Brookfield DTLA Office REIT Defaults on $784M in Loans

The downtown office market in major cities continues to struggle after changes brought on by the pandemic, as another major investor has defaulted on loans for a pair of Downtown Los Angeles skyscrapers. According to an SEC filing, Brookfield DTLA Fund Office Trust Investor said that subsidiaries that owned the 52-story Gas Company Tower at 555 W. 5th St were in default on $465 million in loans related to the building.

In addition, Brookfield DTLA has defaulted on $319 million in loans related to its 52-story building on S. Figueroa Street, the 777 Tower. In both cases, lenders for both properties have not yet exercised their foreclosure option.

The Brookfield DTLA fund owns six office properties and a retail center in Downtown Los Angeles. In November, the REIT warned investors and lenders it wasn’t able to meet loan demands due to declining cash flows and property values. At the end of September, the fund had $2.3 billion of total consolidated debt.

The defaults are the latest sign of a continuing weak office market demand in Downtown LA. A Colliers fourth quarter report showed a vacancy rate of 25.1% in DTLA with a negative net absorption of -407,000 square feet.

I’d like to see a lot of dead corporate real estate converted over to cheap apartments. Not low income stuff for poor people who don’t contribute. I’m thinking that a lot of young people with entry level jobs are living in Mom’s basement because local rents are $2500 a month for an apartment. Expand the number of cheap apartments and do everyone a favor.

Downtown LA? Maybe the banking industry will recognize that wokism and disestablishment of law and order is not beneficial to property values?

There is the flip side consideration that upscale commercial real-estate development may have gone too far compared to the needs of the economy - e.g. what von Mises followers would call gross malinvestment which must be liquidated and the assets put into more useful ventures.

Here's the problem with your scenario -- and I'll use one of the two buildings as an example to illustrate it.

1. The 52-story Gas Company Tower has 1.4 million square feet of floor space.

2. The current outstanding debt on the building is $465 million.

3. Let's suppose you could convert the building from offices to apartments at a rate of 1 apartment for every 1,000 square feet of gross floor area. That will give you 1,400 apartments in this building.

4. Let's also suppose you are paying a simple rate of 6% interest on the loan. That means your annual loan servicing cost is $27.9 million.

5. Divide this loan servicing cost by 12 months and allocate it to the 1,400 apartments, and you'll find that you will have to collect about $1,660/month in rent on each apartment just to cover the loan servicing cost. And you haven't paid a penny in principal down on the loan.

6. And this doesn't even account for the cost of the conversion from office to apartments. That could be an up-front cost of $100 to $300 per square foot ... probably closer to the higher number because the conversion would require a major upgrade in plumbing, electrical, and other building systems. Even if we use the low number of that range, you're looking at an additional cost of $140 million to do the conversion.

7. This doesn't include the property taxes on your apartment building, either.

Convert this building from offices to apartments, and your $2,500 monthly rent is looking like a huge bargain for tenants in that area.

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