Tishman Speyer’s Chicago liquidity problem

Tishman Speyer’s EOP portfolio is in (even more) trouble….word is that the FDIC, who took over ownership of Lehman’s assets, has refused to fund a substantial TI /LC reserve committment Tishman has for tenanting it’s 6 MSF EOP portfolio. It will be tough to get deals done without the capital but I have to believe TSP can reduce thier principal obligations b/c of the FDIC’s unwillingness. Then again, the FDIC might cite breach of technical loan covenants like LTV.
Imagine what rents will do if TSP’s vacancy is essentially removed from the market. Fun times in CRE!

It occured to me that despite all my years of blogging, I never say much about Chicago’s real estate market. It’s about time I actually rant about something of which I have knowledge….
The second quarter of Chicago’s downtown office market resumed tightening, posting a 75 basis point (bps) decrease in the second quarter vacancy rate to 12.5 percent. In the past twelve months, the vacancy rate has dropped 200 bps. This trend defies that of the national market which is characterized by continued softening. The decrease in vacancy was attributable to 1.1 MSF of net absorption (increase in tenant demand for space) along with adaptive reuse of obsolete structures such as the low rise of 330 N. Wabash (formerly known as the IBM Building) and the Pittsfield building to hotel and student housing respectively.
That said, landlord’s perceptions about the future have finally started to temper. New deliveries and national economic conditions are hard to ignore. Next year, three new towers will add three percent to supply in 2009. The general business climate has caused some companies to reverse hiring decisions as demonstrated by the 170,000 sq. ft. of quality, long-term sublease availability added this quarter. At 1.2 percent sublease availability is still low by historical standards, however.
In light of the foregoing, we can expect a tenant-favorable market in the near term. Opportunistic tenants will leverage the effects of the new buildings on supply, particularly in the East Loop from which the new buildings’ tenants come.
However, two forces threaten the duration of this environment: skyrocketing construction costs and equally constraining capital markets. Core and shell building construction prices have escalated from $95 per sq. ft. for One North Wacker (2002 delivery) to $135 per sq. ft. for 155 North Wacker (2009) delivery. The same developer is projecting core and shell pricing of $155 – 175 per sq. ft. for a contemplated 2011 delivery. Added to this are preleasing requirements in excess of 60 percent and significantly higher equity requirements in the capital stack. I wouldn’t expect too many additions to the skyline soon. If Chicago is successful at getting the Olympics, it will be very costly to lease or construct office space for the foreseeable future.