Loop office landlord defaults on the rise

Three office properties in Chicago’s Loop, with combined debt of more than $600M, missed mortgage payments

135 South LaSalle Street, 175 West Jackson Boulevard, 181 West Madison Street (Google Maps, 181 West Madison)
135 South LaSalle Street, 175 West Jackson Boulevard, 181 West Madison Street (Google Maps, 181 West Madison)

Downtown Chicago offices that have managed to hold on during the pandemic are starting to feel the strain as property owners struggle to make mortgage payments.

Owners of buildings at 135 South LaSalle Street, 175 Jackson Boulevard and 181 West Madison Street, with loans totaling more than $600 million combined, missed mortgage payments, Crain’s reported.

AMTrust Realty and Brookfield Properties, which own the La Salle Street and Jackson Boulevard buildings, recently said they will start negotiations about restructuring their loans.

AMTrust will most likely surrender the property through a deed-in-lieu of foreclosure, Crain’s reported, citing a source familiar with the company. A venture of Chinese conglomerate HNA Group filed for Chapter 11 bankruptcy in November.

Landlords of older buildings in particular are feeling the pain as companies are signing leases for Class A buildings in Fulton Market.

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After losing one of its largest tenants, the vintage 10-story building at 216 West Jackson Boulevard generated about $467,000 in net cash flow during the first nine months of last year, about 60 percent of what the landlord owed in debt services on its $16.5 million loan tied to the building, the publication reported, citing Bloomberg data. Compared with 2019, net cash flow was about double the debt service.

For the 14-story building at 79 West Monroe Street, net cash flow generated in the first nine months of last year was less than $1.1 million, short of the $1.4 million debt service Chicago developer R2 owed for that period. Vacancy rate for the building was 34 percent.

Some are holding up with thin margins. The 44-story tower at 333 South Wabash Avenue generated $7.4 million in the first three quarters last year, higher than the $6.4 million in mortgage payments owed by New York investor Shvo. The property, however, was expected to generate about three times as much cash flow as debt service, according to loan documents.

The pandemic-battered office market is nudging landlords, such as R2, to shift their strategies. R2 plans to split up the retail, office and upper floors of the property, selling the first two and potentially redeveloping the upper floors as apartments to pay off debt and generate a profit.

“We aren’t going to sit around idly,” said Matt Garrison, R2’s managing principal. “We innovate, pivot and maximize value.”

[Crain’s] – Connie Kim