Work from home might be great for employees with “email jobs,” but it and rising rates are proving painful for real estate developers and managers in the office building field, as companies no longer have much of a reason to rent out huge office buildings if most of their staff is working from home and connecting over Zoom. Pair that with rising rates making the floating rate debt on such buildings more expensive and you have a budding real estate crash crash.
The scope of the problem was recently shown by Brookfield Corp., a Canada-based “alternative asset manager” that’s one of the world’s largest, with more than $725 billion of assets under management in 2022.
It just defaulted on $161 million in debt on office buildings, with Bloomberg reporting: “Brookfield Corp. funds have defaulted on a $161.4 million mortgage for a dozen office buildings, mostly around Washington, DC, as rising vacancies hit property values.”
What happened? Rising rates made the interest painful as increasing vacancies meant even top-notch properties weren’t making the company money. As Bloomberg reported (emphasis ours):
Among the dozen buildings in the Brookfield portfolio, occupancy rates averaged 52% in 2022, down from 79% in 2018 when the debt was underwritten, according to the report. Monthly payments on the mortgage’s floating-rate debt jumped to about $880,000 in April from just over $300,000 a year earlier as the Federal Reserve raised interest rates.
Speaking about the default in a statement, Brookfield spokesperson Kerrie McHugh said, “We have always focused on quality, so 95% of what we own are trophy and Class A buildings that continue to see strong demand globally and benefit from the flight to quality. While the pandemic has posed challenges to traditional office in some parts of the US market, this represents a very small percentage of our portfolio.”
And that huge default isn’t even Brookfield’s first this year. In early March of 2023, it defaulted on two even larger loans in San Francisco, as the San Francisco Mirror reported, saying:
A wave of defaults on office towers has hit downtown Los Angeles as demand for office space continues to decline. Brookfield Corp., a major office owner in the area, defaulted on $784 million worth of loans on two towers, according to an SEC filing on February 10th. And while these defaults are occurring far from the Westside, the fact that many corporate executives live in areas like Palisades and Santa Monica could be contributing to the decline of downtown in a work environment changed by a pandemic.
Brookfield failed to pay a $465 million loan package for the Gas Company Tower at 555 W. 5th St. and $319 million in loans for 777 S. Figueroa St. The loan on the 52-story Gas Company Tower was comprised of a $350 million mortgage loan, a $65 million mezzanine loan and a $50 million junior mezzanine loan. The 52-story tower at 777 S. Figueroa St. was made up of a $269 million mortgage and a $50 million mezzanine loan.
Working from home is great for workers, but has hit businesses that service such workers, from massive real estate managers like Brookfield to mom-and-pop restaurants that popped up near such buildings to serve the employees that chose to eat out lunch and dinner. Those real estate values are crashing, those restaurants and other stores are now unprofitable, and cities are raking in fewer real estate tax dollars as the buildings are now worth far less, which presents a problem for all involved…except the companies that could cut costs by letting people work from home and those that can now work from home.
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