The wave of defaults on loans backed by office properties appears to be building—in the value of the portfolios going belly up as well as the number and size of CMBS loans becoming distressed, with a portfolio worth more than $2B joining the growing list of defaults this week.
Columbia Property Trust has defaulted on $1.7B in floating-rate loans backed by a seven-building portfolio involving properties in New York, San Francisco, Boston and Jersey City. The total value of the portfolio, based on a 2021 appraisal, is estimated at 2.27B.
Columbia, an office REIT acquired by Pacific Investment Management for $3.9B in 2021, said in a statement it is in discussions to restructure the loans with lenders including Goldman Sachs, Citigroup and Deutsche Bank, Bloomberg reported.
“We, like most office owners, are addressing the unique and unprecedented challenges currently facing our asset class and customer base,” Justina Lombardo, a spokesperson for Columbia, said in a statement. “We have engaged with our lenders on a restructuring of our loan on seven properties within our larger national portfolio.”
The most valuable property in the portfolio is 650 California Street in San Francisco, a 60-year-old tower that made headlines late last year when its anchor tenant, Twitter, stopped paying rent after Elon Musk bought the social media company.
Columbia sued Twitter last month, alleging the chat platform owned the landlord more than $136K in back rent on 650 California Street, which the REIT acquired in 2014 for $309M.
A second building leased to Twitter, at 245 West 17th Street in Manhattan, also is backed by one of the CMBS loans that have gone into default. Columbia says Twitter is behind on rent for the NYC lease.
Other Columbia office assets backed by the defaulted loans include 315 Park Avenue South and the office portion of 229 West 43rd Street in Manhattan; 201 California Street in San Francisco; 116 Huntington Ave. in Boston; and 95 Christopher Columbus Drive in Jersey City.
The 43rd Street tower in NYC is the former headquarters of The New York Times. Columbia acquired 481K SF of the former Times tower in 2015 for $516M.
The outlook continues to get gloomier for aging office towers, which are coping with shrinking office footprints as tenants adopt hybrid or remote work and a flight to quality that makes it difficult to compete with newer, amenity-packed Class A skyscrapers in urban centers.
Rising interest rates are making the cost of continued debt-servicing—particularly for floating-rate loans—untenable for office owners and landlords as valuations for older office buildings drop.
Earlier this month, RXR Realty, one of the largest office building owners in New York City, disclosed that it is preparing to halt debt payments on several older Manhattan office properties and “give the keys back to the bank.”
After what the company described as an “exhaustive” review of its office portfolio, RXR has concluded that an unspecified number of these assets are “obsolete” and no longer make economic sense in a post-pandemic office market.
“With some of those [office properties], I don’t think there’s anything we can do with them,” RXR CEO Scott Rechler told Financial Times.
Rechler said RXR has decided not to invest in its older buildings unless it can find a way to convert them to another use—most likely residential—or has determined in its evaluation that the asset can still prosper as a low-rent alternative to newer office buildings.
The RXR CEO suggested that time is running out for building owners to make the call on which of their older assets to hold and which to fold. “[You have to] be concerned, because they’re becoming competitively obsolete quickly. So, milk what you can get out of it, figure out what to do and move on,” Rechler told FT.
Rechler declined to specify how many office buildings owned by RXR the company’s review had deemed obsolete, but he estimated that as much of 10% of RXR’s office portfolio may be heading in that direction.
