A real estate investment fund recently defaulted on $750 million in mortgages on two Los Angeles skyscrapers. A private equity firm has cut the value of its investment in Chicago’s Willis Tower by nearly a third. A major New York landlord is trying to extend the deadline for repaying a loan for a Park Avenue office tower.
Office districts in nearly every American city have been under great pressure since the pandemic emptied workplaces and made working from home commonplace. But in recent months, the crisis has entered a tense phase that could wreak havoc on local economies and deal financial blows to real estate investors and dozens of banks.
Lenders are increasingly reluctant to provide new loans to owners of office buildings, especially after the collapse of two banks last month.
“They don’t want to make new loans for office construction because they don’t want more exposure,” said Scott Richler, a New York real estate owner who is a big player in the city’s office market and sits on the Fed’s board. New York.
The timing of the decline in lending could not be worse. Landlords need to refinance about $137 billion in office mortgages this year and nearly half a trillion dollars in the next four years, according to real estate data business Tripp. The Fed’s campaign to fight inflation by raising interest rates has also greatly increased the cost of loans that are still being offered.
The unwillingness of the banks to lend and the desperation of the building owners to obtain credit led to a confrontation. Lenders want to make loans and make new loans only if they can get better terms. Many landlords are fighting back, some are threatening default, effectively betting that banks and investors will lose more in foreclosures.
How private negotiations between lenders and building owners are resolved can have major ramifications. Defaults can put more pressure on regional banks and help push the economy into recession. Local property tax revenues, already under pressure, could drop, forcing governments to cut services or lay off workers.
“What we’re seeing is this dance between lenders and owners,” said Joshua Zeigen of Madison Realty Capital in New York, a firm that specializes in financing commercial real estate projects. “No one knows what the correct value is. No one wants to restore a building,” he said, adding that the building owners don’t want to rebuild a new capital either.
He added that the office sector was feeling much more pressure than other types of commercial real estate such as hotels and apartment buildings.
Some industry experts are optimistic that given enough time, building owners and their lenders will find compromises, avoiding foreclosure or a significant loss of property tax revenue because everyone wants to minimize losses.
“I don’t view that as something that would create systemic risk,” said Manos Clancy, Tripp’s chief managing director. It won’t cause banks to collapse, but you can see some banks in trouble. Nothing gets resolved quickly in this market.”
Loans on commercial buildings are usually easier than extending or modifying mortgages. Negotiations are handled by bank executives or specialized finance firms called servicers, who act on behalf of investors who own one or more commercial mortgage-backed securities.
But closing a deal is still difficult.
Mr. Richler’s RXR company recently stopped making payments on a loan it used to finance the purchase of 61 Broadway in midtown Manhattan. He said that his company has regained its original investment in the building after selling nearly half of its stake to another investor several years ago. He added that the lender, Aareal Bank, a German institution, is considering selling the loan and the building.
In this illiquid market, can they sell this loan? Can they sell the building? Mr. Richler said. Aareal Bank declined to comment.
Eric Gorral is the co-CEO of GFP Real Estate, a family-owned company that owns stakes in several Manhattan office buildings, most of which are older. He’s engaged in nearly seven months of negotiations with a bank to offer a $30 million loan for a building in Union Square, with only two months left on the mortgage.
“I am trying to get a one-year extension on an existing loan so I can see what interest rates look like next year, which are likely to be better than they are now,” Mr. Goral said. “Hybrid work created fear in banks.”
Although many workers are back in the offices at least a few days a week, 18.6 percent of American office space is available for rent, according to Cushman & Wakefield, a commercial real estate services firm, the most since it began measuring vacancies. in 1995.
Public pension funds, insurance companies, and mutual fund companies that invest in commercial mortgage-backed securities also have an interest in seeing the problems resolved or postponed. A wave of foreclosures will lower the value of their securities.
Many of the mortgages that analysts worry the most concern buildings in Chicago, Los Angeles, New York, San Francisco and Washington — cities with an abundance of vacant space or where workers are reluctant to return to offices.
One such property is the 108-story Willis Tower in Chicago – the third tallest building in the country, after the World Trade Center and Central Park Tower, both in Manhattan. Private equity giant Blackstone bought it for about $1.3 billion in 2015 and committed to spending $500 million renovating the 50-year-old building, formerly the Sears Tower, including adding retail space and a rooftop terrace.
But in December, United Airlines, the building’s largest tenant, paid an early termination fee and vacated three floors; The company still occupies 16 floors. That month, about 83 percent of the building was occupied, according to KBRA Analytics, a credit data and research firm. Blackstone is skeptical about these numbers. “Approximately 90 percent of the office space is rented,” said Geoffrey Cauth, a spokesman for the company.
Blackstone recently notified some of its real estate fund investors that it had written down the value of its equity investment in Willis Tower by $119 million, or 29 percent, according to a person familiar with the matter, who spoke on the condition of anonymity to discuss sensitive matters. financial information.
In March, Blackstone secured a fourth extension of the $1.33 billion mortgage, pushing back the maturity date to next year, according to Tripp. Under the terms of the loan, the company can seek another one-year extension next year.
Blackstone said only about 2 percent of the company’s real estate funds were invested in office buildings – down significantly from a decade ago.
Even the streets containing some of the most expensive real estate in the country are not immune.
In Manhattan, the owner of 300 Park Avenue, an office building across the street 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 including Tishman Speyer and several unnamed investors.
The 25-story building, built in 1955, is the corporate headquarters for Colgate-Palmolive. But the conglomeration of consumer products is diminishing its presence there.
“We have requested that our loan be transferred to the private servant well in advance of its due date so that we can work together on a mutually beneficial extension,” said Bud Peroni, a spokesman for Tishman Speyer.
Portions of the bond deal that includes the 300 Park Avenue loan were lowered last fall by Fitch Ratings because some tenants have left the building, and a low-rated tranche of the bond is now trading at about 85 cents on the dollar.
Across the country, an investment fund tied to real estate giant Brookfield Properties defaulted on $750 million in loans for the gas company’s tower and a nearby building, Tower 777, in downtown Los Angeles, leading to the potential closure or sale of properties, according to the fund.
Financially challenged office buildings were “a very small percentage of our portfolio,” Brookfield spokesman Andrew Brent said in an emailed statement.
Even as building owners struggle with vacancies and high interest rates, some have found a way 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 a $200 million portion of a loan due in May while finding new tenants to fill several floors formerly occupied by Wells Fargo.
RFR Holding, an investment group led by Aby J. Rosen and Michael Fuchs, purchased the 38-story building in 2000 for $379 million. To entice employees back into the office, last year RFR built a $25 million “playground” in its underground garage equipped with a climbing wall and basketball and basketball courts. Four new tenants have signed leases in the past few months, according to Tripp.
Even with all the vacant lots, some owners like Mr. Rechler’s RXR still want to build new towers. RXR is moving forward with its plans to build the tallest building in the nation at 175 Park Avenue.
“It is unique in what has been, is and always will be one of the best office markets in the world,” he said, pointing to the tower.
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