Morgan Stanley Revives Chicago Office Seized From LaSalle

Mesa West Capital has gotten 123 North Wacker Drive back in business after its previous owner, LaSalle Investment Management, quietly surrendered the 30-story office tower due to financial trouble.

Mesa, a mezzanine lender unit owned by Morgan Stanley, stripped the property from JLL’s investment arm in November to resolve a problematic $153 million floating interest rate debt that LaSalle took on in 2021, according to LaSalle and Cook County property records.

Mesa doled out a $37 million mezzanine loan to LaSalle as part of the deal, while Wells Fargo took a $115 million senior mortgage position for the 550,000-square-foot building. But LaSalle’s Income and Growth Fund decided to walk away from its investment in the building late last year as its debt costs likely surged due to interest rate hikes starting in 2022. Plus, demand for office space was muted in the post-pandemic market.

The loan wasn’t set to mature until next year, and the tower was just 58 percent leased as of January, well below the average of 74 percent for downtown Chicago.

“Despite strong initial performance, unprecedented market shifts created unique challenges for this asset,” a LaSalle spokesperson said in a statement. “We worked closely with all parties, including our investors and lenders, to find the best possible outcome.”

Mesa early this year appointed Chicago-based Sterling Bay as the building’s leasing and property manager to lead the comeback.

So far, the change looks to have generated some payoff, as the building is once again leasing large spaces after being stuck under the weight of LaSalle’s previous financial obligations. Insurance firm CRC Group is moving into a 20,000-square-foot lease of the building’s full 19th floor, a move and an expansion from the tenant’s current 17,000-square-foot office space at One North Franklin Street.

CRC Group’s relocation marked the biggest deal at 123 North Wacker since the change in ownership, following a few smaller leases that helped raise its occupancy to 65 percent, Sterling Bay said. It’s the latest in a series of office leases giving hope to landlords in the beleaguered sector that they can win crucial tenants once their capital stacks are re-engineered from the low-interest rate era.

“This lease underscores the strong leasing momentum we’re seeing not only at 123 North Wacker Drive, but across the downtown office market,” Sterling Bay’s CEO Andy Gloor said.

It’s unclear how Mesa’s relationship with Morgan Stanley — which bought Mesa in 2018 — impacts the building’s $115 million senior mortgage loan. Morgan Stanley declined to comment. But a Mesa entity was switched onto the mortgage as the borrower to replace the LaSalle entity in March, indicating the new landlord’s operation of the building will go toward paying down the Wells Fargo debt, according to Cook County records.

Mesa’s mezzanine position is one of several to blow up on Chicago office towers since the pandemic rocked commercial real estate. Chicago-based Nuveen, which runs a large mezzanine lending division, has taken licks on multiple office deals, including on Wacker Drive, and it is in talks to resolve another big problematic debt package for the riverfront property at 321 North Clark Street.

LaSalle exited 123 North Wacker after paying more than $146 million for the property in 2017. It poured at least $33 million into building improvements thereafter, as JLL noted when it arranged the Wells Fargo-led debt package in 2021. Sterling Bay said that $25 million was recently invested by ownership in the lead up to its takeover of the building’s leasing and management.

Editor’s note: This story was corrected to note that Wells Fargo provided the senior mortgage loan on 123 North Wacker.