Boulevard of broken deals: Distress drives office market on Jackson
Bigtime players from Brookfield to David Werner face loan trouble
Office landlords and lenders on Chicago’s storied Jackson Boulevard aren’t all American idiots. There’s some foreign ones, too.
The corridor has become a boulevard of broken deals, with distress and uncertainty piling up.
A combination of landlords’ declining to invest in maintenance of Jackson Boulevard office assets over the years, its location in the southernmost portion of the Loop and economic pressures induced by the pandemic have put $1.4 billion in real estate value accumulated over the last decade at risk of major losses.
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Between the amount of turnover through short sales and lender seizures, and some recent appraisals of properties facing debt defaults, indications are that more than 50 percent of property values could ultimately evaporate. And those losses could slam some of the biggest names in real estate and finance, including Brookfield Asset Management, Nuveen, Morgan Stanley, the Chinese firm Cindat, Chicago-based Marc Realty and South Korean lender Shinhan Investment Corporation, among others.
Yet another office landlord on the boulevard, New York-based Nightingale, is at the center of a wild scandal after crowdfunding platform CrowdStreet in July requested that a third-party manager take over 200 West Jackson’s management and finances while Nightingale is probed for alleged misappropriation of funds raised from retail investors to buy offices in Atlanta and Miami Beach.
“Nobody really knows how to make money right now,” said Cushman & Wakefield’s Cody Hundertmark, whose Chicago-based capital markets team brokered the October sale of 600 West Jackson for $10.8 million, less than half the $24 million Stockbridge Capital Group paid in 2017. “Every single building in the entire city is worth less than its debt, with less than 10 exceptions.”
Stockbridge’s West Loop loss will probably be one of the smallest for office players with Jackson Boulevard holdings. A couple of blocks east at 300 South Riverside Plaza, big-time owners David Werner and Joseph Mizrachi are in the midst of working through a default on a $175 million loan from Shinhan. The debt was issued against the leasehold in the building only, and sits within a messy capital stack roiled by an expensive ground lease that sends rent to well-known New York investor Rubin Schron of Cammeby’s.
“Is Jackson the problem? Or is it the building stock, the owners and everything that’s happened over the last three years? Is that really the problem?
That’s not the only Jackson Boulevard property getting burned by a bifurcation of a building from the land on which it sits. Closer to Lake Michigan, at 55 East Jackson, longtime commercial landlord Marc Realty split the structure from the ground in a 2019 deal that sold off the leasehold for $64 million to the low-profile Firenze Group. Marc kept the land with the intent of collecting ground rent from Firenze, but the building owner has defaulted on its ground lease obligations, according to credit ratings agency Morningstar.
Closer to the center of the Loop, the Chicago Board of Trade building at 141 West Jackson is the highest-profile example of office distress in the city, but it is attempting a turnaround. Private equity firm Apollo Global Management seized the 44-story, 1.4-million-square-foot asset early this year after a joint venture of Glenstar and Oaktree Capital Management opted against fighting a foreclosure suit over its $256 million debt package, obtained right before the pandemic.
“Is Jackson the problem? Or is it the building stock, the owners and everything that’s happened over the last three years? Is that really the problem?” asked Matt Pistorio, a leasing broker and principal of R2 Companies, which was hired by Apollo to help steer the Board of Trade building’s rejuvenation.
“Now we’re all just attributing that Jackson could be too far south as a reason why you can’t have success,” Pistorio said.
He pointed to the fact that 300 South Riverside and 111 West Jackson — a 24-story, 575,000-square-foot asset owned by New York-based Melohn Group, which is delinquent on a $105 million loan not set to mature until 2027 — were both nearly fully leased in the years before the pandemic. Beacon Capital has also scored with 231 South LaSalle, which backs up to Jackson and netted a $144 million loan in 2021 to refinance a $76 million debt.
In addition, the 65-story, 1.3 million-square-foot 311 South Wacker on the south side of Jackson — which endured a failed sale effort during the pandemic when it was rumored Firenze would buy it for $310 million, a deal that never closed — was just under 90 percent occupied prior to 2020.
It’s now down to 61 percent leased, and mezzanine lender Nuveen risks getting wiped out of approximately $90 million borrowed by a joint venture of Chicago-based Zeller Realty and Cindat. The building sits across the street from the famous Willis Tower (formerly Sears Tower), whose owner, Blackstone, wrote down its investment in the 110-story trophy by $119 million this year, following the opening of a $500 million renovation of its lobby, amenities, retail offerings and attractions.
Even with significant investments, there’s still trouble ahead, as properties may have to change hands to get the injection of capital for improvements they need to compete in a post-pandemic office market driven by tenants seeking to upgrade.
Some buildings have a tougher road ahead due to their design, such as 175 West Jackson, where landlord Brookfield is facing a 59 percent leased building and a lawsuit over its delinquent $280 million loan against the 1.4 million-square-foot property. The large floor plates that make up the tower, built in 1912, no longer appeal to many tenants, and its appraisal last year came in at $195 million, down from $410 million in 2013.
The building was listed for sale through a judge’s approval in July, and Morningstar expects a loss of about 55 percent for the bondholders in the property’s securitized debt “based on its declining performance and assumed valuation, weakened submarket fundamentals, and Brookfield’s demonstrated willingness to walk away from underperforming assets.”