The owner of Chicago’s iconic One Two Pru office complex at Michigan Avenue and Randolph Street said it’s taking steps to head off potential financial trouble amid the rise of remote work and a decimated office market.
Wanxiang America Real Estate Group, which bought the two towers in 2018 for $680 million, said it requested a transfer of the property’s $389 million loan to special servicing, more than two years ahead of the 2025 maturity date.
Transferring a loan to special servicing typically signals financial distress or imminent default. But Wanxiang officials said they plan to own One Two Pru for a long time and will seek a loan modification and extension of four or five years without asking for any serious concessions. The move will allow them to invest more in the towers, add new amenities and improve common areas, hopefully securing the property until the beleaguered office market is on the mend.
“When people hear special servicing, they put a negative spin on it, but in this case it’s positive news,” Wanxiang Managing Director Larry Krueger said. “We think it may take longer than two years for the market to stabilize, and we don’t want to worry about our underlying debt in the meantime.”
Like other downtown commercial properties, the loan for One Two Pru was packaged into commercial mortgage-backed securities bought by bondholders and is administered by a master servicer, in this case Wells Fargo. But a special servicer takes over in case of imminent default and is the only one that can modify such loans.
“We’ve learned to not let things slip when you have the opportunity to start the discussion,” Krueger said. “That’s better than doing it under the gun.”
The 2.3 million-square-foot One Two Pru is 78% occupied, but Wanxiang expects occupancy to decline over the next few years as some leases expire. Tech firm SMS Assist is the largest tenant, signing a lease in 2021 for more than 100,000 square feet.
Downtown office vacancy hit a historic high of more than 22% early this year as many companies shrank or abandoned their offices in favor of work-from-home strategies, according to Colliers International.
Adam Friedman, a partner with Olshan, a New York law firm, said waiting until 2025 to seek modifications to CMBS loans could be risky, and right now, lenders are usually willing to work out solutions.
“The debt market is pretty frozen right now, especially in the office sector,” he said. “People have been calling it Armageddon, and most feel it’s going to get worse before it gets better, so generally speaking, it might be prudent to get ahead of this.”
More than 20 large downtown office buildings are in special servicing, according to CoStar, including the 83-story Aon Center just to the east of One Two Pru.
The 41-story One Pru, the first skyscraper constructed in Chicago following the Great Depression, was the city’s tallest building when completed in 1955. Two Pru, its 64-story neighbor, was completed in 1990. Wanxiang is the majority owner, and Chicago-based developer Sterling Bay holds a minority share.