Commercial real estate (CRE) company Brookfield Corp. has defaulted on a $161.4 million mortgage for 12 office buildings in Washington, D.C. – highlighting the sector's collapse since the Wuhan coronavirus (COVID-19) pandemic.
A Bloomberg report said Brookfield's loan was transferred to a special service working with the company "to execute a pre-negotiation agreement and to determine the path forward." The debt-ridden properties in the federal capital only had an average occupancy rate of 52 percent in 2022, down 27 points from the 79 percent occupancy rate at the time of the debt's underwriting in 2018.
Property security firm Kastle Systems mentioned that about 43 percent of workers in the D.C. metropolitan area were working in office spaces during the week of April 5 compared to pre-pandemic levels. Meanwhile, the Green Street commercial property price index stated that office property values in the area have plummeted 36 percent through March 2023 from a year earlier. The decline was on par with those found in other properties nationwide.
"We have always focused on quality, so 95 percent of what we own are trophy and Class A buildings that continue to see strong demand globally and benefit from the flight to quality," Brookfield spokeswoman Kerrie McHugh said in an emailed statement. "While the [COVID-19] pandemic has posed challenges to [the] traditional office in some parts of the U.S. market, this represents a very small percentage of our portfolio."
With the pandemic introducing remote and hybrid work setups, CRE firms have had a difficult time filling up office spaces. Surging borrowing costs stemming from the Federal Reserve's interest rate hikes have only exacerbated their woes, forcing some landlords to default on debt. These trends have weighed on property values, with Green Street noting that prices on high-quality office properties had fallen by about 25 percent in the past year.
Brookfield also defaults on downtown LA properties
In February, Brookfield – through its subsidiary Brookfield DTLA Fund Office Trust Investor – defaulted on its loans on several properties located in downtown Los Angeles. (Related: Real estate collapse: LA property management firm defaults on $755M loans.)
According to a filing, Brookfield has defaulted on its $465 million loan for the 52-story Gas Company Tower. It has also defaulted on its $290 million outstanding debt for the 52-story 777 Tower.
Aside from the two buildings, the CRE company also owns the Wells Fargo Center. The North Tower has a $500 million debt due in October, while the South Tower has a $263 million debt maturing the following month. Together, Brookfield owes a total of $763 million for the twin towers.
Bloomberg also reported that 725 South Figueroa, another property owned by Brookfield, was transferred to a special servicer and placed on watch by Kroll Bond Rating Agency.
Barclays research analysts Lea Overby and Anuj Jain put in their two cents on Brookfield defaulting on its mortgage for the Gas Company and 777 towers. They noted: "We believe its decision to default on these two assets increases the risk for the remaining loans in their portfolio."
The two analysts also mentioned that the values of comparable office buildings have broadly dropped, hugely because of remote working facilitated by the COVID-19 pandemic.
"Brookfield could potentially be the first in a series of companies defaulting on their office space loans," warned Tyler Durden of ZeroHedge."
"The state of the CRE market is in dire shape as delinquency rates across property types, particularly offices, are rising. The onset of a CRE crisis in the office sector will likely spark significant issues for regional banks and the Fed."
Watch Holly Seeliger of the Zoon Politikon channel as she talks about remote workers pushing back against companies' return to office orders.
This video is from the Zoon Politikon channel on Brighteon.com.
More related stories:
A tsunami of debt worth more than $1.5 trillion coming due for commercial property owners.
Tech companies amass large portfolios of new properties during pandemic.
Mortgage rates surge to 20-year high, causing massive drop in home sales.
Sources include:
Please contact us for more information.