Starwood To Convert K Street Office Building After Foreclosing On Brookfield

A vacant downtown D.C. office building is being delivered to its lender, setting the stage for a residential conversion.

Starwood Property Trust filed a foreclosure affidavit Wednesday for 1200 K St. NW, seeking to take control of the 390K SF property from Brookfield Properties. Also filed Wednesday was a document appointing a substitute trustee for the property’s $120M loan issued in 2021. 

Brookfield Properties declined to comment, and Starwood Property Trust didn't respond to requests for comment. 

Australia’s largest pension fund, AustralianSuper, also holds a stake in 1200 K St. NW. The building is part of an eight-property U.S. office portfolio owned by Brookfield, in which the pension fund owns a 49% stake. 

Starwood has been eyeing the property half a block from Franklin Park for conversion since at least last summer. The 12-story building became mostly vacant in 2022 when the General Services Administration moved the Pension Benefit Guaranty Corp., which had occupied 98% of the property, according to GlobeSt, to the Portals II office building in Southwest. 

On Starwood’s fourth-quarter earnings call in February, CEO Barry Sternlicht said he visited 1200 K St. NW, calling it a beautiful building. He said the firm plans to convert it to residential. 

“It's an unimaginable amount of equity our borrowers have lost, unfortunately,” Sternlicht said of the K Street asset. “But in that case, we will reposition that office building as an apartment building. It's actually quite beautiful. And we'll just take a little bit of capital, but it will come out of our book.” 

Sternlicht added that the company has about $1B of properties that aren’t “earning much, if anything,” and for those, the company sees the benefit in redeploying capital into assets that could produce a “substantial return on investment.” 

On an earnings call in July, Starwood Property Trust President Jeffrey DiModica said the REIT was seeking a “consensual transfer” for a residential play for 1200 K St. NW, the Washington Business Journal reported at the time. 

A month later, DeModica said a sale to a developer for conversion was still a possibility, but an office tenant interested in taking the whole building was actively touring, the WBJ reported. Whatever the result, he said, he expected the loan to be settled by the end of 2023. 

In February, Sternlicht outlined the possibilities for a path forward on the building’s conversion. 

“It's now unlevered on our books. We can borrow the money to renovate and turn it into an apartment,” he said. “That will just take a couple of years to go through the development process. Or we bring in a partner, he either buys it for us, we JV it with him. He puts up the money to renovate it, and we just establish a base property value and we go 50-50 or something like that. So we have a lot of flexibility.” 

D.C. leaders have been looking to office-to-residential conversions to revive the downtown area from the effects of the pandemic-induced remote work shift.

There are five conversion projects underway and another eight planned, the Washington DC Economic Partnership reported in its 2023 development update, citing Delta Associates data from the beginning of the year. 

The city’s first major conversion downtown, Bethesda-based Willco’s project turning the former Peace Corps headquarters into 163 apartment units at 1111 20th St. NW, is expected to deliver in the coming months.

Last month, the city opened up applications for its new commercial-to-residential tax abatement program, in which owners who convert properties in a portion of downtown can receive a 20-year abatement. The program’s funding is capped at $2.5M this fiscal year through 2026, $6.8M in FY 2027 and $41M in FY 2028.

Downtown D.C. has seen a steady stream of lenders taking the keys to older Class-B and C office buildings over the last year. Lender JPMorgan Chase purchased 1850 M St. NW out of foreclosure at an auction in August for 30% of the building’s assessed value. A 202K SF office building near Union Station also sold at an auction in December after the lender, an affiliate of Apollo Global Management, initiated foreclosure proceedings the month before.