One of the biggest landlords in Los Angeles just defaulted on $755M

https://fortune.com/2023/02/14/remote-work-los-angeles-office-building-default-brookfield/

by sgerenser • 3 years ago

55 80 3 years ago

fortune.com

zxexz• 3 years ago

Turn the office buildings into affordable housing.

tasuki• 3 years ago

I know nothing about the topic, but someone who does told me this is not easy to do.

recursive• 3 years ago

We do this not because it is easy, but because it gives us somewhere to live.

nxm2• 3 years ago

It’s rarely that easy or financially viable. Major changes to the building’s core systems are required.

carlosjobim3• 3 years ago

At this point it doesn't matter anymore. We have whole generations of young professionals who are forced into life long debt to have a shack to live in. Your argument is like arguing against letting people have bicycles and continue walking, because cars are better. People need to escape rent feudalism first, then we can talk about other stuff.

fundad3• 3 years ago

Rebuilding in flood zones isn’t financially viable either but government pays for that.

ericd2• 3 years ago

My understanding is that office buildings usually don't have enough plumbing or ventilation ductwork to make this reasonable to do, let alone cheaply enough to make it viable to make it into "affordable housing".

Unless you're suggesting that the government take on a bunch of debt on everyone's behalf to do this as a public service for those who are having trouble with rent, without regard for it being a financially viable project by itself. idk how it compares to the other options for doing that.

scrose• 3 years ago

‘Affordable housing’ is an overloaded term at this point. There are people who qualify for ‘affordable housing’ in NYC who are making ~$180,000 and will be paying $3,000/mo or more in rent after their ‘low-income subsidy’ is factored in.

fundad3• 3 years ago

It would be a service from the government to residents in buildings they acquire and modify (through private-sector construction companies). Housing should not be privatized.

coffeebeqn• 3 years ago

Couldn’t they do dorm style with shared bathroom facilities? Usually office buildings have much better ventilation than private residences.

sowbug• 3 years ago

What about new office buildings? Could it be economically viable to include a residential option? Is there anything comparable to running a bit of extra conduit, the way some newer homes are built? PVC isn't free, of course, but maybe it's a negligible extra cost compared to the rest.

BurningFrog2• 3 years ago

The rezoning alone would take a decade at best.

Cshelton2• 3 years ago

On properties like this, that is still possible, BUT..

It wouldn't happen with the same borrower on the same deal/loan. It would go into a whole new construction type of loan (which is usually some sort of short term "mezz" financing for the transition period), and then get underwritten on maybe a 10 year.

The issue with the above now though is the transition to multi family costs a lot. Many will try and get cities/states to subsidize it. And then getting a good loan to make the deal work in unknown. Nobody makes deals like that happen when there is this much uncertainty in the CRE market. If you can't secure financing post construction to make the cap rate work.. you're done. Deal is dead.

slaw3• 3 years ago

Turn the office buildings into affordable housing.

Or homeless shelters.

berkle4455• 3 years ago

How about we move jobs to somewhere cheaper instead of trying to figure out how to retrofit high-end office buildings into cheap apartments?

xnx2• 3 years ago

Turn the office buildings into whatever the market wants: lofts, warehouse, light industrial, retail, recreational space, housing, etc. The one thing we know the world doesn't want is the status quo (otherwise they wouldn't be empty), so we should not do anything that keeps it from finding its best use.

mezeek• 3 years ago

It's just the beginning.

Downtowns in most cities haven't recovered anywhere near sustainable levels, but rents are still being paid on many office tower floors. By the end of next year, most of those leases will be done, and nearly everyone is downsizing.

paulcole• 3 years ago

By the end of next year, most of those leases will be done

Is this true? What's the average lease length in an office tower?

voisin3• 3 years ago

By the end of next year, most of those leases will be done, and nearly everyone is downsizing.

This is incorrect. Standard leases are for 5 years so 20% would come due in any given year, but for larger spaces that entailed significant investment by landlord or tenant tend to be for 10 years and some as long as 20.

cjrp3• 3 years ago

I guess if you assume that very few leases were being signed after ~March 2020, most of the remaining (short-term) leases would have expired by 2024.

jillesvangurp• 3 years ago

I know many companies stuck with multi year leases on offices that they are no longer using anywhere close to the level as when they got those leases pre-covid. I'm expecting a lot of companies will cut back on their leasing cost by a lot as soon as they can.

This is in Berlin btw. There are still new office buildings being built right now. I'd say, a lot of those projects are going to have some financial challenges. A lot of that construction was planned and financed before covid and the construction work just seems to go ahead here on automatic pilot.

One of the bigger fiasco's in Berlin on this front is a new sky scraper on the Alexander Platz (near the famous big tv tower) that was supposed to become the tallest building in Berlin (except for that tv tower). They have been working on the foundations for this for some time. But since the financial backers of this were Russian, it is doubtful the project will ever be completed and there seems to be not a lot happening on that project recently. And even if it is built, there is already plenty of available office space in existing buildings. https://berlinspectator.com/2022/07/25/berlin-alexander-towe...

There is of course a housing shortage. I'd say a lot of the empty offices are going to eventually be converted for housing. But not before there is a little real estate massacre for current building owners and investors. Office rents should be trending down at this point.

Cshelton2• 3 years ago

I'm in the CRE (Commercial Real Estate) finance tech world.

Most borrowers are currently electing to extend the maturities out another year, many getting IO (interest only) extensions from their lenders, rather than fall into special servicing. "Special Servicing" is the process to take deals like this and find the best outcome for the lowest lender on the capital stack waterfall. Fortunately, there are many processes in place to handle these kinds of things and not left for the taxpayers to bailout... typically.

Bailout? Why? Because it's not just these "rich" landlords/investors that lose their money. They are pension funds, retirement funds, Teachers retirement funds, public service funds, your neighbors' annuity, etc.

The whole thing is a big circle of money that becomes increasingly more complicated in each CRE cycle of boom/bust. The sentiment in the CRE world is definitely of uncertainty and caution right now. Many are optimistic about later this year and things turning around. It's not only Office either, many multifamily deals were done with a cap rate that could not be sustained, and now the deal is no longer "cash flowing", so the borrower cannot service the loan and they can't raise rents either as that side is also under pressure. With Office, companies are still not fully in office, combined with the layoffs, and the prospect of a down economy ahead has them cutting spending where they can. The leases don't renew, and the borrower has no ability to refinance with the rate hikes.

We're in a very delicate time period right now and one catalyst can send it in either direction, very quick.

bsamuels• 3 years ago

Bankruptcy and the ability to flush bad management out of the economic system is the single most redeeming feature of capitalism.

0xfaded• 3 years ago

I also wouldn't mind if these potential dwelling spaces were priced on the open market rather than pegged to whatever imaginary number is needed to keep pension funds above water.

ausbah• 3 years ago

rarely seems to happen from my layperson's experience. bad if not straight up illegal management is given fines at worse and golden parachutes at best. equifax, wells fargo, all the monopolists running around, etc. all seem to just get away with stuff

swatcoder2• 3 years ago

Bailout? Why? Because it's not just these "rich" landlords/investors that lose their money. They are pension funds, retirement funds, Teachers retirement funds, public service funds, your neighbors' annuity, etc.

And why did those socially vital funds invest in a boom/bust industry? Oh, because bailouts will protect them during the bust. Like free insurance. Whee.

What could go wrong with a feedback loop baked into the economy?

bcrosby95• 3 years ago

The biggest trick the rich pulled on the wider public is getting them financially invested in the same things they are. In a democracy, what better way is there to guarantee that your losses will be socialized than giving the masses a financial interest in your losses being socialized?

cjrp3• 3 years ago

And why did those socially vital funds invest in a boom/bust industry?

Presumably because that's the only way they could generate the returns needed to fund the pensions?

voisin3• 3 years ago

And why did those socially vital funds invest in a boom/bust industry?

Because retirees like when their funds earn more than T-bills and actually beat inflation and that entails taking risks. Otherwise everyone can work a hell of a lot longer.

Arnt• 3 years ago

Because real estate has a real component. Those houses exist, and will stay there, for much longer than the boom/bust cycle. Pension funds are long-term entities.

Compared to, say, shares or bonds issued by a consumer electronics company, or a cosmetics company, the real part of real estate is much bigger.

mynameishere• 3 years ago

Nothing would please me more than those gamblers-anonymous pension funds going straight to zero. I would actually pay higher taxes just to watch that shithouse burn. Bailouts need to end.

I am pretty sure they weren't going to share their profits with me had the ball landed on black. Screw them.

celestialcheese2• 3 years ago

This is a new one. What do you think pensions are?

So your hot take is that retired government employees, union laborers and other beneficiaries of pensions deserve to have their contribution to the pension and their retirement income zero'd out just because you don't get some of the money?

morelinks• 3 years ago

Bailout? Why? Because it's not just these "rich" landlords/investors that lose their money. They are pension funds, retirement funds, Teachers retirement funds, public service funds, your neighbors' annuity, etc.

Moral hazard.

Force bankruptcy and use any “bail out” to help the investors named above.

pg_bot• 3 years ago

If your pension fund can't handle an investment potentially becoming worthless you deserve to lose all your money. If you decide to take the risk on any investment, you get the rewards when things go right but face the consequences if the investment doesn't pan out. There's no need for taxpayers to be involved in this process even if the people losing money are teachers, orphans, veterans, or grandmas.

nkh• 3 years ago

We should buy the assets put them in a social wealth fund (like Norway's). https://www.peoplespolicyproject.org/projects/social-wealth-...

It's a very good way to get out of this feedback loop, and I don't ever see anyone mention this very obvious solution.* The linked paper shows all of the different mechanisms that it could be accomplished. But when people go bust, it's even more straight forward.

* Obviously, the reason it isn't talked about in main stream circles is that it would work really well (as it does in Norway and Alaska) and dispossess the ultra wealthy (and the ultra wealthy own those outlets). But thought I'd share the idea here if case people haven't been exposed to it.

rhacker• 3 years ago

CA purchase or lease buildings and pay for remodeling and additional plumbing required to make these permanent homeless shelters. Pack em in too. 10x10 per resident.

FrontierPsych3• 3 years ago

Yes, please.

My friend and I have been talking about this for a long time.

It would cost a lot less to buy these highrises and build them out for homeless, rather than the mess we pay for now.

aaomidi• 3 years ago

Bailouts are only okay if the public ends up owning a huge chunk of it.

trabant00• 3 years ago

Any time somethings like this happens people rejoice and hope for affordable apartments. I think you are wrong on both accounts.

Converting office buildings into housing is harder than tearing them down and building a apartments from the ground up. Every design of the office is wrong for living: the wall placements, windows, plumbing, hvac, stairs, elevators, etc.

And I also think you are wrong in being happy that these buildings are losing tenants. This will have a significant economic on the investors (which could even be you through funds, pensions, etc), and locally on the area. Think about all the businesses and jobs that serve these offices. These areas are going to decay and that will last for decades until it will be economically viable to repurpose them. At least on the short term I am not happy to see this happening.

nxm2• 3 years ago

Also property taxes that government can collect on the building would go down, which leads to budget deficits.

slaw3• 3 years ago

Converting office buildings into housing is harder than tearing them down

So tear them down and build apartments.

This will have a significant economic on the investors

Investors can invest in tearing down useless offices and build housing, instead of throwing good money after bad money.

amarka• 3 years ago

Ahh yes the "we'll rewrite this code from scratch" argument; known well to work every time!

voisin3• 3 years ago

Not to mention zoning often prevents these conversions!

fundad3• 3 years ago

This sounds tough but capitalism is tough, investments go down all the time. It would be much worse if commercial real estate had no risk. Someone sold high before office buildings became obsolete.

Funds and pensions should mitigate downside risk to be successful.

xnx2• 3 years ago

The market will find a way to repurpose these buildings, but it will not be at the rates that the current owners want.

celestialcheese2• 3 years ago

Who's going to pay for the repurposing? Converting an office to residential or lab space can cost between $200-$350/sqft in west coast downtown locations.

jessaustin3• 3 years ago

I have a wealthy friend who has made most of his money in real estate. His rule is that he makes all the money he is going to make on the day of purchase. That is, he only purchases properties being sold for less than they will be worth in the near future. That is, his profit comes out of the pocket of the current owner. (Which could be a bank after repo or even a construction firm that didn't get paid by the previous developer.)

Who will "pay" for making formerly useful property useful again? In a free market, that would be the current owners of that property, and that is what should happen here. No one cries for the rich investors who own commercial real estate in big cities.

BurningFrog2• 3 years ago

I assume they're typically zoned as office spaces, making most repurposing illegal?

binarymax• 3 years ago

In the same week that LA cleared skid row. It’s time to rethink commercial space. rezone these empty buildings for residential and let people live in them.

grogenaut• 3 years ago

Multiple estimates put skid row at at least 25-39% with mental illness... you're probbably not going to be able to put those folks in standard residential housing. The other 60-70% yes... But that still leaves a substantial amount with no effective recourse

phendrenad2• 3 years ago

Before the shift to remote work, these office buildings were the thing that drew businesses to cities, and that brought people to cities. Now, these office buildings will remain empty and become urban blight. Want a sneak peak at what happens next? The owners of these buildings will go bankrupt and abandon them. The city won't pay the electric bill, so they'll go dark. They'll fill up with gangs and drug dealers. The city will be too afraid to inspect them. They'll slowly fall apart and become dangerous.

Cities need to act fast to attract more residents near these buildings, and take over these buildings and rent them cheaply. Losing money on these buildings is preferable to letting them sit idle long-term.

codexb• 3 years ago

To be fair, downtown Los Angeles was dying 20 years ago. Even on the busiest of days, it was dead there. There's nothing at ground level like there is in other cities. And no one takes mass transit so you don't have people walking around. The other problem is that there aren't any dense neighborhoods near downtown where people want to live. So no one wants to work there either. The people that worked there drove from the valley or Pasadena or Orange county into locked basement garages in the city and then drove out at the end of the day.

The only hope for downtown LA is to convert a giant chunk of it to residential and entertainment and restaurants and put something in downtown to draw people, like a museum or something. The only thing even close to there now is the staples center, but even that doesn't have a neighborhood or stuff to do around it.

FrontierPsych3• 3 years ago

Sounds good, let's do it.

carapace• 3 years ago

Large cities are probably economically unsustainable anyway. I wouldn't be surprised if mega-cities turn out to be wholly transient, with places like London and Tokyo effectively becoming museums of themselves.

One of the biggest landlords in Los Angeles just defaulted on $755M

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