What Are Older Workplace Towers Price When They Lastly Promote amid File Emptiness Charges? Not A lot. Enormous Losses All over the place
But foreclosures are far worse, including a complete wipe out of CMBS investors.
By Wolf Richter for WOLF STREET.
36% loss. Private equity firm Blackstone has sold two 13-story Class A office towers, the Griffin Towers, in Santa Ana, Orange County, California for $82 million to a joint venture between Barker Pacific Group and Kingsbarn Realty Capital . The towers erected in 1987 have a vacancy rate of 24%.
According to the Commercial Observer, Blackstone bought the towers in 2014 for $129 million. The selling price represents a loss of 36%. And Blackstone got lucky with this deal.
In 2007, at the height of the previous CRE bubble, the towers changed hands for $183.8 million. And in 2010 it sold again for $89.9 million. In Orange County, office vacancy hit a record 23.1% in the first quarter of 2023, according to Savills.
jingle mail. Blackstone has demolished other office towers, most notably a year ago when it abandoned the largely vacant 26-story, 621,000-square-foot 1950 building at 1740 Broadway in Midtown Manhattan to let lenders — CMBS holders — take the one that remained Loss.
It bought the property in 2014 for $605 million. It then borrowed $308 million for it. And by March 2022, the tower’s value had fallen so far below loan value ($308 million) that Blackstone was better off letting CMBS holders absorb the remaining loss, and it washed itself away from it.
47% loss. In Houston, Parkway Property sold the 960,000-square-foot San Felipe Plaza in Uptown to Sovereign Partners for $82.8 million in late March. The tower was built in 1984. Parkway Property finally got the tower when it acquired Thomas Properties, which bought the property in 2005 for $156.5 million. So that was a 47% loss.
The vacancy rate for Class A offices in Houston has been around 30% for years and has fallen to 32.3% in the first quarter of 2023, according to Savills. The vacancy rate had blown up first due to the oil crisis, which began in earnest in 2015, and then due to work from home and associated property shedding. According to the Houston Business Journal, the tower was last valued at $219 million.
37% loss and more? In Manhattan, the Chetrit Group sold the 617,000 sf tower at 850 Third Ave in March. to its lender HPS Investment Partners for $266 million after paying $422 million for it in 2019. That’s a 37% loss in three years after the property.
But this story is not over yet, and the outcome is still unclear. In October 2021, Chetrit refinanced the property with a $320 million loan from HPS, and HPS has now assumed the collateral, which only covers part of the loan’s value. The final loss of HPS becomes clear when the building is sold.
40% discount, 47% loss. Argentic Investment Management, a lender, brought the 1923 Barney’s New York Building to 115 Seventh Ave in March. for around 30 million dollars on the market. The seven-story building is empty. The lender had acquired the building in foreclosure proceedings initiated in September 2020. In March 2022, he took possession of the building for $49.5 million. The defaulted mortgage was $46.2 million at the time, plus costs and fees. If Argentic can actually sell the building for $30 million, that would be a 40% haircut.
The defaulting owner bought the building in 2014 for $57 million, and a sale price of $30 million would represent a discount of 47% from the 2014 price.
Office tower foreclosures are far worse.
88% loss and 82% loss. Finding a buyer for an office tower yields far better results than selling it at foreclosure. For example, in Houston’s Energy Corridor, two towers in Westlake Park were sold in foreclosure. The towers were collateral for CMBS, and investors took the losses on the debt.
Both towers had been built in the 1980s and renovated some time ago, but were losing tenants who moved into the newest and best office towers to hit the market in Houston — the flight to quality that older office towers have in high-vacancy markets sunk .
After all was said and done, including costs and foreclosure fees, CMBS holders had an 82% loss rate at Two Westlake Park in mid-2020 and an 88% loss rate at Three Westlake Park in early 2022. I have discussed this under the time.
Real estate is slow to develop: the entire process took about two years, from the disruption of the towers when the loans were sent into special administration to the actual foreclosure.
100% loss. That’s about as bad as office towers. The vacant, 46-story, 1.4 million square foot office tower, built in 1985 and formerly called One AT&T Center, in downtown St. Louis was sold in a foreclosure sale in April 2022 for $4.1 million .
In 2006, the property was purchased for $205 million and became collateral for a $112 million mortgage securitized with CMBS in December 2006. It made up 98.5% of the BSCMS 2007-T26. The first two letters “BS” stand for “Bearn Stearns,” which the CMBS issued in 2007, a year before Bear Stearns collapsed. At the time of the securitization, the property was valued at $207.3 million.
In 2017, after AT&T, the only tenant, moved out and the landlord stopped making mortgage payments, lenders — represented by US Bank’s Special Servicer Trustees — foreclosed on the building. The outstanding mortgage balance at the time was $107 million.
The specialist contractor eventually sold the tower to New York developer SomeraRoad in April 2022 for $4.1 million. However, according to Trepp, who is tracking CMBS, all proceeds from the sale were eaten up by special service fees and $4.25 million in liquidation costs. It was a classic 100% total wipeout for CMBS holders.
Sense of reality in San Francisco?
One of the worst major office markets in the US is San Francisco, with a record vacancy rate of nearly 33% in the first quarter and counting. In the years 2022 and 2023 there have not yet been any sales or foreclosures. The last sale was in 2021, PG&E sold its 1.6 million sf headquarters complex to developer Hines for $800 million.
But that was in 2021, when the Fed was still QEing and pushing interest rates close to 0%. Those were the crazy days of consensual hallucinations. Everything has changed since then.
So now there have been two massive defaults in San Francisco: PIMCO’s Columbia Property Trust has defaulted on the debt of the 201 California St. and 650 California St. office towers in the Financial District.
Lenders certainly don’t want to end up with these towers as there are already towers for sale within a few blocks on California Street.
Union Bank is trying to sell its headquarters at 350 California and lease back part of it. The tower originally went up for sale last year for $250 million. Union Bank subsequently delisted it and relisted it in February at a 52% discount to $120 million.
And Wells Fargo tried to sell its 550 California Tower in 2022 for $160 million. It withdrew the listing and will try again in 2023. This time it could market the tower at a 67% discount off the original list price, which would cost around $53 million, according to the San Francisco Business Times.
At this point nobody knows what anything is worth. There have been no transactions since the end of the free money era. But with Wells Fargo (-67%) and Union Bank (-52%) cutting prices on their towers, a sense of reality seems to be setting in.
The older towers, from around the 1980s, have the biggest problems.
Houston used to be the worst major office market in the US, with a vacancy rate hovering around 30% for years. Now San Francisco has shot past Houston in spectacular fashion.
And yet new towers were and are being built in both cities. And what ultimately happens is that when the lease expires, companies move out of their old quarters and into the newest and best building, while downsizing, lowering their rents, and leaving the old office towers vacant—the infamous “flight to quality.” “. “, which sinks old office towers. It’s the old office towers that get into trouble, not the new ones.
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