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229 W. 43rd St. Manhattan Columbia Property Trust

Large Office Loan Defaults Are on the Rise

The number of big office landlords defaulting on their loans is on the rise, providing more evidence that more developers believe that remote and hybrid work habits have permanently impaired the office market, the Wall Street Journal reported. However, 2023 has also seen loan challenges for large multifamily owners.  

In the latest illustration of the office-loan trend, PIMCO’s Columbia Property Trust has defaulted on $1.7 billion in loans tied to seven buildings across the country, according to Bloomberg News. The mortgages on each of the properties, located in Manhattan, San Francisco, Boston and Jersey City, have floating-rate debt, which led to rising monthly payments as interest rates soared last year, Bloomberg reported. 

Concurrently with the Columbia Property Trust news, Trepp reported that a $270.3-million loan tied to 11 apartment properties owned by Blackstone has gone into special servicing. Known as BX 2019-MMP, the loan is the securitized portion of a $363.65-million financing package backing a primarily market-rate apartment portfolio in Manhattan, American Banker reported. 

Last month, Connect CRE reported that apartment owner Veritas had defaulted on a $450-million loan backed by 62 of its properties in San Francisco. The loan went into special servicing on Nov. 3, and wasn’t repaid when it matured on Nov. 15.  

To date, though, the highest-profile distress this year has emanated from the office sector. Brookfield Asset Management recently defaulted on more than $750 million in debt for a pair of 52-story towers in Los Angeles. The WSJ reported that RXR is in talks with creditors to restructure debt on 61 Broadway, its 34-story tower in Lower Manhattan’s Financial District. Handing the keys to the lender is among the options under consideration. 

Five to 10 office towers each month join the list of properties at risk of defaulting because of low occupancy, expiring leases or maturing debt that would have to be refinanced at a higher rate, Trepp’s Manus Clancy told the WSJ

Concerns over the health of the office building industry have mounted throughout the pandemic, according to the WSJ. The weak return-to-office rate has led to soaring vacancy levels in many cities, while last year’s spike in interest rates increased the cost of buying and refinancing properties and squeezed property values. 

“The economy built all this office space for a workforce that was going into the office most of the time,” said Kevin Thorpe, chief economist at Cushman & Wakefield, which predicted that 330 million square feet of office space will be made redundant by the pandemic. “Most businesses simply don’t need as much office space as they had before.” 

For most landlords, “losing buildings to creditors after a default would be painful but not devastating,” the WSJ reported. “Many investors structure buildings as separate financial entities. If they default on debt, creditors generally can foreclose on the building but have no recourse against the rest of the company.”  

But the WSJ said the pain from foreclosures is likely to ripple through the financial system. About $1.2 trillion of debt was backed by office buildings as 2022’s third quarter ended, according to Trepp.

Pictured: 229 W. 43rd St. in Manhattan. The office portion of the property is among the assets backing a $1.7-billion loan which has gone into default.


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About Paul Bubny

Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 13-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 15-20 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces. Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications. Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).