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Lender Takes Control Of Brookfield's Chicago Skyscraper As Troubles Mount For Office Owners

The Chicago office building at 175 West Jackson Blvd., owned by Brookfield Asset Management.

It is only Tuesday, but it has already been a bad week for Chicago’s Loop office market. Commercial finance research firm Trepp reports the lenders of two significant office buildings have either taken possession of the asset or are on the verge of doing so.

This week, the Brookfield Asset Management-owned 175 West Jackson Blvd. was taken over by its lender, Trepp reported Monday. Brookfield had become delinquent on the $258M loan backing the 1.4M SF skyscraper in November, when it was sent to special servicing.

After releasing a warning in December on a $100M loan for 135 South LaSalle St., Trepp reported Tuesday that the special servicer for the 1.3M SF tower states the most likely outcome is a deed in lieu of foreclosure.

The properties’ troubles could signal a wider problem within Chicago’s Central Business District. Although downtown landlords have so far largely avoided a wave of foreclosures tied to the pandemic, the rise of hybrid work schedules over the past two years has office users rethinking their office strategy, with many now considering either shrinking their footprint or trading up into new spaces more enticing to workers currently at home. As tenants flood into new Class-A office towers in the West Loop, River North and especially Fulton Market, older buildings may find it tough to compete and keep their loans afloat, a pattern seen in other U.S. cities.    

About 30% of U.S. office properties, with a total estimated value of $1.1T, face obsolescence as hybrid work entrenches itself into workplace culture, according to a recent estimate.

Last year, 135 South LaSalle lost anchor tenant Bank of America, which occupied more than 800K SF, to a new trophy building at 110 North Wacker DriveAmTrust Realty, the owner of 135 South LaSalle, plans to spend up to $100M to refurbish and upgrade a 4.7M SF portfolio of downtown Chicago buildings but decided to leave 135 South LaSalle out of the renewal effort, according to a December report in Crain’s Chicago Business.

Brookfield Asset Management bought 175 West Jackson in 2018 for $305M, according to Cook County property records. Once known as the Insurance Exchange Building, it was constructed in 1912 and designed by famed architect Daniel Burnham. It is home to the regional headquarters of the Securities and Exchange Commission and several financial firms, but ownership has struggled to fill its floors and service the debt. In 2021, occupancy was 65%, Trepp reported.

Brookfield and LNR Partners, the special servicer for 175 West Jackson, didn't return calls seeking comment.

175 West Jackson isn't a relic. Clayco and the Lamar Johnson Collaborative completed a $100M modernization in 2002, led by architect Lucien Lagrange, that transformed the 22nd floor into a penthouse amenity suite, complete with a full rooftop deck. Tenants have also kept signing deals, including software tech firm WellRight, which last fall agreed to lease 17K SF on the 14th floor, and digital freight broker Loadsmart, which just moved its headquarters from New York to 34K SF in 175 West Jackson.

But it wasn’t sufficient. Due to decreased occupancy and net cash flow, the property’s troubled loan had already hit the watchlist last summer, according to commercial data research firm Reonomy, citing a report from the servicer. The loan was more than 90 days delinquent as of January 2022, with an outstanding balance of $138.7M.

Other Chicago office properties have undergone similar distress. The Civic Opera House Building at 20 North Wacker Drive was hit with a $195M foreclosure lawsuit late last year after the pandemic damaged many of its office tenants, according to a report in Crain’s Chicago Business. In addition, the former owner of 401 South State St., a historic, 487K SF office building, lost control of that property in 2020 after facing a foreclosure lawsuit.