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Hancock Syndrome

Hancock Syndrome
As Golub & Co and Goldman Sachs’ Whitehall real estate fund scramble to refinance $400M in boom era debt on the iconic Hancock Tower that comes due this month, investors are circling. Is this a replay of the Boston Hancock takeover?

Hancock Center

With an eye on the $100M mezz piece, the Blackstone Group may try to buy into the capital stack and eventually assume ownership of the trophy, Bloomberg reported recently. Calls to Blackstone and Golub were not returned. But that strategy worked with the John Hancock Tower in Boston for affiliates of Normandy Real Estate and Five Mile Capital (an owner of the IBM Building at 330 N. Wabash). Starting in '08, Normandy began to purchase the debt. In ‘09, it bought the JHT (then 20% vacant) for $630M. After renovating and leasing, it sold for $930M to Boston Properties in late '10.

Mid-America Mini
Morningstar Director of REIT Research Philip Martin

Chicago will have its share of distress office sales as owners who financed richly priced properties prior to ‘08 face refinancing difficulties, says Morningstar director of REIT research Philip Martin. The CMBS market isn’t fully functioning and during underwriting, the tower will be marked to market. The Hancock, out of the Loop, may have some difficulty attracting new tenants. As an older tower, it may require substantial capital expenditures to lease competitively. But a large private equity fund like Blackstone, with full pockets and a focus on CRE, may like this trophy and its potential for consistent long-term cash flow. Only a few REITS could handle such a large deal. Then, there’s the still struggling office market.

CBRE Econometric Advisors’ Senior Managing Economist Art Jones.
As Hancock Tower leases roll over, new leases are likely to be signed at a lower rent, says CBRE Econometric Advisors’ senior managing economist Art Jones. The Chicago market is stabilizing from the recession, but isn’t back to where it was during the boom. It lost 4.3M SF of leases in ’09 and ’10. Rents declined at the end of ’11 and are now 11% lower than they were in late ’08. The vacancy rate (including sublease space) is up to 13.7%, compared to 10.8% in Q3 ’08. Overall, says Art, the office market is clearly weaker than it was four years ago.