What Are Older Office Towers Worth When They Finally Sell amid Record Vacancy Rates? Not Much. Huge Losses Everywhere

But foreclosure sales are far worse, including a total wipeout of CMBS investors.

By Wolf Richter for WOLF STREET.

36% loss. Private equity firm Blackstone sold two 13-story Class A office towers, the Griffin Towers, in Santa Ana, Orange County, California, for $82 million to a joint venture between Barker Pacific Group and Kingsbarn Realty Capital. The towers, built in 1987, have a vacancy rate of 24%.

Blackstone had bought the towers in 2014 for $129 million, according to the Commercial Observer yesterday. The selling price makes for a loss of 36%. And Blackstone was lucky on this deal.

In 2007, at the peak of the prior CRE bubble, the towers changed hands at $183.8 million. And in 2010, it sold again for $89.9 million. In Orange County, the office vacancy rate reached a record of 23.1% in Q1 2023, according to Savills.

Jingle mail. Blackstone has been dumping other office towers, including most prominently a year ago when it walked away from the mostly vacant 26-story, 621,000-square-foot, 1950-vintage property at 1740 Broadway in Midtown Manhattan to let the lenders – CMBS holders – take the remaining loss.

It had bought the property in 2014 for $605 million. It then borrowed $308 million against it. And by March 2022, the value of the tower had dropped so far below the loan value ($308 million) that it was better for Blackstone to let the CMBS holders to take the remaining loss, and it washed its hands off it.

47% loss. In Houston, Parkway Property sold the 960,000-sf San Felipe Plaza in Uptown, to Sovereign Partners for $82.8 million in late March. The tower was built in 1984. Parkway Property ended up with the tower when it acquired Thomas Properties, which had bought the property in 2005 for $156.5 million. So this was a loss of 47%.

The Class A office vacancy rate in Houston has been around 30% for years, and in Q1 2023 dipped to 32.3%, according to Savills. The vacancy rate had first blown out due to the oil bust that kicked off in serious in 2015, and then due to working from home and the accompanying real-estate downsizing. The tower had most recently been appraised at $219 million, according to Houston Business Journal.

37% loss and more to come? In Manhattan in March, the Chetrit Group sold the 617,000-sf tower at 850 Third Ave. for $266 million to its lender, HPS Investment Partners, after having paid $422 million for it in 2019. That’s a loss of 37% in three years on the property.

But this story isn’t over, and the outcome is still unclear. In October 2021, Chetrit had refinanced the property with a $320 million loan from HPS, and so now HPS took possession of the collateral, which covers only part of the loan value. HPS’ ultimate loss will become clear when it sells the building.

40% off, 47% loss. Argentic Investment Management, a lender, put the 1923 Barney’s New York Building at 115 Seventh Ave. on the market in March, for around $30 million. The seven-story building is vacant. The lender had obtained the building in a foreclosure procedure that it commenced in September 2020. In March 2022, it took possession of the building for $49.5 million. The defaulted mortgage at the time amounted to $46.2 million, plus expenses and fees. If Argentic can actually sell the building for $30 million, it would be a 40% haircut.

The defaulted owner had purchased the building in 2014 for $57 million, and a $30 million sale price would amount to a 47% haircut from that 2014 price.

Foreclosure sales of office towers are far worse.

88% loss and 82% loss. Finding a buyer for an office tower produces far better results than selling it in a foreclosure sale. For example, in Houston’s Energy Corridor, two towers at Westlake Park were sold in foreclosure sales. The towers were collateral for CMBS, and investors took the losses on the debt.

Both towers had been built in the 1980s and had been renovated some time ago, but lost tenants that moved to the latest and greatest office towers coming on the market in Houston – the flight to quality that sinks older office towers in markets with high vacancy rates.

After everything was said and done, including expenses and foreclosure fees, the CMBS holders had a loss ratio of 82% on Two Westlake Park in mid-2020 and a loss ratio of 88% on Three Westlake Park in early 2022. I discussed this at the time.

Real estate is slow moving: The whole process took about two years, from when the towers got into trouble, which was when the loans were sent to special servicing, to the actual foreclosure sales.

100% loss. This is about as bad as it gets with office towers. The vacant, 46-story 1.4 million sf office tower, built in 1985 and formerly called “One AT&T Center,” in downtown St. Louis sold for $4.1 million in April 2022 in a foreclosure sale.

In 2006, the property had been bought for $205 million and became collateral of a $112 million mortgage, which in December 2006 was securitized into CMBS. It made up 98.5% of the BSCMS 2007-T26. The first two letters “BS” stand for “Bearn Stearns,” which issued the CMBS in 2007, a year before Bear Stearns collapsed. At the time of securitization, the property was valued at $207.3 million.

In 2017, after AT&T, the sole tenant, had departed and the landlord had stopped making mortgage payments, lenders – represented by the special servicer Trustees of US Bank – foreclosed on the building. The outstanding mortgage balance at the time was $107 million.

The special servicer finally sold the tower in April 2022 for $4.1 million to New York-based developer SomeraRoad. But all of the proceeds from the sale were eaten up by special servicing fees and liquidation expenses of $4.25 million, according to Trepp, which tracks CMBS. It was a classic 100% total wipeout for CMBS holders.

Sense of reality in San Francisco?

One of the most horrible big office markets in the US is San Francisco with a record vacancy rate of nearly 33% in Q1, and rising. There still haven’t been any sales or foreclosure sales in 2022 and 2023 so far. The last sale was in 2021, PG&E’s sale of its 1.6 million sf headquarters complex to developer Hines for $800 million.

But that was in 2021 when the Fed was still doing QE and repressing interest rates to near 0%. Those were still the crazy times of consensual hallucination. Everything has changed since then.

So now, there have been two massive defaults in San Francisco: PIMCO’s Columbia Property Trust defaulted on the  debt of the office towers at 201 California St. and 650 California St. in the Financial District.

Lenders certainly don’t want to end up with these towers because there are already towers for sale within a few blocks on California St.

Union Bank is trying to sell its headquarters tower at 350 California, and lease back a portion of it. The tower was originally listed for sale last year at $250 million. Union Bank then pulled the listing and relisted it in February for 52% off, at $120 million.

And Wells Fargo tried to sell its 550 California tower in 2022 for $160 million. It pulled the listing and will try again in 2023. This time, it may be marketing the tower at a discount of 67% off the original listing price, shooting for around $53 million, according to the San Francisco Business Times.

At this point, no one knows what anything is worth. There have been no transactions since the free money era ended. But given the price cuts by Wells Fargo (-67%) and Union Bank (-52%) on their towers, a sense of reality appears to be settling in.

It’s the older towers, such as those from the 1980s, that get into the biggest trouble.

Houston used to be the worst major office market in the US with a vacancy rate that has been hovering for years around 30%. Now San Francisco has shot past Houston in spectacular fashion.

And yet, in both cities, new towers have been built recently and are still being built. And ultimately, what happens is that companies move out of their old digs when the lease expires and move into the latest and greatest building, while downsizing the space, reducing their rents, and leaving the old office towers vacant – the infamous “flight to quality” that sinks old office towers. It’s the old office towers that get in trouble, not the new ones.

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