Aon Center Valuation Cut In Half Amid Lower Occupancy, Increased Real Estate Taxes
The Aon Center lost nearly half of its value since the property’s last valuation in 2018 as the prominent skyscraper struggles with increased vacancy, rising real estate taxes and a hefty loan balance.
The 2.8M SF office tower at 200 East Randolph St. reported a new value of $414M, down from a valuation of $780M when JPMorgan Chase lent $536M for the property in 2018, per a Morningstar email alert. The loan moved to special servicing in February, but a modification and three-year extension was negotiated this summer.
The loan entered special servicing in February due to a technical default caused by borrower The 601W Cos. leasing 4.5% of net rentable area to Blue Cross Blue Shield Association without lender consent, according to DBRS Morningstar.
Special servicer LNR Partners resolved the BCBS issue by making a cash deposit and providing a personal guarantee for expenses like tenant improvements and leasing commissions in exchange for a guarantee from BCBS to repay the balance of a $4.6M tenant improvement allowance.
The loan had a July 2023 maturity date, since extended by three years to July 2026. The Aon Center also carried $141.5M in mezzanine debt as of five years ago.
The property’s valuation is now less than its loan, but Brian Whiting, president of The Telos Group, the leasing agent for the Aon Center, said the building is in good shape and has $100M of cash to do new deals.
“The building is healthy,” Whiting said. “The biggest part of the devaluation is because of the interest rate changes, and that's the part of the market that can't be controlled. [It] has nothing to do with the fundamentals of the building.”
As of December 2022, occupancy at the building was 76%, a decline from 89.7% in 2018, per Morningstar. The occupancy decline was largely due to the departures of Integrys Business Support and Daniel J. Edelman, which occupied 13.5% of net rentable area.
Since then, there have been a few positive developments for the building. They include the loan extension, a lease extension through December 2028 for Aon Corp., which takes up 39.6% of net rentable area, and the repayment of mezzanine loan defaults, per Morningstar.
In another piece of good news, the second-largest tenant, KPMG, also expanded its footprint at the property to about 11% of net rentable area on a lease expiring in August 2029.
Even though vacancy has increased over the past five years, Morningstar reported effective gross income had remained relatively consistent as of late last year. However, operating expenses have gone up significantly, driven by an approximately 40% increase in real estate taxes.
Over the next year, rollover is expected to be moderate, as tenants with expiring leases represent less than 5% of net rentable area, Morningstar reported.
Aon Center is the home base of Chicago-based JLL, the world’s second-largest commercial real estate services firm. JLL announced last month it planned to sublease about 61.3K SF, or 30%, of its headquarters space at the 83-story tower as it looks to cut costs.
The Aon Center is the fourth-tallest building in the city, trailing the Willis Tower, Trump International Hotel and Tower and The St. Regis Chicago. 601W purchased the Aon Center for $712M in 2015, per Cook County records.