A real estate investment trust recently defaulted on $750 million in loans for two Los Angeles skyscrapers. A private equity firm has cut the value of its investment in Chicago’s Willis Tower by nearly a third. And a large New York landlord is trying to extend the deadline to pay off a loan for an office tower on Park Avenue.
Office districts in nearly every city in the United States have been under severe stress since the pandemic emptied workplaces and made working from home common. But in recent months the crisis has entered a phase of tension that could damage local economies and cause financial blows to real estate investors and dozens of banks.
Lenders are increasingly reluctant to give new loans to office building owners, especially after the collapse of two banks last month.
They don’t want to make new office building loans because they don’t want more visibility, said Scott Rechler, a New York landlord who is a big player in the city’s office market and sits on the board of the Federal Reserve Bank of New York.
The timing of the withdrawal of the loans could not be worse. Landlords have 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’ reluctance to lend and homeowners’ desperation for credit created a stalemate. Lenders only want to extend loans and make new ones if they can get better terms. Many landlords are pushing back and some are threatening to default, effectively betting that banks and investors stand to lose more in the event of a foreclosure.
How private negotiations between lenders and building owners are resolved could have important consequences. Defaults could increase pressure on regional banks and help push the economy into a recession. Revenues from local property taxes, already under pressure, could plummet, forcing governments to cut services or lay off workers.
What we’re seeing is this dance between lenders and landlords, said Joshua Zegen of Madison Realty Capital in New York, a firm that specializes in financing commercial real estate projects. Nobody knows what the right value is. Nobody wants to take back a building, he said, adding that building owners don’t want to invest new capital either.
He added that the office sector was feeling much more stressed than other types of commercial real estate such as hotels and condominiums.
Some industry insiders are optimistic that, given enough time, homeowners and their lenders will reach compromises, avoiding foreclosures or a large loss of property tax revenue because everyone wants to minimize losses.
I don’t see this as something that will result in systematic risk, said Manus Clancy, Trepp’s senior managing director. It won’t bring down the banks, but you may see some banks having problems. Nothing is fixed quickly in this market.
Commercial building loans are typically easier to extend or modify than home loans. Trades are handled by bank executives or specialized finance 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 making payments on a loan used to finance the purchase of 61 Broadway in midtown Manhattan. His company recouped 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 the building.
In this illiquid market, can they sell that loan? Can they sell the building? said Mr. Rechler. Aareal Bank declined to comment.
Eric Gural is a co-CEO of GFP Real Estate, a family-owned firm that has stakes in several, mostly older Manhattan office buildings. He’s been involved in nearly seven months of negotiations with a bank to extend a $30 million loan on a building in Union Square, and has only two months left on the loan.
I’m trying to get a one-year extension on an existing loan so I can see what interest rates will be like next year, which will likely be better than now, Gural said. Hybrid work has created fear in banks.
Though many workers have returned to the office at least a few days a week, 18.6 percent of U.S. office space is available for rent, according to Cushman & Wakefield, a commercial real estate services firm, the most since it began. to measure vacancies in 1995.
Public pension funds, insurance companies, and mutual fund companies that invest in commercial mortgage-backed bonds also have an interest in seeing the problems resolved or deferred. A wave of foreclosures would lower the value of their securities.
Many of the mortgages that worry analysts the most are for buildings in the cities of Chicago, Los Angeles, New York, San Francisco and Washington where there is a glut of vacant space or where workers are reluctant to return to the office.
One such property 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. Giant private equity firm Blackstone bought it for about $1.3 billion in 2015 and has pledged to spend $500 million to renovate the 50-year-old former Sears Tower building, including adding retail space and a roof terrace.
But in December, United Airlines, the building’s largest tenant, paid an early termination fee and vacated three floors. That month, about 83 percent of the building was occupied, according to KBRA Analytics, a credit data and research firm. Blackstone disputes those numbers; Jeffrey Kauth, a company spokesman, said about 90% of the offices are leased.
Blackstone recently notified some of its real estate fund investors that it had written down the value of its stake in Willis Tower by $119 million, or 29 percent, said a person familiar with the matter, who spoke on condition of anonymity. discuss sensitive financial information matters.
In March, Blackstone got a fourth extension on its $1.33 billion mortgage, pushing the expiration date to next year, according to Trepp. Under the terms of the loan, the company can apply for another one-year extension next year.
Blackstone said only about 2% of the firm’s real estate funds were invested in office buildings, down from a decade ago.
Even streets with some of the most expensive real estate in the country aren’t 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 anonymous investors.
The 25-story building, built in 1955, is the headquarters of Colgate-Palmolive. But the consumer products conglomerate is reducing its presence there.
We requested that our loan be transferred to the special servicer well in advance of its expiration so we can work together on a mutually beneficial extension, said Bud Perrone, a spokesman for Tishman Speyer.
Portions of a bond deal that includes the 300 Park Avenue loan were downgraded last fall by Fitch Ratings because some tenants had moved out of the building, and a lower-rated tranche of bond is now trading at around 85 cents.
Across the country, an investment fund linked to real estate giant Brookfield Properties defaulted on $750 million in loans for the Gas Company Tower and a nearby building, 777 Tower, in downtown Los Angeles, setting up a possible foreclosure o sale of properties, according to the fund.
Andrew Brent, a spokesman for Brookfield, said in an emailed statement that office buildings suffering from financial hardship represent a very small percentage of our portfolio.
Even as homeowners struggle with vacant spaces 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 worked to refinance a portion of a $200 million loan due in May while finding new tenants to occupy several floors formerly occupied by Wells Fargo.
RFR Holding, an investment group led by Aby J. Rosen and Michael Fuchs, bought the 38-story building in 2000 for $379 million. To entice employees to return to the office, RFR last year built a $25 million playground in an underground garage featuring a climbing wall and pickleball and basketball courts. Four new tenants have signed leases in recent months, according to Trepp.
Even with all the free space, some owners like Mr. Rechlers RXR still want to build new towers. RXR is moving forward with plans to build the tallest building in the country 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.