The longtime owner of a boutique office building in River North that houses several Chicago real estate development firms has secured a new loan through 2050, overcoming a daunting market for selling or refinancing corporate properties.
Next Realty finalized a new $11 million loan last week on the Kingsbury Center at 350 W. Hubbard St., CEO and Managing Partner Andrew Hochberg told CoStar News.
The Skokie, Illinois-based firm has owned the building since developing it in 1988. Now, it has a rare cash cushion that it can use to help in managing the property.
"It's a challenging market for Chicago office, there's no question," Hochberg said. "I don't think it's a good time to sell an office building in Chicago right now unless you have to. It remains to be seen whether there's a lot of upside, but I don't see a lot of downside from here."
The new debt provides a clear path to continued long-term ownership for Next Realty, which faced replacing a previous loan on the property at a trying time for office landlords. Many of these property owners have been unable to refinance amid historically low demand, increased interest rates and lender pullback on office deals.
That has led many owners to hand properties to lenders or to sell at massive discounts to previous valuations.
Next Realty experienced those struggles earlier this year when it sold the high-vacancy loft office building at 620 N. LaSalle St. for less than half the loan value. Before the distressed sale, Next Realty had owned the property, previously a Sports Authority store, since 2002.
Market refinancings
Circumstances around other recently refinanced Chicago office properties have varied widely, including Blackstone's agreement to extend the maturity of $1.3 billion in commercial mortgage-backed securities debt on 110-story Willis Tower by up to five years and Hines' $610 million loan that replaced construction financing on the recently completed, 60-story Salesforce Tower along the river.
Shapack Partners, Focus and billionaire Neil Bluhm's Walton Street Capital refinanced the Fulton Market building they developed at 167 N. Green St. for $247 million, more than the $240 million loan that previously refinanced the property in 2021.
Another of Bluhm's firms, JBM Realty, wasn't as fortunate last year in a $180 million refinancing of the 900 North Michigan Shops mall and office space within the 66-story tower on the Magnificent Mile. That deal required Bluhm to put in more than $56 million of fresh capital to cover the difference of a previously larger amount of debt, as well as fund reserves and other leasing costs.
The Kingsbury Center's high-demand location, long-term ownership, low vacancy and the relatively small deal size helped Next Realty overcome broader market difficulties.
The six-story, 135,315-square-foot building is tucked between two well-known properties along the Chicago River: the East Bank Club to the west and the sprawling Merchandise Mart to the south.
The structure along Hubbard and Orleans streets is 95% leased, including ground-floor retail tenants CVS and Petco, according to Next Realty.
More than half of the building's space is leased to real estate companies, including developers Related Midwest, Habitat Co., Oxford Capital, Bond Cos. and Dayton Street Partners. Habitat also has an ownership stake in the building and manages the property.
Tenants in the building have a weighted average tenure of 15 years, according to the owner.
In an unusually long loan agreement, StanCorp Financial Group provided 25 years of debt, with the interest rate scheduled to reset every three years to reflect market conditions, Hochberg said.
That debt replaced a $13.3 million loan from Nationwide Life Insurance in June 2015, according to Cook County property records.
Looking ahead
Next Realty had paid down the balance of that loan over time, meaning the new $11 million loan was effectively a cash-out loan in which the borrower can pocket some money. But instead of doing that, as developers often do during boom times, Hochberg said the firm plans to use new dollars to find tenants to fill remaining spaces and to keep cash on hand in case tenants leave.
"The focus right now is filling the remaining 5%, but in the office business there's always turnover that you have to be ready for," he said.
Hochberg once led his family's Sportmart sporting goods chain before it merged with Gart Sports in 1998. That company became part of Sports Authority in 2003.
Most of Next Realty's real estate investments are in the Chicago area, but it also owns properties in Milwaukee, Wisconsin; Cincinnati, Ohio; Nashville, Tennessee; St. Paul, Minnesota; Washington, D.C.; and Fort Lauderdale, Florida.
The firm recently raised a new fund to seek out opportunistic purchases in retail, residential and parking properties, Hochberg said.
For the record
Daniel Rosenberg of BWE arranged the financing.