DuPage downturn: Inside the decline of suburban Chicago offices

Another wave of commercial real estate distress is swelling in a pocket of Chicago’s western suburbs, presenting DuPage County’s office market with a $270 million question.

That’s the value of seven large debts tied to big office properties in the area that loan servicers have grown concerned about because the buildings struggled to hold on to tenants as the pandemic evaporated demand for real estate, according to securitized debt tracking service Morningstar.

All the debts — including a $63 million loan on Executive Towers West, a three-building property along Opus Place in Downers Grove — have either landed on the watchlists of their respective lenders in recent weeks or did so earlier during the health crisis. Watchlisting a loan is a step usually taken by creditors who notice downturns in the performance of the collateral underlying investments that may lead to nonpayment of debt.

“There’s going to be a bloodbath of office foreclosures just because of that one-two punch,” ACO Commercial broker George Toscas said. “The knockout is the refinancing if they have a loan coming due and they’re in the middle of changing out their tenants or doing a lot of buildout. Pretty sad, but it’s business.”

Yet the loans against these massive office campuses that are watchlisted are actually in a better place than many of the debts on competing buildings in suburban Chicago, which are either already in foreclosure, delinquent on payments or in danger of imminent defaults, and thus being handled by a special servicer that often piles costly fees onto the debt.

For New York-based Group RMC, the owner of the 671,000-square-foot Executive Towers asset, there’s a longer clock to overcome the challenges of refilling the property, which had its debt added to Wells Fargo’s watchlist when its occupancy fell below 70 percent last year, from 86 percent in 2021, after losing key tenant State Farm.

But its $63 million loan doesn’t mature until 2028, meaning Group RMC has a better chance of riding out the storm than landlords with sooner maturities. The building’s leasing revenue covered its debt service last year, though by a slimmer margin than previously, taking in only $5.2 million in net cash flow in 2022, compared to nearly $8 million the three years before.

Still, it’s not the only sore spot for Group RMC, which also owns the five-building, 1.1 million-square-foot Westbrook Corporate Center in Westchester, which has a $99 million loan on its lender’s watchlist and lies just east of the DuPage County line, where it’s fallen victim to tax hikes on commercial real estate in Cook County.

The loan was flagged due to decreasing occupancy — about 71 percent, down from 80 percent in 2019 — combined with expenses that are 17 percent higher than the lender anticipated when the landlord purchased the property from Blackstone for $132 million in 2018. The increase in carrying costs were driven mainly by a 37 percent jump in real estate taxes for the property, according to a loan servicer’s April report. That debt also matures in 2028, though.

Back in DuPage County, Group RMC’s $41 million debt secured by two assets — Oakmont Center at 601 Oakmont Lane in Westmont, which is only 58 percent occupied, and the Oak Creek Center at 500 Waters Edge Lane in Lombard — is also on loan servicer KeyBank’s watchlist.

The Oak Creek Center, a 430,000-square-foot office complex, is about 78 percent occupied but has nine tenants occupying a total of almost 93,000 square feet that have leases set to expire within the year, according to a sevicer’s report this month. Group RMC did not respond to a request for comment.

And the worries emanating from lenders that they won’t get fully repaid the money they handed office landlords don’t end with that firm. New Jersey-based Fairbridge Partners is also facing downturns on multiple fronts in DuPage County.

A $48 million loan on Fairbridge’s 233,000-square-foot Oak Brook Gateway in Oak Brook and 153,000-square-foot Cornerstone Cantera in Warrenville is on Wells Fargo’s watchlist, with a June report from the special servicer noting decreased base rent due to lower occupancy at both properties, which totals about 64 percent.

Fairbridge has said “they are vigorously marketing the spaces through brokers” but don’t have a prospective tenant or an estimate of how long it will take to backfill the space, according to the loan report. The firm did not respond to a request for comment.

Some landlords of other area office properties, including Highland Oaks and Oak Park Plaza owner Accesso Partners, have expressed hope that they can work things out from even more dire situations, such as having missed loan payments.

“We continue to work in good faith with the special servicer on Highland Oaks and Park Plaza, and are optimistic about negotiating mutually beneficial resolutions,” a spokesman for the investor recently told The Real Deal.

Plights faced by ventures of Chicago real estate investor Chet Balder shows how the strategies landlords will employ to solve debt problems depend on whether maturity dates are far enough into the future that there’s a chance of an office market recovery before it’s time to cough up cash or face foreclosure.

Balder’s $19 million debt on the 232,000-square-foot, 10-story tower at 1815 South Meyers Road is on a lender’s watchlist, as well, with an April report from the special servicer citing lower rental income at the 70 percent occupied property. But that loan doesn’t mature until 2029, giving the property a puncher’s chance of a comeback.

Meanwhile, Balder has already agreed to hand back a Rolling Meadows office to its lender, conceding he won’t pay back a $23 million loan against the building.

Read more

Chicago

Lincoln Property, Adventus hit with more suburban office trouble

Chicago

Accesso juggling loan deadlines in rough suburban office market

Chicago

Adventus’ suburban office problems run deeper than Oak Brook auction