 W. Monroe St. in the first nine months of last year was just 73% of what the owner, a business of the Florida-based real estate company Accesso, owed in payment of debts during this period. Accesso did not respond to a request for comment.

Some buildings are still in the dark, but with thin margins. The $7.4 million in free cash flow generated in the first nine months of 2021 by the 44-story tower at 333 S. Wabash Ave. were higher than the $6.4 million in mortgage payments owed by its owner, a joint venture led by New York-based investor Shvo. But when Shvo took out the loan in 2020, the property was expected to generate almost three times as much cash flow as debt service, according to loan documents. One likely factor was a series of concessions granted to tenants in 2021, according to Bloomberg lending data.

A statement from Shvo CEO Michael Shvo noted that the Wabash building – the former CNA Center, known for its bright red facade – is over 90% occupied and the company expects its facilities to improve. financial performance. “We’ve never been more confident in Big Red as a major office asset in Chicago.”

At Illinois Center, the 2.1 million square foot complex in the East Loop, third-quarter revenue fell $2.5 million from the same period in 2020, according to loan data from 260 million dollars from owner AmTrust Realty on the property. Free cash flow in the first nine months of 2021 offset AmTrust’s total debt service by $1.2 million, compared to $11.9 million in 2019.

In an attempt to stop the bleeding, the real estate firm plans to revamp the Illinois Center as part of a $100 million plan to renovate a handful of its downtown Chicago office buildings .

“As the country begins to emerge from the pandemic, we have full confidence in the return of the Chicago office market and are particularly bullish on best-in-class properties such as Illinois Center,” the president said. of AmTrust, Jonathan Bennett.

Pandemic-weakened office demand in the Loop has spurred a strategic shift for Chicago developer R2, which paid about $25 million in 2018 for the leasehold interest in a 14-story building at 79 W. Monroe St. After a renovation it helped land a great new tenant, R2 refinanced the building just before the pandemic hit with a $27 million CMBS loan.

But the weak market has probably eroded the market value of the building. With 34% of the building vacant, free cash flow was just under $1.1 million in the 12 months ended Sept. 30, well below the $1.4 million in debt service for that period. , according to Bloomberg.

With the mortgage coming due in early March, R2 plans to split the retail, office and upper floors of the property, sell the first two and potentially redevelop the upper floors into apartments to pay off the debt and try to generate a profit.

“We’re not going to sit idly by,” said R2 chief executive Matt Garrison, whose company is best known locally for redevelopment of properties on Goose Island. “We innovate, pivot and maximize value.”

Sarah J. Greer