Developers, commercial properties run into money trouble as stricter lending practices come into play and fewer buyers place bids

By Robert Manor

Tribune reporter

May 2, 2008

There is little doubt that the nation’s credit crisis has cooled speculative real estate projects in Chicago, but now that chill has spread to developments with marquee tenants and backed by established companies.

Last week, the developer of a nearly half-billion-dollar project at Chicago’s landmark Union Station said he has been unable to get financing, despite the American Medical Association’s commitment to lease 275,000 square feet and the support of the city and Jones Lang LaSalle, the second-largest commercial property broker.

So far this year, Chicago has seen just one megadeal, the $540 million sale of the UBS tower at 1 N. Wacker Drive in February. “Right now, in this credit market, it is a meltdown,” said one major office developer who spoke on condition of anonymity. He said even the strongest institutional borrowers are having difficulty getting money.

Developer Hossein Youssefi, who is leading the effort to renovate and expand Union Station, seems an ideal candidate to be able to raise money.

He is working to add an 18-story tower to Union Station with Jones Lang LaSalle, a Chicago-based firm experienced in similar projects including the redevelopment of Grand Central Terminal in New York and Washington’s Union Station. Youssefi formerly worked with Jones Lang LaSalle in developing millions of square feet of commercial real estate.

Construction on the project, which calls for residential, retail and office space, is scheduled to start this summer.

In addition to the Jones Lang LaSalle partnership, the project has the backing of nearly $59 million in public funding, a sign that city officials will do what they can to help the project.

“As of right now, we do not have financing in place,” Youssefi said.

Youssefi said he isn’t giving up, and Jones Lang LaSalle said the project will go forward. But Youssefi was blunt about the problem he faces.

“It is no secret that it is very difficult to obtain financing,” he said. “Maybe we will have to re-engineer the financing.”

That could involve obtaining financing from several sources, he said, or perhaps from foreign investors.

Jones Lang LaSalle faces its own problems.

After the markets closed Tuesday, the real estate services company reported net income of $2.8 million, or 9 cents per diluted share of common stock, for the quarter ended March 31, far below the net income of $27.3 million, or 81 cents per share, for the first quarter of 2007

Jones Lang LaSalle said its business was “significantly impacted in the first quarter of 2008 by liquidity conditions in credit markets.”

Lack of financing held up work on the Waterview Tower & Shangri-La Hotel, which is being built along the Chicago River at Wacker Drive and Clark Street.

Teng & Associates, the Chicago-based developer, took two years to secure a $300 million loan needed to finish the project.

And last month, the owners of the Aon Center, Piedmont Office Realty Trust, took the building off the market after they were unable to obtain an acceptable price for the property. At the time, they cited “capital markets” as one reason to hold on to the office tower.

Asked Wednesday if difficulty in getting loans has made it challenging for potential buyers to make an attractive offer, Raymond L. Owens, executive vice president of capital markets for Piedmont, had a simple and direct answer: “Of course. Yes.”

Robert Dobilas, chief executive of credit rating agency Realpoint LLC, said the general weakness in home values is making it hard to get financing for commercial properties around much of the country.

“The longer the residential market worsens, it is going to trickle down into the commercial” realm, Dobilas said. “We are starting to see weakness in the retail sector, the hotel sector.”

People whose net wealth is declining as their homes lose value are apt to cut back on discretionary spending, like inessential shopping or out-of-town vacations.

“The most difficult [market] is retail,” said Al Vallejo, commercial division manager for Re/Max Team 2000.

“Because the economy is suffering the way it is, people are cutting back on luxury items,” Vallejo said.

The AMA’s plans to move to Union Station also raise the question of the future of its current headquarters at 515 N. State St. German investors have the 29-story building up for sale, and real estate observers estimate its value at perhaps $160 million.

An individual familiar with the AMA building says existing financing could make the structure an easy sell.

“A new buyer can walk in and assume the existing financing,” said the source, who spoke on condition of anonymity. “It is at an attractive interest rate.”

Less hurt by the credit slump are smaller projects or projects tied to industries with growth potential.

Self-storage projects, particularly climate-controlled properties in highly visible locations, are also easy to finance and sell, said Marc Boorstein, principal with MJ Partners.

Boorstein said Elmhurst Self Storage on Illinois Highway 83 near Oakbrook Center easily found construction financing, even though it did not have a single tenant.

The asking price for the state-of-the-art storage building, with 81,000 square feet of rental space, is $10.5 million.

“We are already getting offers,” Boorstein said.