Chicago office landlords score bargains and face foreclosures in equal measure

In the deal of a lifetime, real estate investment firm R2 in January bought 150 North Michigan Avenue, the office tower with a diamond-shaped rooftop that is a defining feature in the Chicago skyline, at a 50 percent discount to its previous sale.

“There are maybe five buildings in Chicago that everyone knows, and this is one of them,” R2 CEO Matt Garrison said of 150 North Michigan. 

But as R2, founded by locals and headquartered in Chicago, was making headway downtown, it was also losing its grip on a $42 million underperforming loan issued for an office portfolio in the West Loop. 

R2 isn’t the only investor climbing crests and plunging into drops in short succession. On the roller coaster of the Chicago office market, the opportunistic buyers and distressed sellers are often one and the same — just on different deals or in disparate parts of the metro area. 

The reason is simple. Some deals in Chicago are simply too good to pass up, even for a company dealing with distress. And there is a lot of distress: 43% of office-backed CMBS loans that matured from 2020 to 2023 in the metro area defaulted, were seized or were foreclosed, according to a recent report from Avison Young.

For every shockingly low-priced sale, one buyer is scoring a potentially career-defining win while a seller’s investment is left in shambles.

“I think at some point there’s a clearing price, there is a basis for a building that is not functionally obsolete,” Robert Sevim, Savills’ Chicago region president, said. “At a certain basis, there is likely to be a buyer out there that would look at it and say, I think that I can create value.”

These opportunities won’t stick around forever. Beyond 2026, there is a much smaller pool of loan maturities, according to the Avison Young report. 

With a lender closing in, R2 scores big

R2’s purchase of 150 North Michigan Avenue came at one of the biggest discounts of the year so far. 

CBRE Investment Management had bought the 41-story, 655,000-square-foot building for $121 million, or about $185 per square foot, in 2017. R2 paid $60 million, or about $92 per square foot. 

Garrison said R2 is on the lookout for similar opportunities.

“In terms of what other buildings we are looking at, we are looking at them all,” he said.

But a few months after the Michigan Avenue purchase, the firm faced a potentially stomach-churning loss. R2 was struggling to hold onto a $42 million West Loop office portfolio that it owned in a joint venture with Maury R. Tognarelli’s real estate investment company, Heitman. 

Maryland-based Beltway Capital Management bought the underperforming $42 million loan note — likely at a substantial discount from its face value — tied to the portfolio, which included 641 West Lake Street, 901 West Jackson Boulevard and 130 South Jefferson Street. R2 and Heitman have owned the buildings jointly since 2019.

Since post-pandemic work-from-home policies hammered the market, some lenders have offered extensions on underperforming loans rather than file foreclosure lawsuits as soon as loans mature. 

“Nobody wants to pull the trigger on these loans if they can avoid it, because nobody wants to see an entire market collapse,” said Scott Stuart, CEO of the Turnaround Management Association, a corporate-renewal industry group.

In other cases, lenders have pursued loan note sales before a loan matures as a stopgap measure before pursuing foreclosure. 

“At a certain basis, there is likely to be a buyer out there that would look at it and say, I think that I can create value.”
Robert Sevim, Savills Chicago

“Some banks are willing to take an asset back and manage it and hold on to it or build it back up to sell it, and some will just want nothing to do with it and want to get out,” Stuart said.

Although the sale of the loan was a sign of trouble for the West Loop properties, the new lender could keep R2 in the driver’s seat. 

In February, Beltway Capital initiated foreclosure on a River North loft office building at 730 North Franklin Street owned by the New York-based Feil Organization, just a few months after buying the property’s $15.3 million loan note. A deed-in-lieu of foreclosure agreement was finalized on July 9. In a vote of confidence in R2, Beltway tapped the firm as an investment partner in the property, tasking it with operating the building. 

R2 confirmed it will invest capital in a turnaround effort, though the exact amount is currently undisclosed. 

Garrison is confident that Beltway wants to see the West Loop investment through as well.

“We are fully on the same page with the new lender, who wants to capitalize aggressive leasing programs at these properties,” he said, adding that 901 West Jackson is now almost fully occupied. 

Golub & Co. takes one step forward,
two steps back

Chicago development firm Golub & Company hit a series of setbacks in the office market in quick succession. But those obstacles have not stopped it from pursuing a complex office-to-residential conversion project. 

In March, a venture of Golub and Alcion Ventures relinquished control of the four-building suburban Oak Brook 22 office complex by assigning its $57.2 million loan back to its lender.

The giveback followed an unsuccessful attempt to sell the 389,000-square-foot complex in Oak Brook, roughly 20 miles west of Chicago.

One month later, Golub and partner CIM listed office tower 444 North Michigan Avenue for sale after failing to pay off a $123 million debt tied to the asset that had recently matured. 

Although they had paid down the debt to $95 million, the joint venture was looking at a substantial loss. The 2018 purchase price was $138 million. 

The companies had put $11 million toward capital improvements at the building but still failed to bring its occupancy above 65% by the time it was listed. Capital improvements can make a building attractive to current and future tenants, but in this case it wasn’t enough to save the asset. 

“You’re going to invest to survive, or you’re going to invest to thrive, but you have to invest either way,” Sevim said of the office market in general. “If you’re not, you’re just going to be giving your keys back to the lender. It’s a tough position to be in.”

In July, the company appeared headed toward foreclosure on the famed Burnham Center after listing the tower and failing to find a buyer. 

Legal filings show that Golub terminated its ground lease for the property and stopped making payments to the landowner, the Shidler Group, in April. The suspended payments triggered a default and led Wells Fargo to file foreclosure on a $42 million loan issued to Shidler for the land. 

The future of the building, which Golub bought for $80 million with a $75 million loan from CIT Group, is unclear, as landowners traditionally have senior interests in properties with ground leases.

Representatives of Golub declined to comment.

But it hasn’t been all bad news for Golub. Multifamily properties have been its lifeboat out of the choppy waters of the office market, and the company could be at the forefront of Chicago’s push for office-to-resi conversions. 

In 2018, Golub played a major role in redeveloping the historic Tribune Tower into luxury condos, Chicago’s best-known office-to-resi conversion to date.

As city officials look to spur more of these redevelopment proposals as a way to stabilize the downtown real estate market, Golub has become a front-runner.

Conversions will play a crucial role in transforming downtown markets with high vacancy rates, but they are complex endeavors. Companies that can position themselves at the forefront of the trend could win big, Stuart said. 

Pending final city approvals, the firm scored a $57 million commitment from Mayor Brandon Johnson this spring to help fund a new office-to-resi conversion at 30 North LaSalle. 

The proposal was one of only four chosen by the city to receive such subsidies in return for setting aside 30 percent of the units as affordable to households earning certain percentages of the area median income. 

The building was yet another Loop property to see its value tumble post-pandemic. Its lender, an affiliate of AIG known as Corebridge Financial, took over the building after no buyers came forward in a foreclosure auction that had a minimum bid of $35 million.

The former owner, AmTrust Realty, bought it for $238 million in 2014 with a $165 million loan from AIG. 

Now Golub is partnering with Corebridge to turn the lower portion of the 43-story building into 349 apartments in a $143 million proposal that would yield 105 affordable units.

A wild two weeks for Midwest Property Group

In one of the most intense cases of Chicago’s real estate-induced whiplash, Midwest Property Group’s Jaime “Jay” Javors lost an office building at 448 North La Salle Street to foreclosure and bought a warehouse primed for redevelopment in buzzy Fulton Market two weeks later. 

Javors, developer of the 12-story office building at 448 North LaSalle, signed a deed-in-lieu of foreclosure on May 28 rather than pay off the $70 million loan tied to the property, which  issued in 2019 by Washington, D.C.-based National Real Estate Advisors.

Even before the foreclosure, the property was entangled in multiple lawsuits regarding one of its former tenants, the embattled development firm CA Ventures. 

As Javors got himself out of the fray at 448 North LaSalle, he was already teeing up a redevelopment proposal in Fulton Market. The former meatpacking neighborhood has become the epicenter of new development in Chicago, emerging from the pandemic in better shape than the rest of the city. It was the site of one of the few new office buildings to break ground in the country in 2023. 

Stuart likened the area to New York’s Hudson Yards, where office demand is strong. 

Chicago’s reputation as a “city of neighborhoods” could play a role in its post-pandemic reshaping. 

“It’s easier to spread yourself out in Chicago,” Stuart said. “It might not look like it did before the pandemic, but I think the city is hopeful it is still an economic center.”

Just two weeks after losing the River North property, Javors’ firm inked a $13 million purchase of a collection of warehouses at 900-914 West Fulton Market Street formerly owned by local meat wholesaler Nealey Foods. 

Javors did not respond to requests for comment. 

Midwest’s plans for the site, which include lower-level retail spaces and upper-level residential units, were approved by the city in the week of the purchase. The architectural firm NORR will design the development.

The combined mixed-use structure will reach five stories, with three setback floors added on top of the existing buildings. The cost of the redevelopment plan is not yet clear.