Blue-Chip Investors Driving CRE Defaults

Major investors are powering the churn of delinquencies and defaults in the office market

Prominent creditors are choosing not to service some debts, willing to cut losses rather than grapple with struggling properties, the Wall Street Journal reported. Brookfield Asset Management, Columbia Property Trust and Blackstone are among those dealing with commercial distress.

More than a quarter of the $7.7 billion in office loans sent to special servicing are owed by big-name investors, according to Trepp. Delinquency rates remain low, but are creeping upwards.

A Brookfield loan on EY Plaza in Downtown Los Angeles was sent last week to special servicing after the owner fell behind on its $275 million loan. The building is part of the same portfolio as two other office buildings in the same area, where Brookfield defaulted earlier this year (delinquency doesn’t guarantee default).

Columbia Property Trust, owned by Pimco, defaulted on a $1.7 billion office loan earlier this year. Blackstone, meanwhile, has sent a couple of loans to special servicing.

Blue-chip investors playing a critical role in commercial defaults are more likely to back off a losing property when compared to smaller property owners, whose records could be scarred by a single foreclosure.

Institutions also carry the burden of acting in the best interest of investors. If the dollars of default or delinquency make more sense, they can make an empirical decision to cut losses and live for another day, unlike small investors that may have a larger interest in keeping a particular building at all costs.

“The thinking was that the institutions would be the last to give the keys back, but it may be the other way around in some cases,” CBRE executive Rachel Vinson told the Journal.

Concerns around vacancies, interest rates and defaults have been swarming around the office sector and the risk of distress have crept up on Class A offices, which appear to be losing their grip on resisting the troubles affecting the rest of the market.

— Holden Walter-Warner