Blackstone, the global property investing entity, is negotiating to receive an extension on Chicago’s legendary Willis Tower loan. The entity, who last year extended the loan for the fifth time, is seeking to bring forward their maturation date to 2028, and have an extension to 2030. The loan of $1.3 billion, acquired in 2018, is under close eye by holders of bonds and by KeyBank, who recently acquired special loan servicing.

While loan extensions tend to suggest financial pressure, in this case, there is something more subtle. The course of action taken by Blackstone is suggestive of planning carefully for what comes next, and ignoring short-term financial pressures. As the commercial property market continues to evolve in response to the ongoing impact of working from home and unpredictable interest rates, is this an opportunistic bet on recovery?

Why Blackstone is Seeking an Extension

The Willis Tower loan is securitized in a commercial mortgage-backed securities (CMBS) transaction, and therefore, is sliced up between multiple lenders. As a loan is sent to special servicing, usually, questions around whether or not the borrower is able to satisfy obligations always do. In this situation, however, Blackstone and KeyBank have apparently reached in-principle accord on terms to restructure the loan, to allow extension rather than forced sale or unfavorable refinancing.

Although the details of the transaction have not been revealed, chances are, to obtain lender approval, Blackstone is probably going to have to make an up-front principal payment, something standard in similar high-profile office building deals.

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Financial Performance: In Surprisingly Better Shape Than Predicted

Despite the ongoing negotiations, Willis Tower surpassed financial projections. The building generated nearly $188 million in revenues in the first nine months of last year, surpassing the initial year-end projection of $186 million. In addition, net 2023 cash flow exceeded $110 million, up considerably compared to 2022’s total of $80 million.

The tower’s occupancy rate also lends to stability. The space in the building is 83% occupied, up significantly against downtown Chicago’s 75%. The company also recently signed 400,000 square feet in deals in 18 months, including an 84,000-square-foot deal for Adtalem Global Education.

Beyond office rentals, the building’s Skydeck observatory serves as a major revenue stream, drawing over a million visitors annually. This diversified income source provides a financial cushion that many other office buildings lack, positioning Willis Tower more favorably in a turbulent market.

Market Timing: Abstention From Refinancing in Unpredictive Markets

Instead of refinancing or selling, Blackstone has repeatedly chose to roll over the loan—a sign of confidence in future property values. High interest and shifting work patterns have disrupted the office market, and refinancing is an expensive and unpopular option. Nonetheless, Blackstone President Jon Gray recently expressed optimism in the market, and office property may be on the brink of hitting rock bottom and experiencing an upturn.

When compared to their fellow commercial property landlords, Blackstone’s approach is distinct. Others have either sold their property for under market price, re-financed their loan, or made concessions in order to retain their tenants. Blackstone’s decision to negotiate extensions, however, means that it is holding on for a market recovery, believing Willis Tower is still a good long-term asset, having recently spent $500 million on restoration in 2022.

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What Lies in Store for Willis Tower and the Office Market?

Blackstone’s handling of the Willis Tower loan is representative of a larger commercial property pattern: landlords are relying on financial flexibility to avoid marking their holdings to market. The future course of several years will determine whether such a strategy is successful. If office space demand stabilizes or recovers, Blackstone’s holding pattern may have been worthwhile. 

If, however, remote work continues to affect leasing patterns, even such iconic structures as Willis Tower might have to bear ongoing financial burdens. For now, Blackstone is keeping its powder dry, instead of rushing to refinance or to sell. The consequence of such an action will give us an important indication of how robust is the office market to ongoing economic shifts.

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