How JLL and a broken deal are exposing Chicago’s weak office market

Is one of the city’s largest brokerages cornering troubled assets?

From left: A photo illustration of the office buildings at 200 South Wacker, 311 South Wacker, and 55 West Monroe (Getty, Google Maps, LoopNet)
From left: A photo illustration of the office buildings at 200 South Wacker, 311 South Wacker, and 55 West Monroe (Getty, Google Maps, LoopNet)

As word of a $310 million purchase of a Wacker Drive office tower made its way through Chicago’s commercial real estate circles early this year, something seemed off to some of the city’s top investment sales brokers.

A low-profile Virginia-based buyer, Firenze Group, was selected for 311 South Wacker by brokerage Hodges Ward Elliott on behalf of the seller, a joint venture of Chicago-based Zeller Realty Group and the Chinese firm Cindat. It had no chance to close from the beginning, top brokers rightfully thought.

The fact that the deal eventually fell apart and the property was relisted early this month with a new brokerage team, — JLL’s Chicago capital markets crew — underscores the office sector’s weakness amid a pandemic that has changed the workweek and workplace, perhaps permanently. Firenze’s selection as the buyer was considered a warning sign from the beginning and the company never would have been chosen in a seller’s market, according to top commercial brokers in the area who spoke with The Real Deal.

But JLL rebounding the property also highlights nuance within the commercial brokerage business, and the varying strategies employed by competing dealmakers to perform business during market downturns.

Now, 311 South Wacker is expected to fetch a much lower price than the $310 million Firenze was reportedly working to cough up, and any sale in the near future will be hamstrung by a higher interest rate environment. It’s likely to set up a loss for not only the seller but also lender Nuveen on a mezzanine loan of about $90 million issued against the tower, people familiar with the property said.

It’s also not the only Loop office tower JLL is marketing in a similar situation. No other brokerages are publicly marketing as many large Loop office towers, plus JLL has been hired to sell several smaller downtown office buildings that remain on the market, too.

The brokerage’s growing reservoir of Chicago office listings also includes 55 West Monroe — which is expected to fetch bids for less than $130 million after seller Manulife Financial paid $244 million for it in 2014, when it was more than 90 percent leased compared to 67 percent leased today — as well as 200 South Wacker, another Manulife-owned tower poised for a loss of around $45 million from its 2013 purchase price of $215 million, according to published reports.

Not only does the listing backlog illustrate the dearth of buyers hunting in the office sector, but it also shows JLL is an attractive hire for sellers in tough positions, ready to offload Windy City assets with less than they had when they entered.

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The reasons for its allure are debated among local brokers. Some said it’s because the firm’s performance in Chicago, home of its headquarters, has been dominant and established enough to yield more business from clients in a variety of positions with their properties.

Still, others speculate JLL is taking on assignments after telling sellers they’ll try to get the price they need in hopes the market turns around during the listing period, then ultimately convincing clients to negotiate downward. And there’s a lack of confidence that Chicago office values achieved in the past decade can hold up in the near term streaming from conversations JLL brokers have had with each other and at least one prominent property owner that’s dealt with the brokerage recently, one investor suggested.

Many brokers exit competition for assignments if the values they estimate they can fetch for buildings don’t align with those that sellers need to hit to make a deal.

The JLL Chicago capital markets team declined to comment. Further, Zeller, Cindat and Nuveen didn’t return requests for comment. Morgan Stanley, which issued a $215 million senior loan against 311 South Wacker, also declined to comment, and attempts to reach Firenze were unsuccessful.

Whatever the reason for the parade of listings heading to JLL during one of the most significant pullbacks on office investment, it’s impacting the market for assets that aren’t in as difficult of positions, brokers said.

When there’s firesales at substantial discounts from previous cycles available to buyers or that recently closed, they drag down the prices buyers are willing to pay for properties with nearly full rosters of tenants that offer stable revenues to owners, according to the brokers TRD spoke with.

There is, however, evidence that JLL’s work on struggling properties is still proving beneficial to Chicago.

Despite a lack of big deals made since the fall by any brokerage, JLL’s Chicago team in the summer pulled off the sale of a loan that went bad against the former BMO Harris building at 115 South LaSalle Street. The $120 million sale, at a discount of more than 33 percent from the original debt, paved a path for the state government to move its offices into the property. That enabled Google to buy the Thompson Center for $105 million, in a transaction hailed as critically important for the Loop and its future. The tech giant plans to place thousands of workers in the building once it’s renovated by 2026.

The ultimate outcomes JLL delivers for the Manulife and Zeller properties that have so far been impossible to sell will set the tone for 2023 for other sellers, and also give brokers a sense of the significance the role distress will play in the market as pandemic fallout progresses.