Stress mounts as office building owners and lenders haggle over debt
A real estate fund recently defaulted on $750 million in mortgages for two Los Angeles skyscrapers. A private equity firm slashed the value of its investment in Chicago’s Willis Tower by nearly a third. And a major New York landlord is trying to extend the deadline for repaying a loan for an office tower on Park Avenue.
Office districts in nearly every US city have been under intense pressure since the pandemic has depleted workplaces and made working from home commonplace. But in recent months, the crisis has entered a tense phase that could hurt local economies and deal financial blows to real estate investors and numerous banks.
Lenders are increasingly reluctant to provide new loans to owners of office buildings, especially after the bankruptcy of two banks last month.
“They don’t want to make new loans for office buildings because they don’t want more exposure,” said Scott Rechler, a New York landlord who is a major player in the city’s office market and on the board of the Federal Reserve Bank. from New York.
The timing of the credit slump could not have been worse. Landlords need to refinance about $137 billion in office mortgages this year and nearly half a trillion dollars over the next four years, according to Trepp, a commercial real estate data company. The Federal Reserve’s campaign to fight inflation by raising interest rates has also significantly increased the cost of loans still being offered.
Banks’ unwillingness to lend and building owners’ desperation for credit have led to a stalemate. Lenders only want to make loans and make new ones if they can get better terms. Many landlords are pushing back, and some are threatening to default, in effect betting that banks and investors will lose more in a foreclosure.
How private negotiations between lenders and building owners are resolved can have major implications. Defaults could put pressure on regional banks and push the economy into recession. Local property tax revenues, already under pressure, could plummet, forcing governments to halt services or lay off workers.
“What we’re seeing is this dance between lenders and owners,” said Joshua Zegen of Madison Realty Capital in New York, a firm that specializes in financing for commercial real estate projects. “No one knows what the correct value is. Nobody wants to take back a building,” he said, adding that building owners also don’t want to bring in new capital.
He added that the office sector was experiencing much more stress 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 compromise and avoid bankruptcy or a major loss of property tax revenue because everyone wants to minimize losses.
“I don’t see it as something that will lead to systemic risk,” said Manus Clancy, senior managing director at Trepp. “It won’t bring down the banks, but you might see banks that have problems. Nothing is solved quickly in this market.”
Commercial building loans are typically easier than residential mortgages to renew or change. Negotiations are handled by bank managers or specialized financial firms called servicers, who act on behalf of investors who own securities backed by one or more commercial mortgages.
But closing a deal can still be difficult.
Mr. Rechler’s company, RXR, recently stopped paying a loan it used to finance the purchase of 61 Broadway in midtown Manhattan. His company recovered its original investment in the building after selling nearly half of its stake to another investor several years ago, he said. He added that the lender, Aareal Bank, a German institution, was considering selling the loan and building.
“Can they sell that loan in this illiquid market? Can they sell the building?” said Mr. Rechler. Aareal Bank declined to comment.
Eric Gural is co-chief executive of GFP Real Estate, a family-owned company that has interests in several Manhattan office buildings, mostly older ones. He is in nearly seven months of negotiations with a bank to make a $30 million loan for a building in Union Square, with only two months left on the mortgage.
“I’m trying to get a one-year extension on an existing loan so I can see what interest rates look like next year, which will probably be better than they are now,” Mr Gural said. “Hybrid labor has created fear among banks.”
While many workers have returned to the office at least a few days a week, 18.6 percent of U.S. office space is for rent, according to Cushman & Wakefield, a commercial real estate services firm, the highest number since it began measuring job openings in the United States. 1995.
Public pension funds, insurance companies and mutual funds investing in bonds backed by commercial mortgages also have an interest in problems being resolved or delayed. A wave of bankruptcies would lower the value of their securities.
Many of the mortgages analysts are most concerned about relate to buildings in Chicago, Los Angeles, New York, San Francisco and Washington – cities where there is an abundance of empty space or where employees are reluctant to return to offices.
An example of such a building is the 108-story Willis Tower in Chicago – the third tallest building in the country after One World Trade Center and Central Park Tower, both in Manhattan. The giant private equity firm Blackstone bought it in 2015 for about $1.3 billion and pledged to spend $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. That month, according to KBRA Analytics, a credit data and research firm, about 83 percent of the building was occupied. Blackstone disputes those numbers; Jeffrey Kauth, a spokesperson for the company, said that “about 90 percent of office space is rented.”
Blackstone recently informed some of its real estate fund investors that it had written off the value of its equity investment in Willis Tower by $119 million, or 29 percent, said a person who was briefed on the matter and spoke on condition of anonymity to disclose sensitive information to discuss. financial information.
In March, Blackstone was granted a fourth extension on the $1.33 billion mortgage, pushing the due date to next year, Trepp said. Under the terms of the loan, the company can apply for another one-year extension next year.
Blackstone said only about 2 percent of the company’s real estate funds were invested in office buildings — much less than a decade ago.
Even streets with 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 that includes Tishman Speyer and several unnamed investors.
Built in 1955, the 25-story building is the headquarters of Colgate-Palmolive. But the consumer products conglomerate is shrinking its presence there.
“We have requested that our loan be transferred to the special manager well in advance of the due date so that we can work together on a mutually beneficial extension,” said Bud Perrone, a spokesman for Tishman Speyer.
Portions of a bond deal that included the 300 Park Avenue loan were downgraded by Fitch Ratings last fall as some tenants vacated the building, and a lower-valued portion of the bond now trades at about 85 cents on the dollar.
Across the country, an investment fund tied to real estate giant Brookfield Properties has defaulted on $750 million in loans for the Gas Company Tower and a nearby building, 777 Tower, in downtown Los Angeles, triggering a possible foreclosure or sale of the property. properties became possible. said the fund.
Andrew Brent, a spokesman for Brookfield, said in an emailed statement that office buildings in financial distress were “a very small percentage of our portfolio.”
Even as building owners grapple with vacancy rates and high interest rates, some have found a way to put their properties on a firmer footing.
The owners of the Seagram Building at 375 Park Avenue in Manhattan have been working to refinance part of a $200 million 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 lure employees back to the office, RFR last year built a $25 million “playground” in an underground garage equipped with a climbing wall and pickleball and basketball courts. According to Trepp, four new tenants have signed leases in recent months.
Even with all the empty space, some landlords, like Mr. Rechler’s RXR, still want to build new towers. RXR is moving ahead with plans to build the nation’s tallest building at 175 Park Avenue.
“It is unique in what is and always will be one of the best office markets in the world,” he said, referring to the tower.