Brookfield Defaults $784M on L.A. Trophy Office Towers

Good morning. In today's issue: Brookfield failed to repay $784M loans linked to its prime office buildings in Downtown L.A. The industrial market is rebounding to pre-pandemic levels. Meanwhile, Delaware Statutory Trusts were a popular investment in 2022 but faced surplus inventory issues.

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DISTRESS DOWNTOWN

Brookfield’s LA Office REIT Defaults on $784M Office Tower Loans

Brookfield has defaulted on $784M worth of loans connected to two of its trophy office towers in Downtown L.A. This latest default indicates further trouble for the already weakened office market in the area due to the pandemic and a tech exodus.

Loan defaults: Brookfield DTLA Fund Office Trust Investor, a bellwether for the city's downtown office space, stated that subsidiaries that owned the 52-story Gas Company Tower at 555 W. 5th St. defaulted on roughly $465M in loans related to the building. They also defaulted on roughly $318.6M in loans related to their 52-story 777 Tower at 777 S. Figueroa St. Lenders have yet to exercise any of their options after the default as of Feb. 10

The portfolio: The fund owns six Class A office properties and a retail center in downtown Los Angeles, totaling roughly 7.6 MSF, including the mall FIGat7th, the 1.4 million-square-foot Bank of America Plaza, and the soon-to-be-finished 785-unit Beaudry apartment building. The disclosed February loan defaults have no bearing on other properties in the portfolio.

➥ THE TAKEAWAY 

Market struggles: Office real estate owners in the nation's second-largest city are struggling due to remote working policies enacted in the pandemic hampering demand. The market's vacancy rate is 18.8%, up 8% YoY, and above the greater L.A. average of 15%. Meanwhile, the market's average rent is $39.31 per square foot, below the greater L.A. average of $42.13 per square foot.

IN THE NAME OF INDUSTRY

Industrial Real Estate Market is Beginning to Look Like 2019 Again

Pre-pandemic real estate is just a fond memory for some. But after three years of record-setting growth, the industrial sector is getting back to pre-pandemic levels.

Serious success stories: Even in the midst of a cooling real estate market, industrial developers are still hot and bothered. First Industrial (FR) posted its best year ever during its Q4 earnings report with a 98.8% occupied  68.9 MSF portfolio. And Rexford Industrial (REXR) reported 98% occupancy, with same-facility net operating income up 7.3% in Q4 compared to 2021.

Red hot rents: REXR is optimistic and expects rent to grow around 15% by the end of 2023. As much as 90% of their vacant space has seen recent interest and rents went up by 1.5% in January alone. Prologis (PLD) shares the same sentiment, claiming that even if absorption stopped, occupancy would only fall to 95%. Overall, 2022 was the market’s second-highest year on record for overall net absorption.

➥ THE TAKEAWAY 

Keep on keeping on: With conditions this good, it’s no wonder developers want to capitalize on demand. Currently, 632.3 MSF of industrial assets are under development. And the most significant obstacle to more development isn’t high rates or economic headwinds, but local communities. High-volume metros in states like California and Massachusetts often push back against such developments.

GIVE ME LIBERTY

High-Flying DSTs Suddenly Weighed Down by Excess Inventory

Delaware Statutory Trusts (DSTs) enjoyed record inflows of capital in 2022. But as we all know, all good things must come to an end. And decreasing demand has left some sponsors stuck with properties longer than they anticipated.

From oasis to desert: From January to June last year, investors couldn’t get enough of DSTs, raising over $9B in capital. Their appetite started to diminish as higher rates impacted the buyer-seller relationship, slumping sales by 62% in Q4. The appeal of DSTs is also influenced by 1031 exchange activity, and lower investment sales directly correlate with more capital flowing into DSTs. 

Holding the bag: Following changing market conditions, DST sponsors slowed down asset purchases and are cutting back on new DST offerings. But a significant amount of inventory is still left over from previous offerings—$3.5B across 82 products and 39 sponsors, to be exact. Using January’s fundraising as a benchmark, that’s about 7.5 months of excess inventory DSTs have to deal with.

➥ THE TAKEAWAY 

Moving the caravan: The good news is that the DST market is on pace for a $5.5B run rate in 2023, which would be its 3rd best year on record. Many investors are also influenced more by lifestyle changes than by prevailing market conditions. DSTs cater to property owners transitioning from active investing towards a more passive management style suitable.

• New contenders: As rents began to cool late last year, some emerging markets stood out, including Madison, WI; West Palm Beach / Boca Raton, FL; and Huntsville, AL.

• Trend-chasers: Ken Griffin’s recent play to move Citadel’s HQ to Florida has led to many other financers considering a similar move, specifically to Miami.

• Shouldering the burden: According to a Moody’s report, the average US renter spends more than 30% of their median income on rent, surpassing the ‘rent-burdened’ threshold.

• Waiting in the wings: Sam Zell’s Equity Commonwealth has $2.6B ready to deploy for a new project—but they’re waiting until the market drops even more to make a move.

• Accreditation argument: The House of Representatives held a hearing last week over the definition of ‘accredited investor’ and whether the current definition is too limiting.

• Ushering in the AI era: How will the new hype around AI affect real estate and proptech? Search, listings, mortgages, and even construction could be influenced by this emerging technology.

• Revolution in relaxation: Legacy Hotel & Residences in Miami has opened the Blue Zones Center, a 170 KSF medical/wellness facility offering services like surgeries and spa treatments.

• It's up to you now: Dallas Code Compliance Services has launched a new program for single and multi-family property owners to perform their own annual inspections. The goal is to free up compliance staff to tackle more persistent code violators.

• Housing hurdles: It’s no secret that the US really needs more housing stock. But convincing current homeowners to accept looser zoning laws that would make this possible? Good luck.

• Jumping ahead: Tech had a rough sendoff to 2022, reflected in their office leases. Finance and insurance companies claimed 25% of the largest 100 office leases, leaving tech in the dust.

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📰 Deals & Dealmakers

• Ware it's at: Rexford Industrial Realty (REXR) announced it will purchase a 1.1 MSF warehouse in Inland Empire for $365M. This deal cost more than all of REXR’s 2022 acquisitions.

• Multifamily moves: Blackstone acquires Ellington Midtown, a 473-unit multifamily building in Midtown Atlanta, for $133M from Goldman Sachs Asset Management.

• Grocery grab-bag: Retailer Lidl plans to expand its presence on the East Coast as the German company has purchased 69 acres in PA (for warehousing) from NorthPoint for $144.6M.

• Life science longevity: Crescent Communities and Nuveen Real Estate broke ground on the second phase of their 2 MSF life sciences campus, THE YIELD Holly springs.

• Constructing Canyon Ridge: Hawkins Cos. secured $56M in construction financing for Canyon Ridge, a 287-unit multifamily development in Boise, Idaho. 

• Distinguished guest: Miami-based South Beach Plaza Hotel has been purchased by New York-based Blue Suede Hospitality Group for $26.5M.

• Staying with Union: Rexmark will be retaining Cushman & Wakefield (CWK) as the exclusive leasing agent for the nearly 608 KSF office asset at DC’s historic Union Station.

• Industrial is in: CanTex Capital is expanding its portfolio by acquiring a 313.6 KSF industrial campus in Irving, TX.

• Shaking hands: Cushman & Wakefield has been busy lately, having advised the sale of a 85 KSF industrial building in San Diego to Wimatex for $21.05M.

• Off to the races: Premier Properties received approval to begin construction of Union Square Apartments, a $60M 150-unit housing development near Rutgers University in New Brunswick.

📈 Chart of the Day

Both professional and retail investors expect 30-year fixed-rate mortgage rates to be between 5.5–6.0% by the end of 2023.

😎 Offering-MEME-Orandum

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