Owners of a 26-story office tower in Chicago’s Loop business district have handed over the keys about a year after a $138 million loan matured, following a national trend of voluntary surrenders in the hard-hit office sector.
Chicago-based Hearn and New York-based Fortress Investment Group earlier this month gave up the property at 2 N. LaSalle St. via a deed in lieu of foreclosure, according to Cook County property records.
It was taken back by New York-based Torchlight Loan Services, the special servicer on a commercial mortgage-backed securities loan that matured in August 2023. The loan has a remaining balance of just over $137.8 million, according to CoStar loan data.
The 46-year-old building is the latest example of office towers either selling at a steep discount from previous prices or owners walking away because they’re unable to continue making loan payments or refinance at maturity.
Those challenges, because of factors such as poor demand for office space, rising interest rates and low sales volume, have led many borrowers such as Fortress and Hearn to voluntarily hand over properties rather than going through a formal foreclosure process.
The trend has played out throughout the country and locally, including a similar transaction involving the four-building Oak Brook 22 complex in Chicago’s western suburbs a few months ago.
The move by Hearn and Fortress has been in the works for months, according to loan reports. The Real Deal Chicago in May reported the landlords’ plans to walk away from 2 N. LaSalle, citing a Morningstar Credit loan report.
It’s unclear what Torchlight plans to do with the office tower on behalf of bondholders in the debt. Fortress declined to comment. The special servicer and Hearn did not immediately respond to requests for comment from CoStar News on Friday.
The building is about 26% vacant, according to CoStar data.
Older-generation office buildings such as 2 N. LaSalle for several years have struggled as large tenants such as Bank of America and BMO Financial have moved to big, new trophy towers near the Chicago River and farther west in Fulton Market.
Those challenges became even greater with the arrival of COVID-19 in early 2020, which has led to remote and hybrid work schedules. That has caused many employers to significantly cut back their space, often while moving to smaller offices in higher-quality properties.
That has led Mayor Brandon Johnson to back a plan to provide more than $151 million in public subsidies for the conversion of unwanted office space on and around LaSalle Street into more than 1,000 apartments, 30% of which would have affordable, below-market rents. Developers are eyeing similar projects in other parts of downtown, including the Magnificent Mile shopping district.
Hopeful signs in the center of the Loop include Google’s plans to buy and eventually occupy the formerly state-owned, Helmut Jahn-designed James R. Thompson Center and JPMorgan Chase’s plans to overhaul and continue to occupy its 60-story namesake tower.
The office tower at 2 N. LaSalle sold for $152.7 million to Harbor Group in 2007, just before an economic crisis and a plunge in real estate values.
Fortress and Hearn later took a controlling stake in the tower by providing Harbor Group with a $42 million investment toward leasing costs and other improvements to help Harbor Group avoid defaulting on its approximately $127.4 million CMBS loan, Crain’s Chicago Business has previously reported.
Because of unpaid interest and other fees, the balance on the matured loan is now more than $137.8 million. That is far more than the building is now worth today, according to people familiar with the property.