It’s contagious.
The strain on Chicago’s depressed office market has officially wiped out its unsecured lenders — funders who once thought downtown properties were so safe they didn’t need collateral.
A trio of pre-pandemic bets that Chicago-based Nuveen — the investment arm of the Teachers Insurance and Annuity Association of America, or TIAA — made by providing big-time Windy City landlords mezzanine loans on top of their massive first mortgages look unlikely to pan out, and Nuveen and its affiliates are on the verge of taking a fourth painful hit in Chicago’s commercial property debt market.
How the investments vanished is a prime example of risky high-leverage strategies that load up properties with extra debt coming back to bite landlords and their lenders, especially when economic conditions go from boom at a deal’s origination to bust by maturity.
One building, owned by Blackstone, entered foreclosure litigation in February over a default on its $310 million first mortgage, jeopardizing Nuveen’s $60 million second-loan position; a second building has lost so much value there’s talk of it becoming the world’s tallest to ever be torn down; and another has already sold at a massive discount that wiped out Nuveen’s mezzanine loan position while also damaging mortgage lender Morgan Stanley’s senior debt package.
“These were mid-2010s deals made pre-COVID. Nuveen had a bunch of money to put out and by historic metrics they should not have lost all their investment,” an expert on Chicago’s office market said.
Unlike lenders who underwrite traditional mortgages, mezzanine money types can’t do much to improve building operations or modify loan terms — as a TIAA account’s annual report, filed in March, notes in one disclosure of risk.
“As a subordinated lender, the account may have limited rights to exercise control over the process by which the mortgage loan is restructured or the property is liquidated following a default,” the section reads. “Any of these circumstances may result in the account being unable to recover some or all of its original investment.”
Mezzanine lending is a shadowy world, since it’s rare that any public records document when these loans get made, unlike traditional mortgage debt. All together, Nuveen’s string of deals threatens to evaporate about $280 million in credit it extended to major real estate owners as distress roils Chicago’s office market.
Now, another bet that Nuveen placed on 321 North Clark Street, in the summer of 2021, is entering the danger zone.
Nuveen said that the company was working to modify the loans on 321 North Clark but declined to answer bigger-picture questions about distress at buildings where it had made loans. Its borrowers that own Chicago offices either declined to comment or didn’t respond to requests for comment. The people who spoke about Nuveen’s misses were granted anonymity to discuss sensitive financial matters.
The empty office problem
By pre-pandemic standards, Nuveen’s positions were assumed to be safe at the properties, which include Blackstone’s 350 North Orleans; the 65-story 311 South Wacker, owned by a joint venture of Zeller and Cindat; and 600 West Chicago Avenue, which just sold for $89 million to former Phoenix Suns owner Robert Sarver’s firm.
But the shift to remote work and ensuing interest rate hikes depressed the market to an unmanageable extent for several of Nuveen’s borrowers, not only in Chicago but across the U.S., its financial disclosures show.
At 311 South Wacker, the lender has publicly acknowledged that it’s unlikely to receive any of the $93 million in principal it provided to its landlord.
The 1.6 million-square-foot West Chicago Avenue sale price was less than 20 percent of the $510 million that its previous owner, Sterling Bay, paid for the property in 2018. The deal wiped out much of Morgan Stanley’s $374 million mortgage loan, as well as all of Nuveen’s $54 million mezzanine position, according to people familiar with the sale.
“The building is frozen. The challenge was always whenever you have multiple parties involved in the ownership front, equity or debt, getting decisions made just becomes impossible.”
Nuveen’s deal at 321 North Clark, where in 2021 it gave a $296 million floating rate loan to the Hines-led landlord entity, still has a fighting chance to get back on track. Nuveen sold off about $222 million of the debt to a consortium of German banks, while keeping an approximately $74 million mezzanine position, according to public records and people familiar with the property.
But the building’s cash flow constricted, as interest rate hikes that started in 2022 spiked the cost of debt service. Leasing efforts have paused while Hines and its two landlord partners, Chicago-based Diversified Real Estate Capital and Los Angeles-based American Realty Advisors, try to hash out a resolution with their German lenders and Nuveen to the $250 million remaining total balance in debt. There’s a chance the property’s value has already dipped below the outstanding debt, a person familiar with the situation said.
“The building is frozen,” another person familiar with the property said. “The challenge was always whenever you have multiple parties involved in the ownership front, equity or debt, getting decisions made just becomes impossible.”
A spokesperson from Nuveen said the company was in “active negotiations with the borrower and the senior lender group to modify the position.”
While 321 North Clark is 85 percent leased now, its second-biggest tenant, CBRE — the world’s largest commercial real estate brokerage — is in talks to move out of its 61,400 square feet into the Irvine Company-owned skyscraper nearby at 300 North LaSalle Street. (The CBRE move is likely contingent on a deal to take over property management and leasing for Irvine’s in-house team at its three-tower Chicago office portfolio, according to a source.)
Vulnerable
Chicago is far from alone in handing losses to mezzanine lenders.
Foreclosure notices on mezzanine loans reached an all-time high in 2023. That’s the same year the TIAA account that provided mezzanine debt to Blackstone’s 350 North Orleans and the troubled 311 South Wacker chalked up losses of $344 million in its loans receivable business, according to its annual report. That was followed up by $170 million in losses last year for the category.
Last year’s lumps were caused by “unfavorable valuations” of three loans, the annual report said. It’s worth noting Nuveen’s loan receivables business, which primarily includes mezzanine loans, represented only 3.5 percent of the account’s total investments, while real estate and real estate joint venture investments represented about 85 percent.
Unlike some lenders, Nuveen is unafraid to take on ownership. Last year, it seized three office properties where it made big loans through deeds in lieu of foreclosure, including the 253,000-square-foot Stratum building in Austin, Texas, whose former owner owed Nuveen a total of $51 million in senior and mezzanine debt as of 2023, the lender’s annual report shows.
The others it took back were a 267,000-square-foot Portland, Oregon, building, and a 333,000-square-foot office building in Herndon, Virginia, valued at $43.6 million.
In Chicago, Nuveen is unlikely to move to take over ownership of 311 South Wacker or 350 North Orleans, which remain burdened by massive first-lien mortgages that exceed the diminished property values.