While office foreclosures have the spotlight in Chicago, a South Loop apartment building’s financial distress is now raising doubts about the resilience of the city’s multifamily market.
An affiliate of Los Angeles-based Ares Management filed an $80 million foreclosure lawsuit in Cook County court last week against the owner of 1411 South Michigan Avenue. The 15-story, 199-unit building is now subject to the largest multifamily foreclosure in Chicago since commercial real estate owners began struggling with rising interest rates in 2022.
The landlord is an affiliate of Russland Capital, a Chicago-based firm led by Felix Friedman. Russland took out a $53 million construction loan to develop the building in 2016.
After refinancing the construction debt with Ares through a new $76 million loan, Russland was obligated to pay off the lender by January 2022. The loan’s maturity date was extended twice until April 2023 but was never paid off, the lender alleged in a complaint filed Friday.
In total, the lender is seeking $80 million from Russland, including fees and interest. Representatives of Russland and the lawyer for Ares did not respond to requests for comment.
The building was proposed during a multifamily building boom in Chicago that has recently slowed due to rising interest rates and construction costs.
While foreclosures in the multifamily space have been rare in the Windy City, headwinds continue to cause some financial losses. Barings recently took a haircut on an apartment building near the Bally’s casino development site in River West. The firm sold the building known as Mondial for $42 million despite an affiliate buying it for $56 million in 2013. And the city’s second-priciest multifamily sale last year also resulted in a big loss for Invesco, which moved on from the 400-unit Streeterville apartment building for $173 million after it had paid $240 million for it in 2016.
A couple notable foreclosure cases in Chicago’s multifamily market have cropped up, but fewer than in the office market, where landlords are particularly vulnerable to distress due to falling demand compounding the impact of higher interest rates.
Last year, Barings found itself on the other side of an apartments foreclosure dispute when it had to file a $74 million complaint against the owner of 29 South LaSalle Street, where an affiliate of Florida-based DLC Residential converted the building from offices into housing but didn’t pay back the construction loan, according to court papers.
And a lender recently completed its takeaway of the 223-unit Edison building at 5200 North Sheridan Road in the Edgewater neighborhood after its previous owner defaulted on a $43 million loan, public records show.
Still, big multifamily deals outpaced Chicago’s struggling office market in 2023, claiming some of the top spots among the priciest commercial real estate transactions of the year. At the top of the list was the $232 million sale of the 492-unit, 45-story luxury apartment building at 727 West Madison in the West Loop. The had previously secured a $177 million loan.