Delinquency Drops In LA Office To Start The Year, But Distress Still Widespread

The share of delinquent loans attached to Los Angeles office properties fell by 2% from December to January, but the dip conceals a broader trend indicating continued distress in the market. 

Los Angeles’ rate of office CMBS delinquency fell to 6.2% in January from 8.23% in December, but the drop has more to do with an overall increase in loan volume and the fractured nature of huge loans than a meaningful resolution of distress.

 “From a general standpoint, things have not gotten much better,” Cushman & Wakefield Senior Director Erica Finck said. “It's still pretty rough out there for office.” 

In the Los Angeles metro area, there are 18 loans that are delinquent or nonperforming in some way, according to Trepp data. The balance on those loans is $784M, an amount Trepp Senior Research Manager Thomas Taylor called “rather substantial.” 

Some of the fluctuation in LA’s office distress numbers is because of one property: Bank of America Plaza. Its loan is in four securitized pieces, each with its own delinquency status. They’ve been “flipping back and forth between performing and nonperforming, which at least partially explains fluctuations in the rate,” Taylor told Bisnow. 

While not all office properties are using CMBS debt, the numbers offer an important window into the market. CMBS debt has also played a role in several of the most high-profile distressed properties in Downtown Los Angeles, including a handful of former holdings of a Brookfield entity that focused on the area. 

CMBS debt, because of the tranches and interested parties, is some of the most inflexible debt out there, Newmark Vice Chair Laura Stumm said. Other troubled office properties with private debt have more options available to them in terms of workouts and when those options can be tapped into, she said. 

Of these buildings grappling with delinquency, Taylor highlighted at least six that are producing enough income to pay their debts, at least on paper. This indicates the building’s status is likely related to its inability to secure new financing, he said. Many of the buildings have seen their valuations plummet since their last appraisal.

When these buildings eventually trade, there will be buyers out there that are looking to purchase for the right price. 

Sometimes, those exits can involve seller financing, which might result in a slightly higher price per SF. But all-cash sales result in better bargains for buyers. 

“There's a buyer that's looking for a price-per-square-foot discount, and there's a lot of capital that's coming in outside of real estate,” Stumm said. 

These buyers are usually private buyers, such as family offices, that are looking to come in at a low basis and can do so because they have a very long-term or indefinite hold, investment sales professionals told Bisnow. 

Some see the light at the end of the tunnel. Finck pointed to the impact return-to-office mandates and their hoped-for boost to occupancy rates will have on the market, along with the effect of more sales in general, even if they’re essentially forced. 

“As some people are forced to sell their projects, the buyers who are picking up those projects at a lower basis are going to be able to be more competitive with their lease rates, and so that'll also help the leasing market,” Finck said. 

Newmark co-Head of Capital Markets Kevin Shannon said there is growing confidence that the fundamentals have bottomed in many markets, and that is giving people renewed optimism about office properties. 

“It's creating more conviction on buying now, which is creating more bidders, which is creating more competition and more velocity,” Shannon said.