PIMCO-Controlled REIT Defaults On Mortgage, Pointing To More Stress In Commercial Real Estate Market

February 23, 2023

The owner of seven office buildings from San Francisco to Boston has defaulted on $1.7 billion of mortgage notes — more bad news for investors in some of the largest commercial real estate concerns as the market bleeds property values and rising interest rates put pressure on borrowers.

The seven buildings, located in San Francisco, New York, Boston and Jersey City, New Jersey — are owned by Columbia Property Trust, which was acquired in 2021 for $3.9 billion by funds managed by Pacific Investment Management Co. (PIMCO), Bloomberg reported.

Columbia Property Trust operates one of the largest U.S. real estate investment trusts (REIT), focusing on developing, owning, leasing and operating commercial real estate properties.

The world’s largest credit-focused fund manager, PIMCO is an investment management firm focused on fixed-income securities. It manages $1.74 trillion in assets as of Dec. 31 2022. That’s down from more than $2.2 trillion in assets in October 2021. The company serves high-net-worth individuals, individual investors and institutional investors.

Even before 2020, commercial real estate was experiencing setbacks. The covid pandemic accelerated challenges of new working environments and less need for commercial spaces, according to a report in the peer-review publication Best Lawyers. Landlords are seeing increasingly vacant buildings as the economy faces high inflation, rising interest rates and the prospect of a recession.

“No one has said that office space is dead or on life support, but it does appear that many tenants and users of office space are reevaluating and reconsidering their needs,” wrote Brion J. Kirsch, a real estate lawyer with Pullman & Comley LLC.

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U.S. offices, especially older ones with fewer amenities, have struggled in recent years with the rise of remote work during the pandemic and recent layoffs, Bloomberg reported. Values of those properties have fallen 20 percent since March 2020, according to Green Street.

A San Francisco building at 650 California St., built in 1964, is the most valuable of the seven buildings in the Columbia Property REIT default portfolio at $479 million, according to 2021 figures. Other properties include three Manhattan buildings — 229 W. 43rd St. (built in 1912), 245-249 W. 17th St. (built in 1909) and 315 Park Ave. South (built in 1911); 201 California St. in San Francisco (built in 1980); 116 Huntington Ave. in Boston (built in 1990); and 95 Christopher Columbus Drive in Jersey City (built in 1989).

Other large commercial real estate defaults are starting to reveal cracks in the market. New York-based real estate investment trust Vornado Realty Trust defaulted Dec. 21 on a $450 million mortgage loan. Vornado’s Fifth Avenue and Times Square joint venture defaulted on a loan tied to the retail property, where tenants include the luxury labels Harry Winston and Blancpain.

Commercial real estate defaults have hit downtown Los Angeles’ office market hard. The vacancy rate in the L.A. central business district was 22.7 percent in the fourth quarter of 2022, according to a Jones Lang LaSalle Inc. report.

Earlier this month, Oaktree Capital Management foreclosed on a 48-story office tower. And Brookfield Corp., the parent of the largest office landlord in downtown Los Angeles, has defaulted on $784 million worth of loans tied to two buildings rather than refinancing the debt. 

The seven buildings owned by Columbia Property Trust were appraised at $2.27 billion in 2021, according to loan documents, Bloomberg reported. Goldman Sachs, Citigroup and Deutsche Bank funded the original debt of almost $1.9 billion

Image: 249 W. 17th Street in Midtown South Manhattan is home to Twitter’s New York office. Photo: Columbia Property Trust

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