L.A. Walk Away
Brookfield DTLA Fund Office Investor announced it was in default on $465 million in loans secured by the 52-story Gas Company Tower in downtown Los Angeles at 555 W. 5th. At the same time Brookfield said it was also in default on $318.6 million in loans on the 52-story 777 Tower at 777 S. Figueroa St.
In both cases the lenders have not exercised their options (like starting foreclosure) after the default.
CoStar News reports, “The loan defaults are another sign of struggle for office real estate owners in the nation's second-largest city as remote working policies enacted in the pandemic hamper demand. National office real estate demand has been curtailed since 2020, with vacancy at 12.8%, its highest since the Great Recession, according to CoStar data.”
In November Brookfield warned “it may not be able to meet ‘material financial covenants contained in the loan agreements’ because of its declining cash flows, net operating income and value of its properties, leading to the possibility of foreclosure.”
Brookfield owns six office properties and a retail center in downtown L.A. totaling 7.6 million square feet. Loans on two other office towers totaling $763 million mature this October and November.
“The fund had roughly $2.3 billion of total consolidated debt as of Sept. 30 and its "substantial indebtedness" required it to use "a material portion of our cash flow to service interest on our debt," according to the latest figures disclosed in November. The company's debt matures in 2023 and 2026 with $821.7 million due by the end of 2023, according to the November filing.”
The downtown L.A. office vacancy has popped 8 percent since last year to 18.8 percent according to CoStar, with Jones Lang LaSalle Inc. reporting the L.A. central business district was 22.7 percent vacant in the fourth quarter.
"Demand continues to be soft, and there's no end in sight to downtown L.A.'s office pains," said Ryan Patap, senior director of market analytics in CoStar Group's Los Angeles office.
Bloomberg reports that Brookfield has $1.8 billion floating rate obligations secured by its downtown L.A. portfolio. Brookfield elected not to get interest-rate protection which was required for loans for the 777 Tower property. Essentially throwing in the towel.
“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.
In Walk Away I wrote of the double standard that for commercial firms a strategic default is a good business strategy while individuals who do the same thing are viewed as bad characters.
At the end of 2009 Morgan Stanley announced it planned to give back five San Francisco office buildings to its lender—just two years after buying them at the top of the market.
“‘This isn’t a default or foreclosure situation,’ spokeswoman Alyson Barnes told Bloomberg News at the time ‘We are going to give them the properties to get out of the loan obligation.’”
With Lael Brainard leaving the Fed, as Fed Whisperer Nick Timiraos writes for the WSJ, citing economist Derek Tang, “At the margins, Ms. Brainard’s Fed exit raises the risk of a recession because it could lead the central bank to raise rates more aggressively this spring,”
Brookfield doesn’t see any sense throwing good money after bad, at least in downtown L.A..
