Office properties, at least the non-trophy ones, are like a CRE Rodney Dangerfield. They don’t get no respect at all.
Not only do they suffer from the uncertainty of work-from-home and hybrid business models battling the traditional sitting in the office five days a week, but there is the specter of obsolescence.
The recent moves that Blackstone has taken with its River North Point property in Chicago are an example that will likely get repeated by others elsewhere in the U.S.
Blackstone acquired the building in 2015. The property had a $309.8 million non-recourse, first lien floating rate loan with an initial two-year term and five one-year extensions, according to KBRA. The loan went into special servicing on May 11, before a maturity default took place on July 9, 2023.
“On May 2, 2023, KBRA downgraded the ratings of six classes of certificates and affirmed its other outstanding rating,” the rating agency said. “The downgrades were primarily driven by the weak performance of the underlying property stemming largely from a decrease in occupancy. In addition, KBRA expressed concerns regarding the loan’s upcoming July 2023 maturity, as an extension of the loan would require a new rate cap agreement which could require a meaningful outlay by the borrower.”
“The loan, which is currently in its third extension option, remains fully cash managed since January 2021 due to a low debt yield trigger,” added KBRA. “The cash management account had a balance of $636,839 as of April 2023. The financing includes in-place mezzanine debt of $60.0 million.”
But the building’s vacancy rate had climbed to 35%. Blackstone had written down the property value over a number of years. Because the loan is non-recourse, the lender could only pursue the asset.
“The property is experiencing the well-known headwinds facing U.S. traditional office buildings lacking first class modern amenities and this location in the River North submarket has been particularly challenging, which is why we effectively wrote this investment down to zero last year,” Blackstone said in a statement. Aside from a suburban asset up for sale, the only other property the company has in Chicago is Willis Tower, which it plans to retain.
Blackstone’s overall U.S. office strategy has changed over the last 16 years.
“What you own matters, and US traditional office represents less than 2% of our global portfolio today versus more than 60% in 2007,” Blackstone said in a statement sent to GlobeSt.com. “We intentionally pivoted toward sectors like logistics and data centers, which are benefitting from exceptionally strong macro-tailwinds and supply/demand fundamentals.”
While defaults are still rare, they are increasing and experts expect to see more of them as loans mature. Brookfield defaulted on two Los Angeles office towers in February and a $161.4 million office portfolio mostly situated in Washington, D.C.
Columbia Property Trust, acquired by Pacific Investment Management for $3.9B in 2021, defaulted on $1.7 billion loan on a portfolio of offices back in February. “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.”