With office space selling 30% below the 2007 high in the top-10 US office markets, and with lease rates still falling, one should expect to see more foreclosures in major cities.

Chicago is about to be hit says Crain’s Chicago Business in Office tower at 500 W. Monroe flirts with foreclosure — again

A Georgia firm that holds two junior mortgages on the 46-story tower at 500 W. Monroe St. says the building’s loans went unpaid when they came due this month and that the company may foreclose and take control of the property.

It would be the first foreclosure of a major office tower in the Loop in 11 years and a sign that the market remains mired in the hangover of the debt-stoked valuation bubble that peaked in mid-2007. That’s when Broadway Partners Fund Manager LLC, a once high-flying New York firm, bought 500 W. Monroe for $336.7 million, with a package of loans that made up more than 95% of the purchase price.

“These are the situations that have gotten awfully complex,” says Dan Fasulo, managing director at New York-based Real Capital Analytics Inc., a commercial real estate research firm. “This one looks untenable.”

Mr. Fasulo reckons that 500 W. Monroe could be worth about $240 million today, based on an estimate of the building’s net operating income and the return investors would expect since the tower is just 70% leased. That would put its current value at roughly 30% below the 2007 purchase price, a decline in line with national trends. A report last week by New York-based Moody’s Investors Service showed property values in the top 10 U.S. office markets have plummeted 31% since the 2007 peak.

Should 500 W. Monroe fall into foreclosure, it’s unlikely to be the last, given the recession-stymied demand for office space and the wave of big loan maturities in coming years. Lenders so far largely have been willing to extend those loans, but that could change.

“This is an early canary in the coal mine,” says Rick Schuham, a Chicago-based executive vice-president at Studley Inc., a firm that represents office tenants. “There are plenty of tough stories out there.”

Big Wave of Commercial Foreclosures Coming

Bernanke’s stimulus efforts did next to nothing for residential housing, and absolutely nothing for commercial real estate. With a wave of maturities coming due, and with lease prices still dropping, pressures on commercial real estate are enormous.

Moreover, it is crystal clear that the economy is headed back towards recession, assuming of course one believes the recession that started in 2007 ever ended.

I suggest the recession never ended in light of the fact 3rd Quarter GDP Likely Negative.

How much patience lenders have in a weakening economic environment to restructure loans remains to be seen, but surely it isn’t infinite.

Big Wave of Bank Failures Coming

Given that regional banks are in general the ones with the most commercial real estate exposure, it should not be too difficult to look one step ahead and see the effects of another economic downturn on mid-sized banks.

Recovery a “Statistical Mirage”

Brace yourself because the recovery of 2009 was nothing but a statistical mirage fueled by unsustainable government spending and bank bailouts. That mirage is rapidly fading off into the sunset.

Mike “Mish” Shedlock
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