A real estate investment fund recently defaulted on a $750 million mortgage on two skyscrapers in Los Angeles. A private equity firm has slashed the value of its investment in Chicago’s Willis Tower by almost a third. Also, a landlord in New York is looking to extend the loan repayment term for an office tower on Park Avenue.
Since the pandemic emptied workplaces and made working from home the norm, office blocks in nearly every U.S. city are under great stress. In recent months, however, the crisis has entered a tense phase, damaging local economies and potentially hitting real estate investors and many banks financially.
Lenders have become increasingly reluctant to extend new loans to office building owners, especially after two bank failures last month.
“They don’t want to take out loans for new office buildings because they don’t want more exposure,” said Scott Rechler, a board member of the Federal Reserve Bank and a big player in the New York office market. said. of New York.
The timing of the lending pullback could not have been worse. Landlords will need to refinance about $137 billion of office loans this year, and about $5 trillion over the next four years, according to commercial real estate data firm Trepp. The Federal Reserve’s campaign to combat inflation by raising interest rates has also significantly increased the cost of loans that are still being offered.
Bank reluctance to lend and building owners’ desperation for credit created a stalemate. Lenders want to extend their loans and make new loans only if they can get better terms. Many landlords are resisting, and some are even threatening to default, effectively betting that banks and investors will suffer even more losses in foreclosures.
How private negotiations between lenders and building owners are resolved can have a significant impact. A default could put pressure on local banks and help push the economy into recession. Already squeezed local property tax revenues could plummet, forcing governments to cut services and lay off workers.
“What we’re seeing is this dance between lenders and owners,” said Joshua Zegen of Madison Realty Capital in New York, which specializes in financing commercial real estate projects. Nobody wants to take the building back,” he said, adding that the building’s owners also don’t want to put in new capital.
He added that the office sector is under much more stress than other types of commercial real estate, such as hotels and apartments.
Some industry experts are optimistic that, given enough time, building owners and their lenders can come up with a compromise and avoid foreclosures and large losses in property tax revenues. Because everyone wants to minimize their losses.
Manus Clancy, senior managing director at Trepp, said: “No bank will go bankrupt, but we may see some in trouble. Nothing in this market can be fixed quickly.”
Commercial building loans are usually easier to extend or change than mortgages. Negotiations are handled by bank executives or specialized financial firms called servicers. Servicers act on behalf of investors who own securities backed by one or more commercial mortgages.
But getting a deal can still be difficult.
Rechler’s company, RXR, recently stopped paying the loan it used to finance the purchase of 61 Broadway in downtown Manhattan. He said his company had regained its original investment in the building after selling nearly half of his stake to another investor several years ago. He added that the lender, German institution He Aareal Bank, is considering selling the loan and the building.
“In this illiquid market, can they sell the loan? Can they sell the building?” Arreal Bank declined to comment.
Eric Gural is co-CEO of GFP Real Estate, a family-owned company that owns several office buildings (mostly older ones) in Manhattan. He’s been embroiled in his nearly seven-month negotiations with the bank that will lend him $30 million to the Union Square building, with only two months left on his mortgage.
“We are looking to extend the existing loan for another year because the interest rate next year is likely to be better than it is now,” Gral said. “Hybrid’s work brought fear to the bank.”
While many workers are back in the office at least a few days a week, 18.6% of U.S. office space is available for rent, according to commercial real estate services firm Cushman & Wakefield. This is the highest number since the measurement started.
Public pension funds, insurance companies, and mutual fund companies that invest in bonds backed by commercial mortgages are also interested in solving or deferring the problem. A wave of foreclosures will devalue their securities.
Many of the mortgages analysts are most concerned about are for buildings in Chicago, Los Angeles, New York, San Francisco and Washington, where vacancies are either excessive or employees are hesitant to return to their offices. I’m here.
One such property is Chicago’s 108-story Willis Tower. This is his third tallest building in the country, after One World Trade Center and Central Park Tower in Manhattan. Blackstone, a giant private equity firm, purchased the building for about $1.3 billion in 2015, and he’s working to renovate the 50-year-old Sears Tower building, including adding retail space and a rooftop terrace. promised to spend $500 million.
But in December, the building’s largest tenant, United Airlines, paid an early termination fee and evicted three floors. was Blackstone disputes these figures. “About 90% of the office space is leased,” said company spokesman Jeffrey Kauth.
Blackstone recently notified some of its real estate fund investors that it had devalued its equity investment in Willis Tower by $119 million, or 29%, according to the person briefed on the matter. He spoke on condition of anonymity to discuss confidential information. Financial information.
Blackstone received a fourth extension of its $1.33 billion mortgage in March, pushing the deadline to next year, according to Trepp. Under the terms of the loan, the company could ask for a one-year extension next year.
According to Blackstone, only about 2% of its real estate funds are invested in office buildings, down significantly from a decade ago.
Even the streets with some of the most expensive real estate in the country aren’t invulnerable.
In Manhattan, the owner of 300 Park Avenue, an office building across from the Waldorf Astoria, is seeking a two-year extension on a $485 million loan due in August, according to KBRA Analytics. The property is owned by a joint venture that includes Tishman Speyer and several unnamed investors.
Built in 1955, the 25-story building is the headquarters of Colgate-Palmolive. But consumer goods conglomerates are shrinking their presence there.
Bud Perrone, spokesman for Tishman Speyer said:
Some of the bond deals, including the 300 Park Avenue loan, downgraded last fall With some tenants leaving the building, a lower-rated slice of the bond is now trading at about 85 cents on the dollar, according to Fitch Ratings.
Across the United States, an investment fund affiliated with real estate giant Brookfield Properties has defaulted on a $750 million loan to the Gas Company Tower in downtown Los Angeles and the nearby Building 777 Tower, resulting in property foreclosures or We set the possibility of sale. , according to the fund.
Brookfield spokesman Andrew Brent said in an emailed statement that the struggling office buildings are “a small part of our portfolio.”
Even as building owners struggle with vacancies and high interest rates, some have found ways to put their properties on a more solid footing.
The owners of the Seagram Building at 375 Park Avenue in Manhattan are working to refinance $200 million in loans maturing in May, with a new building filling several floors previously occupied by Wells Fargo. looking for a tenant.
Investment group RFR Holding, led by Aby J. Rosen and Michael Fuchs, purchased the 38-story building for $379 million in 2000. To bring employees back to the office, RFR last year built a $25 million “playground” in his basement garage complete with a climbing wall, pickleball and basketball court. Trepp said he’s had four new tenants sign leases in recent months.
Even with all the empty space, some landlords like Rechler’s RXR want to build new towers. RXR plans to build the nation’s tallest building at 175 Park Avenue.
“This is and will continue to be one of the best office markets in the world,” he said, referring to Tower.
