Group RMC’s creditors are expressing concern over several of its suburban Chicago office holdings on the heels of a key tenant’s big lease cutback, dimming the outlook for the New York-based landlord’s string of real estate purchases made before and during the pandemic.
Follett Higher Education Group, a company that creates academic materials and helps college campuses with bookstore buildouts, scaled back its office space at the Westbrook Corporate Center by 65 percent last month, according to loan data compiled by Morningstar Credit.
About 15 miles west of Chicago, the firm’s Westchester office is now about 45,000 square feet. The original lease, signed in 2013, was for 128,000 square feet.
Follett’s lease was previously scheduled to expire this year but the company extended its term for another 7.5 years through 2032 as part of the downsizing deal.
Prior to the trim, Follett was the largest tenant at the five-building, 1.2 million-square-foot corporate campus. Group RMC purchased the property from Blackstone for $132 million in 2018, when it was 84 percent occupied. It’s likely worth much less today, after Follett’s downsize brought the property to just 58 percent leased, according to public loan data.
The corporate center’s occupancy rate is now well below the average suburban Chicago office occupancy rate of 74 percent as of the first quarter this year, according to Colliers data. Plus, interest rate hikes since 2022 have eaten into commercial real estate values, spelling potential trouble for the $99 million commercial mortgage-backed security loan that Group RMC took out on the property, one of several suburban Chicago debt packages the landlord is struggling to iron out.
Neither Follett nor Group RMC returned requests for comment.
The Westbrook Corporate Center’s latest financial data shows it posted a debt service coverage ratio of just 0.99 on net cash flow of a little less than $6.2 million last year for the 12 months ending in June. Any figure below 1.0 means the landlord isn’t bringing in enough revenue to cover the costs of operations and debt service. The property’s debt service cost nearly $6.3 million last year, prior to Follett’s downsizing.
As the new lease was completed, the Westbrook property’s debt was sent into special servicing, which is normally a signal of financial trouble ahead for landlords, according to Morningstar Credit loan data. The landlord is, however, up to date on loan payments, and in talks with the lender to modify the debt package, the data shows.
Group RMC — which owns more than 3.6 million square feet of commercial real estate in the Chicago suburbs — also entered troubling financial territory on several other fronts in the region.
At least two other loans to the firm for suburban Chicago properties have been watchlisted, including Executive Towers West, a three-building, 681,000-square-foot complex in Downers Grove. Lenders watchlist loans when their underlying real estate shows a growing chance that borrowers will default on debt obligations due to declining property performance.
At Executive Towers, Group RMC posted a healthier debt-service coverage ratio of nearly 1.3 last year. But when the property dropped below 80 percent leased, it triggered its move to the watchlist.
The landlord also has a $40 million loan tied to two more properties in the western Chicago suburbs and one in Indianapolis that is watchlisted. The trio of properties, which includes the 427,000-square-foot Oak Creek Center asset in Lombard and the 118,000-square-foot Oakmont Lane in Westmont, similarly posted a debt-service coverage ratio just below break-even last year. However, the properties are also current on debt payments, meaning the landlord could be kicking additional cash into the deals out of its own pocket, as at the Westbrook Corporate Center.
Whether Group RMC can pull off a turnaround for the Westbrook property remains to be seen. Its loan matures in 2028, and has a remaining balance of nearly $88 million, which could be difficult to refinance given commercial real estate’s downturn.
At the same time, Group RMC has a roster of other suburban Chicago offices that the firm bought amid the pandemic and needs to keep afloat. Group RMC continued an acquisition streak following the death of its founder Raymond Massa in early 2021. That year, the firm purchased four buildings in Downers Grove for about $100 million total including the Highland Landmark III and three buildings in the Corridors Office Park.
Chicago’s suburban office market has shown signs of stabilizing in recent months but has a long way to go to reach a full recovery, if one is possible at all without teardowns or conversions of obsolete properties.
Chicago’s suburban office market recorded its highest net absorption since the pandemic in the first quarter of this year, data from Colliers found. Sublease availability decreased by 70 basis points to 1.8 percent of total inventory in the first quarter, the lowest level recorded since the onset of the pandemic.
The suburbs’ record-high vacancy rate is skewed by the widening gap between Class A, B and C properties and areas in higher demand like the O’Hare submarket. The area near the airport has outperformed others in the suburbs, maintaining a vacancy rate of about 20 percent since 2022, according to Colliers.
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