BY SRH
Commercial Real Estate Crash: Paper Losses Turn Real. Bloomberg says the great commercial real estate waiting game may be over. In the years after Covid changed how Americans use office space, lenders and property owners were able to delay much of the financial harm. Restructured loans, extended maturities, and building recovery time were granted.
The idea was that rates would gradually fall, employees would spend more time downtown, and refinancing markets would reopen. Instead, many owners are running out of runway with high rates and buildings worth much less than their debt. The Chicago Aon Centre seems absurd. After selling for $712 million in 2015, the 83-story tower was refinanced with $536 million in commercial mortgage-backed securities. The property, which lost major tenants, is worth much less today. Its latest valuation was $195 million, down 73% from its 2015 purchase price.
Bloomberg reported that the owner requested three more years to settle the debt in July after being unable to pay. This lender declined. The request was “denied unequivocally.” Cases like these are appearing nationwide. Trepp reports 12% of CMBS office loans are delinquent.
Distress is near an all-time high and shockingly above 2008 financial crisis levels. Meanwhile, over $64 billion in office CMBS loans mature this year and next. About $40 billion of that pile is delinquent, in default, or suspected trouble. No uniform nationwide office collapse here. Banking, law, and technology still compete for space in New York, surprising many. The pandemic has left San Francisco struggling, but the AI boom has boosted demand. Other cities have little going for them.
Over 27% of downtown Chicago offices are vacant. Up to 39% in Denver. Los Angeles and other downtown cities, especially submarkets with older office stock, are struggling. Two office markets in cities are becoming more common. Companies that pay for office space prefer newer buildings, good locations, and modern amenities.
That leaves yesterday’s class B towers competing for fewer tenants as their economics decline. Some re-pricing is ugly. Republic Plaza in Denver lost 80% of its value after Brookfield financed it in 2012. The Citadel Centre in Chicago sold for $137 million, 76% less than in 2006. CoStar expects almost 11.5 million square feet of Chicago office space to be destroyed by 2031 due to the dire situation. That huge valuation hit may be less than lenders recover. Deutsche Bank analysis cited in the paper found that distressed office properties sold this year sold for 20% less than their most recent appraisals. A dramatic paper write-down of a structure may not be enough. But the collapse has another side.
When the price drops enough, someone will take the risk. That process begins now. Investors are buying buildings at a fraction of their previous assessments, resetting the cost basis of properties that weren’t economically viable yesterday. The same 601W that owns the problematic Aon Centre bought 175 West Jackson Boulevard for $41 million, 90% below its pre-Covid price. Around Chicago, investors bought debt from another prominent tower for $100 million, 76% less than the last sale. Perhaps the most important aspect of current events.
Office buildings need not recoup their prices. It requires old valuations to die. Lenders kept lending and owners kept waiting, so the business never knew how much many of these buildings were worth. As maturities approach and extensions become harder to find, theoretical losses become real ones. Only then can buildings sell at reasonable post-Covid prices. Dan McNamara of Polpo Capital says office CMBS delinquencies are higher than after 2008. “One of the scariest headlines. More maturities will raise it.
