59M SF Of Office Loan Maturities Are Coming To Kick LA When It's Down
As the city contends with historic levels of distress in its office market, Downtown Los Angeles is headed for even bigger problems in the form of maturing debt on some 59.3M SF of office property in the next two years.
Los Angeles is among the markets with the highest percentage of office loans maturing between now and 2025, according to a report from CommercialEdge. Just over 20% of its total office loans are slated to mature in that period.
The piling on of flagging office demand, major layoffs in tech sectors and financing difficulties caused by rising interest rates “have made it, in my opinion, the worst market — at least in LA — that I've ever seen,” JLL International Director Tony Morales said.
“I don't think in my 35 years in real estate I've ever seen such a confluence of negative movements in the region, which is a microcosm for the country, as we have now.”
It is a problem by no means unique to Los Angeles or California. Loans on 15.6% of office properties nationally will reach maturity between 2023 and 2025, CommercialEdge found. In light of the data, an increase in defaults seems all but certain. The real question is how much of an increase there will be, the CommercialEdge report says.
“Office tenants are likely to continue to reduce space demand which will continue to be a problem and put pressure on property income and values and lead to an increasing number of defaults,” said Yardi Matrix Director of Research Paul Fiorilla, the CommercialEdge report’s author.
It is hard to say how many defaults are coming, in part because there is often little indication on paper of which borrowers are going to have trouble paying off their debts, Moody’s Analytics Director of CRE Economics Matt Reidy said. It is possible for a loan to be paid off when it matures, averting trouble.
In Los Angeles, there are about $843M in CMBS loans slated to mature this year, according to data from Moody’s Analytics. Of that $843M, about $700M was from one portfolio of properties in Irvine and LA owned by The Irvine Co., which paid off the whole debt this month.
On paper, Reidy said, those Irvine Co. loans had characteristics that presented as potentially troubled.
“That sort of illustrates that not all of the loans that have lease rollovers or currently have a less-than-ideal amount of cash flow or operating income are destined to have a maturity default,” Reidy said. “Some of them are definitely going to pay off, which was what we saw there.”
There is likely to be a large sample to study in the coming years. Relative to the size of the market, LA’s $843M commercial mortgage-backed securities debt this year is “probably a little bit on the high side,” Reidy said. In 2024, that figure more than doubles to $1.8B in CMBS debt.
“The overwhelming share of those [properties] are going to be facing a significant amount of lease rollover and/or current vacancy,” Reidy said.
Trepp Senior Managing Director Manus Clancy on Bisnow's podcast earlier this month said he is anticipating widespread office defaults and major cuts to valuations, as seen in the retail sector five years ago, but with one potential difference: property owners’ determination to hang onto their assets.
“The one part of the equation that has yet to be really told yet is in 2018 to 2022, mall owners really dug in and fought to keep their properties,” Clancy said. “We don't know what the behavior of the office owner will be yet. That part of the story remains very fluid.”
At least one major office owner in Downtown LA has shown its willingness to walk away. A Brookfield fund this month let EY Plaza in Downtown fall into receivership, the second time it has done so with a major office asset this year.
“If the biggest guys in the real estate business are walking away from property, where’s the leverage of the lender?” said Bert Haboucha, president of debt restructuring specialist Atlas Capital Advisors.
“What happens when [the borrowers] instead turn the tables on the bank and say, ‘You know what? Come get it. I don't even have enough cash flow to pay the basic bills, forget your mortgage,’” Haboucha said. “Now the bank is thinking, ‘How do I negotiate with the guy who's telling me he's given up? There's no leverage there.’ That’s what makes this very scary.”
Market conditions that have led Downtown office towers to sell at steep discounts or fall into receivership are proving stubborn. With demand down and interest rates up, Morales said it is going to take a new force that reinvigorates demand to juice the market. Whether that will be the entertainment industry, which is already in Los Angeles but not especially present in Downtown, or something more nascent like artificial intelligence remains to be seen, Morales said.
But for now, the LA office market is stuck trying to shake a 22.5% vacancy rate as maturities loom.
“You have the chance for this to be a continued downward spiral if you don't have new demand,” Morales said. “You need drivers in markets to recover, and we don't have a driver right now.”
