Fortune reported on Feb. 15 that Brookfield DTLA Fund Office Trust Investor, a subsidiary of Brookfield Corporation, is deeply in the red. Back in November of last year, the fund manager warned that it may face foreclosure on some of its properties.
According to a filing, Brookfield has defaulted on the loans for the 52-story Gas Company Tower amounting to $465 million. It has also defaulted on its $290 million outstanding debt for the 777 Tower, also standing 52 stories high. Together, the total arrears accounted to $755 million.
The filing added that Brookfield chose not to extend the maturity on the loans tied to the Gas Company Tower. The 777 Tower had interest-rate protection required for loans on the property, but Brookfield did not invoke this option. The lenders have not foreclosed on the two properties or exercised other remedies available to them.
"We believe [Brookfield DTLA's] decision to default on these two assets increases the risk for the remaining loans in their portfolio," noted Lea Overby and Anuj Jain, research analysts for Barclays.
The two buildings in downtown LA are not the only properties under the Brookfield DTLA portfolio.
The Wells Fargo Center, also in the city's downtown, also has loans set to mature this year. 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.
Real estate on a downturn as remote work continues
According to Overby and Jain, the values of comparable office buildings have broadly dropped. Remote working facilitated by the Wuhan coronavirus (COVID-19) pandemic played a huge role in this plunge in values. (Related: Commercial real estate market collapsing due to covid.)
A report by real estate firm Jones Lang LaSalle revealed that in the fourth quarter of 2022, the vacancy rate in the LA central business district was 22.7 percent. Data by commercial property analytics company CoStar appeared to back up this finding, mentioning that demand for office real estate at the national level has been curtailed since 2020. CoStar added that the current national vacancy rate, standing at 12.8 percent, is the highest since the Great Recession of 2008.
Real estate industry analysts have long tracked Brookfield DTLA as a bellwether for the downtown LA office market after it was established in 2013. But the company defaulting on its loans for the Gas Company Tower and 777 Tower are another sign of struggle for office real estate owners in the country's second-largest city.
According to the Washington, D.C.-based CoStar, the LA office real estate market's vacancy rate stands at 18.8 percent – up by eight percent year-over-year. This exceeds the greater LA average of 15 percent. Average rent for the said market is at $39.31 per square foot, lower than the greater LA average
"Demand continues to be soft, and there's no end in sight to downtown LA's office pains," said Ryan Patap, senior director of market analytics in CoStar's LA office.
The analytics company added that office owners in downtown LA struggled with relatively high vacancy rates prior to the pandemic. But the pandemic and remote working policies impacted demand, something office owners continue to struggle three years on.
Visit EconomicRiot.com for more stories about the real estate market's collapse.
Watch Holly Seeliger discuss remote workers pushing back against companies' return to office orders below.
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