Valuation Haircuts Pile Up For Atlanta Office Properties

A host of suburban office properties tied up in a distressed CMBS loan have lost as much as 36.5% of their value, according to a new appraisal, as lenders and owners continue to search for a bottom on office prices.

An eight-building office portfolio held by bankrupt landlord Adventus Realty Trust, the majority of which are in the Atlanta suburbs, saw its appraised value fall from $439M to $279.9M, according to Morningstar Credit.

Five of the eight repriced office complexes are in Metro Atlanta:

• The three-building, 315K SF Barrett Lakes office park in Kennesaw, which was repriced to $55M, down 30.5%.

• The four-building, 350K SF TownPark Commons in Kennesaw, which saw its value drop 19.3% to $63.8M.

• The six-story, 162K SF Milton Park at 30000 Mill Creek Ave. in Alpharetta, which was reappraised at $47.9M, down 36.5% from its prior value.

• The 10-story, 213K SF 1000 Parkwood Circle in the Cumberland/Galleria submarket, which was reappraised downward by 21.9% to $37M.

• The six-story, 155K SF 1600 Parkwood Circle office building in Cumberland/Galleria, which saw its value drop 13.8% to $28M.

The CMBS loan tied to this portfolio, which includes three Illinois properties, was originally issued by Credit Suisse. It was placed into special servicing last August with Rialto Capital, according to documents filed with the Securities and Exchange Commission.

Vancouver, British Columbia-based Adventus, which filed for bankruptcy in July, was delinquent on the loan before the CMBS was placed in special servicing.

They weren't the only local buildings that took a haircut. The 2.5M SF Peachtree Center office complex, which was taken over in a foreclosure auction by its lender in 2022, was reappraised this month at $155M, according to Morningstar. That is down from $192.4M in July 2022 and $260.8M in 2018. 

For Adventus, the bankruptcy and loan defaults aren't the only challenges facing its suburban office portfolio. The Canadian firm was also sued last year in New York federal court by a group of bondholders who alleged that Adventus improperly diverted $93M from affiliates that own the real estate to other Adventus entities, The Real Deal reported in November.

“Through these transfers, borrowers have misappropriated the rental income from the properties that secure the loan,” Venable partners Gregory Cross, Heather Deans Foley and Adam Possidente wrote in the lawsuit on behalf of the CMBS bondholders.

“The magnitude of these transactions is so great that borrowers are not only unable to meet any of their obligations under the parties’ loan agreement, but also unable to support the basic operating needs of the properties,” the attorneys said in the lawsuit.

While the valuation drops might raise eyebrows around Atlanta, they weren't as severe as the three Chicago-area buildings in the Adventus portfolio. Columbia Centre I and II in Rosemont was reappraised at a 56% discount, to $26.5M, the two-building The Crossings at Oak Brook saw its value drop nearly 60% to $14.2M, and Cantera Meadows, an eight-story, 204K SF office building in Warrenville, saw nearly 75% of its value erased, getting repriced at $7.5M.

Rialto Capital and Adventus’ bankruptcy trustee, FTI Consulting Canada, didn't respond to messages seeking comment. 

Morningstar Credit Vice President Sarah Helwig said it wasn't surprising that the values of the Chicago-area offices were slashed by a larger percentage than the ones in Atlanta.

“Chicago has a lot of older stock,” Helwig said. “So the older buildings are just taking a hit.”

Veteran commercial real estate broker Craig Viergever, a principal with Lee & Associates in Atlanta, said the Adventus portfolio repricing is just the start of a wave of office revaluations in Metro Atlanta.

All eyes in CRE have turned to the Federal Reserve and hopes for interest rate cuts that could provide some relief to the holders of maturing loans. While the Fed has held rates steady, economists say it may wait until June, if not later, before chipping away at interest rates again, according to a Reuters poll.

“The challenge is the interest rates aren’t coming down anytime soon, and we’re not seeing the occupancy uptick,” Viergever said. 

Morningstar Credit Head of CRE Analytics David Putro said he expects the decline in office values to be a protracted process, perhaps taking years before some buildings, particularly older, Class-B suburban offices, will realize a new bottom.

So far, office properties tied to CMBS loans that have gone through reappraisal have lost an average of 30% to 50% of their initial value, Putro said. Other buildings still have leases in place with tenants obligated to pay rent. But once those leases expire, landlords will need to come up with the capital necessary to re-lease them — even if they can find new tenants.

“What we’re seeing in the office space now, almost to the market, is this older stock, when it gets to a certain occupancy, you wonder what their future is. Does anyone need that space anymore?” he said. “Until these buildings actually sell, it’s hard to judge where the bottom is.”