Brookfield Properties defaults on two properties in Los Angeles
Brookfield Properties is one of the largest US commercial property owners, with large holdings in major cities including NYC and Washington.
With the impact of covid on working in central business districts--most cities have at best 50% of employees back in the office--the value of commercial property is taking a big hit. Most companies are reducing their office footprint in favor of work from home, and this is devaluing property.
Cities haven't really started reducing property tax assessment values in response ("Real Estate Values in the Time of COVID," NBER).
Another way to see the impact is whether or not there is an increase in loan defaults, because the revenue from leasing isn't enough to cover the loan, especially as mortgage rates rise.
That's why this loan default is big news ("One of the biggest landlords in Los Angeles just defaulted on $755 million in loans for two sky scrapers as remote work keeps offices vacant," Fortune). From the article:
The two properties in default, part of a portfolio called Brookfield DTLA Fund Office Trust Investor, are the Gas Company Tower, with $465 million in loans, and the 777 Tower, with about $290 million in debt, according to a filing. The fund manager had warned in November that it may face foreclosure on properties.
The company had the option to extend the maturity on the loans tied to the Gas Company Tower, but elected not to, according to its latest filing. It also elected not to get interest-rate protection that was required for loans for the 777 Tower property, which amounts to an event of default, the filing said.
“We believe DTLA’s decision to default on these two assets increases the risk for the remaining loans in their portfolio,” Barclays Plc research analysts Lea Overby and Anuj Jain wrote in a note Tuesday. Brookfield declined to comment.
The values of comparable office buildings have broadly dropped, according to the Barclays analysts. Office vacancies have increased across the country since the pandemic made working remotely more routine. The vacancy rate in the Los Angeles central business district vacancy rate was 22.7% in the fourth quarter of 2022, according to a Jones Lang LaSalle Inc. report.
Labels: commercial district revitalization planning, commercial real estate market, Downtowns/Central Business Districts (CBDs), property tax assessment methodologies, public finance, urban revitalization
posted by Richard Layman @ 10:30 PM&Permanent Link
6 Comments:
https://www.cnbc.com/2023/02/16/dropbox-has-175-million-real-estate-loss-in-2022-for-san-francisco.html
https://www.reddit.com/r/Economics/comments/1184it2/mt_20_of_banks_office_cmbs_loans_in_danger_of/j9f969w?utm_medium=android_app&utm_source=share&context=3
M&T Bank says 20% of CMBS loans are at risk.
The Wall Street Journal reports on a big loss at a big private investment firm, over an investment in an office properties focused REIT with heavy exposure in DC>
https://www.wsj.com/articles/pimco-is-saddled-with-a-1-7-billion-default-in-office-market-meltdown-79dcb6fc
2/28/2023
"Pimco Is Saddled With a $1.7 Billion Default in Office-Market Meltdown"
In September that year, Pacific Investment Management Co. said it was acquiring Columbia Property Trust Inc., which owned 19 office buildings in New York, San Francisco, Washington, D.C., and other cities. The deal valued Columbia at $3.9 billion.
“We continue to believe that high-quality office buildings in major U.S. cities offer long-term value,” John Murray, Pimco’s global head of private commercial real estate, said at the time.
Columbia has now defaulted on more than $1.7 billion of debt backed by seven of its buildings, according to people familiar with the matter, which makes it one of the biggest office defaults during the pandemic period.
The company suffered from the rise in borrowing costs and plateauing return-to-office rates in big cities, issues that are hammering many office owners. But Columbia also faced unusual circumstances, such as when Twitter Inc. stopped making rent payments in New York and San Francisco, say people familiar with the matter.
https://therealdeal.com/national/2023/02/22/pimcos-columbia-property-trust-defaults-on-1-7b-of-office-loans/
Apparently the buildings are in SF primarily and NYC. Not DC.
Corner Bakery, which has a lot of urban locations, has declared bankruptcy.
https://www.the-sun.com/money/7498680/corner-bakery-rival-panera-bread-bankruptcy/
2/27/2023
"ajor restaurant and rival to Panera Bread files for bankruptcy, putting 140 stores at risk"
Amazon iust canned hq2
https://financialpost.com/real-estate/property-post/work-from-home-mortgage-securities-default-risk-moodys
"Remote-work trend creates mortgage-backed securities default risk, Moody's warns"
3/22/2023
U.S. office space revenue falling on record vacancy rates
The popularity of working from home in the U.S. is cutting into office tower revenue to the point that it is putting some commercial mortgage-backed securities at risk of default, according to a new report from the credit rating agency Moody’s.
“Lenders’ anticipation of lower office revenue is creating refinancing difficulty for office loans with low debt yields and loans with significant lease maturities in the next 36 months,” the March 20 report said.
... as companies shed office space, lease rates from commercial real estate are falling, reducing overall cash flow to office towers and potentially weakening the ability of borrowers to pay back their debt.
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