‘Nobody Knows Where The Bottom Is Yet:’ Investors Eager To Pounce On Maturing Class-B Office Loans
Investors hoping for a deal on Chicago office space might find ample opportunity in the coming years, but figuring out when the price is right may be a challenge.
While industry players at Bisnow’s Chicago Office Summit Thursday rehashed familiar concerns with stagnant return-to-office numbers well below pre-pandemic levels and bemoaned how cost-prohibitive repositioning efforts can be, many panelists said the opportunity to invest is coming.
Loans are maturing on 25.5M SF of Class-B Chicago office space by the end of 2026, the most in the Midwest and the third most in the nation, per a CommercialEdge market report.
“Lenders aren't going to want these buildings on their books, and they're going to want to sell them at a massive discount,” Stream Realty Managing Director Phil Geiger said at the event, held at the Warwick Allerton - Chicago. “There's going to be a lot of people making a lot of money on these buildings in five to seven years.”
One of the challenges for investors who may look to take advantage of those discounts is a relative lack of comparable deals in the market.
There has only been one office building purchase in the Loop in more than 12 months: Menashe Properties' $45M acquisition in September of a 29-story office tower at 230 West Monroe St.
“We haven't established the price point for an obsolete office building or what's going to be a repositioned office building,” Hines Managing Director Brian Atkinson said. “I know there was the acquisition of 230 West Monroe recently. A lot of people are pointing to that. But we need a couple of those data points before we figure out figures and ways to reset.”
The building at 230 West Monroe St. saw a stark drop-off in value since it was last on the market. It sold in 2014 to Accesso Partners for $122M, per public records. The new price represented less than half of the $87.7M loan Morgan Stanley provided to Accesso in 2019 as part of a refinancing deal, Crain’s Chicago Business reported.
The last Loop deal before the Menashe transaction was Google’s splashy purchase of the Thompson Center in July 2022 as the location for its new Chicago headquarters. Construction seems to be imminent after the city this week approved permits for Google to conduct demolition work on the building’s exterior and atrium.
“The reality is nobody knows where the bottom is yet,” Atkinson said.
While many investors are steering clear of purchasing anything but Class-A office space, some investors like Farbman Group CEO Andy Farbman are already positioned to take advantage of the uptick in cheap Class-B space expected to hit the market. Farbman said his Detroit-based group focuses on the purchase of “B-plus” buildings in great locations with a good office environment.
Farbman said his company looks for buildings with good pre-existing bones that need minimal renovations beyond paint and carpet. He said there is still a market for users who want a more affordable space.
“We do not focus on Rolls-Royces,” Farbman said. “We definitely focus on Chevys, but we think that Chevys have all kinds of cool features nowadays.”
However, there are still notable headwinds ahead, and Kahler Slater CEO Glenn Roby said brighter days may still be somewhat distant.
“The Loop is going to get worse before it gets better,” Roby said. “And we can’t compare it to what it was.”
