What can you get for 4.1M in Vancouver? A pretty awesome house, I am sure, but in 2022 April it was enough to buy the AT&T Centre in downtown St. Louis. It is a 44-story skyscraper valued at 207M in 2007. The building owner was in trouble when the sole tenant, AT&T, left in 2017.
The landlord stopped making mortgage payments and it was eventually foreclosed. SomeraRoad, a New York developer, came in and bought it for 4.1M which was just enough to pay all the fees and expenses. In 2017, the mortgage balance outstanding was $107M. That was a complete loss for the lender.
Interested in getting in on more deals? The discount might not be as steep but there will be more to come. Higher interest rates, lower occupancy and dropping office tower valuations is a deadly combination for commercial real estate owners. As you can see from the chart provided, a fifth of the office space in the US is paying NO rent. Workers are not moving back into the office fast enough to save a lot of these landlords. Even if they can maintain the loan payments now, will they be able to if they need to renew into a higher rate? If this doesn’t cause a default, the fact that most office buildings have lost about 25% in value may cause the lender to demand more collateral. If they cannot come up with more money, we are back to default again.
For example, this year Brookfield Asset Management has defaulted on a 161.4M mortgage for a dozen office buildings mostly around Washington, DC. When the loan was set up the occupancy rate was 79% and the monthly payment was $300,000. Now they are 52% and $880,000 respectively. Under similar circumstances Brookfield also walked away from loans on three buildings in L.A. totaling over 1 trillion dollars.
While only a few might benefit from these deals, many will be affected by the losses at the banks that hold these loans. And as the graph shows, 70% of US commercial real estate loans are held by small banks. The ones that were having a crisis of confidence earlier. At a minimum these losses will force the banks to lend less and the resulting reduction in credit will slow the economy as businesses fail to get loans.
At worst, this can kick off another bank crisis and cause more small banks to fail, shrinking the economy in an even more forceful manner. This is one of the forces that might lead the US and Canada into a recession.
