For the second time in the past year, Morningstar Credit Ratings has raised major concerns about loans on a prominent commercial real estate property in the Milwaukee area. We ought to be paying attention.
Last year, Morningstar issued a report about a dozen shopping malls in the United States that had large loans and were anchored by Bon-Ton stores. The report expressed concern for the loans on those malls because The Bon-Ton Stores Inc., the parent company of Boston Store which was based in Milwaukee and York, Pennsylvania, was having significant problems and had not turned an annual profit since 2010.
One of the malls Morningstar cited in the report was Southridge Mall in Greendale. The mall’s owner, Indianapolis-based Simon Property Group Inc., had $119.6 million in debt on Southridge, which had already lost its Sears store and was due to lose its Kohl’s store. It could ill afford to lose its Boston Store as well.
But since then, Bon-Ton declared bankruptcy and has been liquidated. All of its stores, including the Boston Store location at Southridge, were closed.
Simon Property Group is working to attract new tenants to keep Southridge viable. Dick’s Sporting Goods and Golf Galaxy stores just opened at the mall. A Round1 Bowling and Amusement center will open there next year.
It will be interesting to see if Simon can attract even more tenants, and hold on to its remaining inline stores, at Southridge or if the loss of Sears, Kohl’s and Boston Store will be too much to overcome.
Recently, Morningstar issued another report of concern to the Milwaukee area. It placed a $51.9 million loan for the 100 East office tower in downtown Milwaukee on its watch list “because of a high amount of space available for lease and sublease.”
The 37-story office tower, built in 1988 at 100 E. Wisconsin Ave., was once one of downtown’s premiere office properties. But it is facing new competition from new buildings, including the 833 East building and the BMO Tower, which is under construction. Law firm Michael Best & Friedrich plans to move from the 100 East building to the BMO Tower, which will open in late 2019.
In addition to Michael Best, Morningstar’s report raised concerns about the possibility of The Marcus Corp. and Wells Fargo moving out of the 100 East building. Meanwhile, the former John Hawks Pub restaurant space there has been vacant for two years.
The $51.9 million loan on the 100 East building matures in 2026. Net cash flow on the building is down 21.6 percent since underwriting, according to Morningstar, which estimates the value of the building has fallen 35.8 percent since underwriting, to $53.7 million.
The 100 East building was sold in 2016 to Santa Monica, California-based Hertz Investment Group LLC, which is going to have to work to attract new tenants.
We all should be keeping an eye on how things turn out at Southridge and 100 East.