Nearly a Quarter of Chicago’s CMBS Loans Are in Distress

Chicago had the highest distress or delinquency rate in the nation for CMBS loans as of August among the top 20 US metros, according to a report from ratings agency Kroll Bond Rating Agency (KBRA).  

The Windy City led all metros with an overall distress rate of 22% in CMBS 2.0 loans. CMBS 2.0 is the designation for the post-GFC series of commercial mortgage-backed securities.

Chicago’s distress rate is nearly three times the average of 7.2% for top 20 metros, and almost double the 12.5% rate KBRA reported for Chicago in June 2022.

KBRA said Chicago’s distress was primarily due to exposure in the lodging and office sector, with several large loans contributing to the red ink, including a $400M loan backed by the Aon Center, a $388M loan backing Prudential Plaza and a $329M loan on the Palmer House Hilton.

Denver had the second-highest distress rate at 19.1%, followed by Philadelphia at 14.2% and San Francisco at 13.9%.

In August, CMBS 2.0 delinquencies rose to 6.8%, based on an analysis of nearly $600B of the $4.5T CRE debt market. KBRA noted that the Federal Reserve’s campaign of interest rate hikes was the fastest monetary tightening cycle in the past 35 years.

On the brighter side, seven of the top 20 metro markets posted distress rates of less than 2%, including Orlando; San Jose; Phoenix; Miami; Boston and Seattle. San Diego posted a distress rate of less than 1%, according to KBRA’s report.

The amount of distress in Chicago may make Mayor Brandon Johnson’s proposal for a new property transfer tax a tougher sell. Johnson has proposed the tax on CRE transactions to fund an effort to fight homelessness, similar to Measure ULA in Los Angeles.

The current transfer tax is a flat rate of 0.75% on all property sales. Under Johnson’s proposal, the rate would increase to 2% for properties about $1M and 3% for properties $1.5M and above.

However, Carlos Ramirez Rosa, a sponsor of the transfer tax resolution in the city council, noted that the transfer tax rate will decrease for all properties under $1M—a potential selling point for voters should the council decide to put the issue on the ballot.

“Ninety-six percent of home sales will see a reduction in the one-time real estate transfer tax that they pay because 96% of sales in the city of Chicago are less than $1M,” he told a local ABC television station.

While supporters of the transfer tax are framing it as a tax decrease, the Illinois Real Estate Association (IREA) is calling it a tax increase and warning that it will deter buildings from investing in Chicago.

“Landlords own multi-family buildings and they cost north of $1M. That is going to increase the cost that will eventually get passed down to the tenant and increase rent,” Tommy Choi of the IREA told ABC.