Office Building in Chicago Returned to Lender

By Elias DaSilva | September 11, 2024.

Due to the changes currently occurring in the national office market, the owners of a 26-story building in Chicago’s Loop have been forced to return the property to their lender. The decision made by the investment group Hearn and Fortress comes after the expiration of the $138 million loan held by the tower.

This office tower was initially purchased by Harbor Group for $152.7 million in 2007, but its value has decreased since then. To prevent the group from losing control and to help the former owner avoid foreclosure on a $127.4 million mortgage loan secured on the property, Fortress and Hearn invested about $42,000,000 at that time. However, the current loan balance exceeds the building’s value. All this highlights the current challenges facing the office sector.

The property, located at 2 N. LaSalle St., registered under Hearn and Fortress Investment Group, had a pending balance of $137.8 million by August 2023, by which time the commercial mortgage termination originally agreed upon should have occurred.

With internal reports leading to the decision to relinquish the property and the inability to meet the mortgage terms, it was decided to transfer the property early through a deed to Torchlight Loan Services, which was the mortgage loan administrator.

This new situation is another example of the crisis currently affecting the real estate market, especially office buildings, where properties are sold at significant discounts or owners are forced to refinance their debt due to the severe difficulties in keeping up with loan payments.

Not only Fortress and Hearn have voluntarily handed over the building; many more investor groups have been affected by the situation as the low demand for office spaces, rising interest rates, and reduced sales have driven them to give up their properties before foreclosure processes begin, which could further impact their interests.

What will happen with this office building remains uncertain due to its age and its marked competition with new real estate projects. Currently, Torchlight has not yet revealed its plans for the property, although it is known that the building is now almost 26% vacant.

In addition to the difficulties that major office building investor companies now face in timely meeting mortgage payments due to the various economic situations they are experiencing, another major challenge these large companies have to tackle, and which has affected them, is the new hybrid or remote work model that has led many companies to downsize and relocate to higher-quality spaces.

However, this issue is not only affecting the inner city but is also now manifesting in the outskirts of Chicago, as seen with important properties in the sector such as the Oak Brook suburb.

In response to this new issue, Mayor Brandon Johnson supports a plan to convert or modify these unused office buildings into apartments or other forms of significant housing.

Despite all these difficulties and new work models, today Chicago’s Loop has seen important and positive developments, such as Google’s purchase of part of the James R. Thompson Center and the renovation plans for the JPMorgan Chase tower.