The Chicago Metropolitan Statistical Area (MSA) is facing a significant challenge as it ranks second in the United States for the highest percentage of office loans on the CMBS watchlist, according to Trepp. With 48% of the area’s office loans flagged for potential distress, only Portland, Oregon’s MSA surpasses Chicago’s figures, with 55.6% of its CMBS office loans on the watchlist.
Alarming Trends
This alarming trend underscores the emerging crisis in the commercial office sector, with the Chicago MSA, one of the largest in the country, at the forefront. The situation has worsened over the latter half of 2023, as reported by Cred IQ in the Commercial Observer on January 23, 2024. Nearly $100 billion in loans were added to the servicer watchlist due to signs of distress, marking a 110% increase in the second half of the year alone.
The surge in watchlisted loans is attributed to several factors. Upcoming loan maturities account for 35.8% of these additions, while 28.8% are due to low debt service coverage ratios. Delinquencies and major tenant lease issues have also contributed to the growing concern, suggesting that the number of troubled loans may continue to rise if current market conditions persist.
Suburban Office Vacancies On the Rise
“Doom Loop” scenarios are particularly evident in downtown Chicago, where Class A space vacancy rates have reached 16%, and lower-tier buildings are experiencing even higher vacancies. This phenomenon is not limited to urban centers, as the Chicago suburban office markets also face escalating vacancy rates, surpassing 30% in the fourth quarter of 2023, according to Crain’s Business Journal. This represents a significant jump from the approximately 22% vacancy rate at the onset of the pandemic.
The difficulties are compounded for borrowers who struggle with loan covenant triggers and foreclosures, often finding CMBS lenders challenging to negotiate with due to stringent loan agreements and a complex servicing process.
In response to these challenges, Brighton Capital Advisors emphasizes the critical role of CMBS loan advisors. By facilitating direct communication with CMBS Master and Special Servicers, advisors help borrowers prepare operational and investment plans, aiming for favorable outcomes such as loan modifications, extensions, or discounted payoffs.
As the crisis unfolds, the demand for experienced loan advisory services in the Chicago MSA and across the Midwest is growing. With a deep understanding of CMBS securitization and access to key decision-makers, CMBS loan advisors play a pivotal role in navigating these turbulent times, offering a glimmer of hope for embattled property owners and investors.
