Its started!
Commercial sales outlook turns darker
As it has gotten harder to obtain loans in the global credit crunch, deals for prime office buildings have faded
By Susan Diesenhouse
Tribune staff reporter
December 15, 2007
In a city that prides itself on its skyscrapers, One North Wacker Drive is considered a supertrophy tower. But the struggle to sell the 6-year-old office building this fall signals the dramatic slowdown in Chicago's multibillion-dollar commercial-property sales market.
The gleaming glass-and-steel-clad UBS Tower, named for its anchor tenant, isn't perfect, but its location in the popular West Loop, its high rents and its roster of creditworthy tenants make it about as good as existing offices here get.
The tower has been on the block for four months, but a deal to sell the 50-story office for perhaps $600 million probably won't be reached until sometime next year, according to industry sources. Early this year, when the market was awash in cheap credit for eager buyers paying exorbitant prices, it might have sold in four to six weeks, industry experts agree.
But since the summer, sales in the commercial real estate market have slowed radically as financial institutions and debt markets reel from the fallout of years of ill-advised financing.
The marketing of One North Wacker "is a perfect barometer to gauge changes in the investment market, values for Class A downtown properties and investor attraction to Chicago," said Dan Fasulo, research director for research firm Real Capital Analytics. "I expect there'll be great interest because it's an irreplaceable asset."
There's interest, yes, but nothing more, industry sources said.
As with other buildings that have lingered on the market, been pulled off, fallen out of contract or been held back despite the owner's desire to lure investors or buyers, a degree of blame goes to the global financial turmoil caused by the failure of subprime residential mortgage loans sold as securities.
And as the economy slows, real estate fundamentals such as rents and vacancies seem destined to weaken, and some wonder if the frenzied commercial property deals of the recent past were wise.
Lenders competing for ever-larger shares of commercial property loans offered low- or no-interest financing for 90 percent or more of the asset value to buyers who might have rushed through their due diligence and bid up prices extravagantly, said Arthur Oduma, a senior analyst for Morningstar Inc.
"Lenders were almost reckless," he said.
Mark "Sam" Davis, senior managing director of real estate for Allstate Insurance, a commercial property lender and a unit of Northbrook-based Allstate Corp., agrees.
"In hindsight, some of these deals don't look so good and are unlikely to perform as the economy weakens," Davis said.
Even before last summer's meltdown of securitized housing loans, some federal regulators were more worried that banks had too much capital committed to commercial real estate loans, said Mark Zandi, chief economist for Moody's Economy.com.
"The Federal Deposit Insurance Corp. was more concerned about capital tied up in commercial loans like those that caused the credit crunch of the early 1990s," Zandi said.
Screw tightens for lenders
Now, as the economy weakens, it puts more pressure on already troubled lenders that are likely to further reduce credit to businesses and consumers.
"That makes it difficult to build the next office or mall, which means fewer jobs and even slower growth," said Zandi.
As job growth slows, demand for office space slackens. In the Chicago area, job growth fell to 42,000 during the 12-month period ended in October, down from 51,000 a year earlier and well off the peak of nearly 100,000 in 1998, Zandi said.
Financial turmoil coupled with slowing economic growth has been a toxic mix for commercial property sales.
The approximately $200 billion a year in credit that came through the commercial mortgage-backed securities market in recent years "has stopped flowing almost completely," said Allstate's Davis. "The ability to close deals is not there."
Overall, 2007 might end up as a record year for commercial real estate sales here and nationwide, but "sales are clearly slowing," Fasulo said.
Signs of the shift started to show up in the summer, when such buildings as the Civic Opera House and 30 N. LaSalle St. were pulled off the market. They were followed more recently by 200 W. Madison St. and 555 W. Monroe St., among others, industry sources said.
Rethinking a sale
This fall, Bentley Forbes LLC considered marketing a seven-building, 6 million-square-foot national portfolio that includes top-notch properties such as the Prudential Plaza in Chicago but changed course, said its chief executive, David Cobb.
"The debt market's in chaos, so we'll look at putting it up for sale in mid-January," said Cobb, who added that he would rather wait than lower his price.
But today's buyers expect to pay less for the certainty of closing a deal. As the gap widens between the prices sellers expect and those buyers are offering, it is tougher to close sales, said Cedric La Chance, an analyst at Green Street Advisors.
The Chicago office market could be further weakened because 6 million square feet of new office space is in development, with 3.6 million square feet of that scheduled for completion in 2009.
This could create problems for One North Wacker. The 1.3 million-square-foot building has at least 600,000 square feet of leases expiring in 2012, according to CoStar Group.
"With so much space rolling over, and tenants having more options, that makes investors back away," said Oduma.
One North Wacker, being marketed by Eastdil Secured, is owned by a subsidiary of Deutsche Bank, which declined to comment.
But this trophy's time on the market likely marks the end of the recent wild ride and perhaps the return to a previous longer pace.
"It used to take three to six months for such big deals to come to fruition," said Fasulo. "We're entering a period of normalcy."
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sdiesenhouse@tribune.com
Copyright © 2007, Chicago Tribune
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