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The office market’s freefall is accelerating

Blackstone, Goldman Sachs take big hits, while others continue to confront distress

Blackstone's Jonathan Gray, Brookfield's Bruce Flatt and Goldman Sachs' David Soloman
Blackstone's Jonathan Gray, Brookfield's Bruce Flatt and Goldman Sachs' David Soloman (Illustration by Priyanka Modi for The Real Deal with Getty, Brookfield, Blackstone)

The news isn’t getting any better for anyone invested in office assets.

The BREIT Blackstone, amid rising rates and tight credit markets, reported a near 40 percent drop in distributable earnings — cash tapped to pay shareholders’ dividends — to $1.2 billion.

Real estate net realizations, the returns investors receive after the sale of a property, fell to just $50 million in the second quarter from $1.2 billion a year ago, a 96 percent drop.

“During [less favorable markets], as we’ve seen in past cycles, the portion of our earnings related to realizations is interrupted but ultimately re-emerges as markets heal,” chief financial officer Michael Chae said on an earnings call.

Misery loves company. 

Goldman Sachs said it lost a billion dollars hit in the second quarter, with real estate partially to blame.

The bank reported $1.15 billion in losses during the most recent financial quarter, Bloomberg reported. Writedowns on some of the firm’s $14 billion in real estate investments helped drive the quarterly losses.

The company didn’t specify which properties were most responsible for the losses, but noted in its earnings presentation that the office market only accounted for a small share of its property investments. The firm did reveal a $485 million impairment charge related to its real estate bets.

Meanwhile, Mitchell Modell, former CEO of the Modell sporting goods chain, appears to have swung and missed at his office play. Special servicer Rialto Capital slapped Modell with a foreclosure filing Monday for 22 West 38th Street, citing the borrower’s missed debt payment in February, according to court documents. As of June, Modell was over four months behind on payments, according to Morningstar.

In June 2019, eight months before the pandemic, Modell picked up the newly remodeled 22 West 38th Street for $61 million in a partnership with BEB Capital, whose CEO touted the 12-story Midtown property as a stable asset.

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But Modell ran into problems early and the loan was first watchlisted in February 2020 after he doled out a significant number of rent concessions, according to Morningstar. 

Brookfield Asset Management also transferred control of the Brill Building in Midtown to its lender, the family owned and operated Mack Real Estate Group, in a transaction valued at $216.1 million.

Brookfield acquired the building for $213.2 million in 2017 after foreclosing on a $60 million mezzanine loan. The previous owners were Allied Partners, Brockman & Associates, New York’s Conway Capital and an Israeli pension fund. They had hoped to lease the retail space to Jimmy Buffett’s Margaritaville restaurant, but the deal didn’t materialize.

Located at 1619 Broadway, the Brill Building has a long, storied history in music and pop culture, similar to that of Tin Pan Alley on W 28th Street. After its opening in 1931, the property became an epicenter of big band jazz composition, producing charts for the Benny Goodman, Glenn Miller and Tommy Dorsey jazz orchestras.

The company wasn’t done with potential foreclosures, as a court-appointed receiver in Chicago tapped JLL to market a 22-story, 1.4 million-square-foot building at 175 West Jackson Boulevard in the Loop, Crain’s reported

Brookfield was hit with a foreclosure lawsuit roughly 10 months ago after allegedly defaulting on its $280 million loan on the property, marking the biggest case of distress for a downtown office building since the start of the pandemic.

It’s unclear how much the property will fetch in a sale, but it’s likely to sell for far less than the $306 million Brookfield paid for the site in 2018. 

In San Francisco, lenders are poised to foreclose on a 20-story office tower in the city’s Financial District owned by an affiliate of WeWork, which occupies half the building.

A special servicer has sued the New York-based WeWork Capital Advisors to foreclose on 600 California Street after the co-working firm fell behind on a $240 million loan, the San Francisco Business Times reported.

Torchlight Loan Services, a special servicer based in New York, sued the co-working company’s investment arm that owns stakes in buildings where WeWork leases offices.

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