Brookfield Corp., one of the largest public real estate companies in the world, has defaulted on $161.4 million worth of office building mortgages, according to a report from Bloomberg, as high office vacancy and interest rate hikes have contributed to a string of defaults this year and fueled concerns of a commercial real estate debt crisis.
The mortgage default covers roughly a dozen office assets, primarily around Washington, D.C., and comes roughly two months after the company defaulted on $784 million in mortgages for two Los Angeles office towers.
As interest rates and borrowing costs rise, pandemic-era remote and hybrid work models have made it difficult to fill offices, eating into rent profits and dragging office property values down 25% compared to last year, according to Green Street.
Occupancy and interest rate hikes had hit Brookfield’s defaulted D.C. office portfolio hard—across the 12 properties, occupancy rates averaged 52%, down from 79% in 2018 when the debt was underwritten, Bloomberg reported.
On top of that, monthly mortgage payments jumped from $300,000 to $880,000 over the past 12 months due to interest rate hikes.
Offices in major cities are still averaging at less than half their pre-pandemic capacity, according to data from Kastle Systems, which tracks keycard swipes.
The Canadian firm’s stock was down 0.75% Tuesday morning following news of the default.
Brookfield’s default in Los Angeles earlier this year marked one of the first major defaults among big-name real estate companies. Within weeks, Pacific Investment Management Co. also defaulted on $1.7 billion in office mortgages across major cities like Boston, New York and San Francisco, sending shockwaves through the commercial office industry. Five to 10 more office towers each month become at risk of defaulting because of low occupancy or maturing debt that would have to be refinanced at a higher rate, the Wall Street Journal reported in February.
“While the pandemic has posed challenges to traditional office in some parts of the US market, this represents a very small percentage of our portfolio,” a Brookfield spokesperson said in a statement.
What To Watch For
Increasing debt default could be a major concern for small and regional banks, which hold roughly 67% of all commercial real estate loans, according to Federal Reserve data. As $1.5 trillion in commercial real estate debt is set to mature over the next two years, according to Morgan Stanley, small banks could face risk of collapse if a large portion of those debts are defaulted on. The threat to regional banks was amplified when New York-based Signature Bank collapsed in March, as roughly half of its lending was to commercial real estate. The extent of commercial real estate troubles remains to be seen, however, as loan-to-value ratios are historically low, which would help borrowers afford new loans despite sinking property values and mitigate losses for lenders.
City officials have begun efforts to deal with the excess of vacant office space in their downtowns, which can become a burden on local economies. While D.C. has struggled with low office occupancy as the federal government is still not mandating in-office work, other major cities are facing similar concerns. In January, New York City Mayor Eric Adams announced plans to open up a slice of Midtown Manhattan to office-to-residential conversions, following in the footsteps of D.C. Mayor Muriel Bowser’s plan to add 7 million square feet of residential space in the city’s traditionally office-laden downtown, which has already spurred several conversion projects.
What Happened To Signature Bank? The Latest Bank Failure Marks Third Largest In History (Forbes)
The ‘office apocalypse’ is upon us (Business Insider)
Smaller Banks’ Critical Role in Economy Means Distress Raises Recession Risks (Wall Street Journal)