COVID-19 Consequences Continue to Affect Chicago’s Commercial Real Estate

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The Palmer House Hilton has reopened, but foreclosures are looming. Gurnee Mills has secured a grace period from lenders. The building of the Civil Opera is in purgatory.

After a daunting 2020 for commercial property investors, the fading pandemic and economic recovery are allaying their worst fears of a long and painful downturn – and a wave of foreclosures. But the return of the market in 2021 will not save all home buyers who are still plagued by debt problems caused or exacerbated by COVID-19.

Delinquency rates for a key category of debt, mortgage-backed commercial securities, or CMBS, fell to 11.2 percent in May, according to Trepp, a New York-based research and consulting firm. This is an improvement from a peak of 14.0 percent in June 2020, but it could take years for that figure to return to its pre-COVID level of 2-3 percent.

“I don’t think we’re out of the woods yet,” says Tom Fink, senior vice president and managing director at Trepp.

This statement applies to some of the largest real estate properties that contribute to the high crime rate in the area. The 1,635-room Palmer House, the city’s second-largest hotel, reopened on June 17 after being closed for 15 months by the pandemic. But its future remains in question as its owner, New York-based Thor Equities, is trying to settle two foreclosure claims totaling more than $ 410 million.

Gurnee Mills, the third largest shopping mall in the area with approximately 1.9 million square feet, is in a prime location. After defaulting on about $ 124 million in CMBS debt last year, the mall owner, Indianapolis-based Simon Property Group, struck a lender abstinence agreement in December to protect the property from a potential foreclosure claim.

In the West Loop, the owner of the Civic Opera building in Nanuet, New York, Berkley Properties, is also trying to work out an abstinence agreement after the cessation of payments on CMBS’s about $ 164 million debt, according to government securities reports. The possibility of foreclosure still exists.

Real estate represents the three real estate sectors: hospitality, retail and office, which have been hit hardest by the pandemic. Hotels suffered huge losses in the past year as business and leisure travel stopped and room occupancy plummeted.

The CMBS delinquency rate for hotels in the Chicago area jumped to 57.1 percent in October, largely due to Palmer House problems, and has declined only marginally since then, to 55 percent in May, Trepp said. Local CMBS overdue hotels include W Chicago City Center, Marriott Chicago River North and Hilton Orrington Evanston.

A resurgence of tourist and business travel can push many hotels out of the danger zone. Some homeowners, such as Godfrey in River North, have already developed a loan modification.

But lenders, with patience with hoteliers who broke the law during the pandemic, could also begin to demand that borrowers do more to recapitalize their properties now that the market is improving, says attorney David Neff, a partner at Perkins Coie who specializes in bankruptcy and hotel restructuring. … According to him, if the owner of the hotel asks the lender to forgive part of his debt, the lender will require the borrower to invest more capital in real estate.

“I think you’ll see lenders become more aggressive,” says Neff, who represents lender Wells Fargo in one of the lawsuits against Palmer House.

While he would not make any predictions about the fate of the Loop Hotel, Neff believes the hotel’s opening is a positive step. A Thor spokeswoman declines to discuss the costumes, but says Thor is “looking forward to a lively summer” at the hotel.

The economic recovery is also a good sign for retail landlords, who crashed last year as retailers went bankrupt, closed stores or stopped paying rent. CMBS retail arrears in the Chicago area rose to 29.6% in August, according to Trepp.

In an encouraging sign, late retail payments fell to 11.9% in May. The owners of some large properties, such as the Yorktown Center in Lombard and North Riverside Park Mall, have negotiated a loan change and averted foreclosures. Rather than taking over a large mall and bringing in another firm to renovate it, many lenders and lenders would prefer to strike a deal with a mall owner who has the experience to fix it.

“People try to be rational about what they do because the alternative is to be stubborn and take a loss,” says Fink.

However, the long-term outlook for retail is far from bright. For many homebound consumers, the pandemic has simply increased the convenience of online shopping, which has severely disrupted the retail sector over the years. While shoppers are returning to stores, e-commerce will continue to pose a growing threat to malls and other property, which is one reason to expect even more concern in the future.

The future of the office market also remains uncertain. The CMBS delinquency rate for local office space has increased but is still relatively low at just 3.8 percent in May. The question is, what will happen in the coming years: Will the demand for office space decrease as more professionals work from home in the post-pandemic era? Now nobody knows, but Fink is preparing for more serious violations.

“The office will slowly burn out,” he says.

Only one large downtown property, a 487,000-square-foot office building at 401 S. State St., was lost last year and its owner turned over the building to his lender. Rialto Capital, the lender that oversees the Civic Opera Building, has not ruled out a foreclosure claim against the 915,000-square-foot tower at 20 N. Wacker Drive, according to official filings.

Although Berkeley, the owner of the Civic Opera Building, has cut mortgage payments, the real estate problems are mostly temporary, said Brian Whiting, president of the Chicago-based Telos Group, a rental agent for the building. Two joint tenants, Bond Collective and TechNexus, struggled to pay rent as people stopped coming to the office but their business is returning, Whiting says. He is confident that Berkeley will be able to negotiate with Rialto.

“There are peace talks between the lender and the landlord,” he says.

Investors looking for distressed properties may find some attractive opportunities in the future. “The volume of problem deals is still fairly low, but it’s still early days,” said Jim Costello, senior vice president of Real Capital Analytics, a New York-based research and consulting firm.

But making deals will require different skills than those used in the aftermath of the 2008-2009 recession, he says. Many properties that ran into problems then suffered from financial distress: they simply had too much debt, which the financial professionals restructured.

This time, more properties are suffering from operational problems – insufficient cash flow. According to Costello, a different person is needed to solve these problems.

“This is not a financial sniper,” he says. “These are people who understand the value of fittings.”

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