Workspace Property Trust Office CMBS Debt in Special Servicing

The complexes are miles outside of cities including Phoenix, Philadelphia, Minneapolis and Miami. Some have the look and feel of the 1999 classic “Office Space.”

Two years ago, Workspace Property Trust made a billion-dollar bet on suburban offices, doubling its portfolio to 18 million square feet. In the wake of Covid, it looked like companies would trade cities for the suburbs, repeating the trend of several decades before.

“It is the clear solution for corporations looking to provide a safe, accessible, flexible, lifestyle-oriented, and community-based environment,” Workspace co-founder Thomas Rizk said at the time.

Last month, that thesis came crashing down. A $1.2 billion loan backed by some of Workspace’s suburban office campuses landed in special servicing for imminent maturity default, according to Morningstar Credit.

It’s the biggest securitized office loan — and the second biggest CMBS loan of any kind — in special servicing, according to Morningstar Credit. The only larger CMBS debt in special servicing, at $1.4 billion, is tied to another hulking suburban complex, New Jersey’s Mall of America.

Workspace’s other co-founder, Roger Thomas, did not respond to a request for comment. The company is part of Rizk’s eponymous investment firm Rizk Ventures.

Workspace wasn’t wrong in thinking suburban offices would outperform those in city centers. As of April, according to Colliers, city offices had posted higher vacancy rates than their suburban peers for two years straight, the Wall Street Journal reported.

But being better wasn’t enough. Office vacancy rates still surged in the ’burbs, just not by as much as in cities. They climbed to 17 percent in January from 12.2 percent in January 2020 while their city counterparts surged to 18.5 percent from 10.3, according to the Journal.

Occupancy rates at the Workspace Property Trust portfolio declined similarly. Across 146 properties, occupancy dropped to 76 percent this summer from 80 percent at the end of 2022. The portfolio was 95 percent leased when the loan was made in 2018, according to Morningstar.

In another questionable call, Workspace Property Trust used floating-rate debt, only to see the Federal Reserve raise rates like ride-share apps in a rainstorm. It did manage to blunt the pain with a rate cap it had acquired.

As of June, the portfolio’s net cash flow was barely covering monthly mortgage payments, according to Morningstar. Workspace is now pushing for a workout that gives it time to bolster tenancy.

Rob Verrone’s Iron Hound Management is representing Workspace in those negotiations. The workout firm also represented Workspace last year when it scored a short-term extension on the same debt.

But as a Moody’s report recently found: “The office is in flux on all fronts.”

Employees’ love for shorter commutes is still driving “steady performance” in the suburbs, the report detailed.

“But it is distinctly possible that fleeing to the suburbs for the sake of flexibility may be short-lived,” Moody’s continued. “And it is certainly not a long-term cure for office woes.”

Workplace Property Trust filed in 2017 for an initial public offering, but canceled the plan the next year because of investors’ doubts about suburban offices.

This article has been updated to include that Rob Verrone’s Iron Hound Management is representing Workspace Property Trust in workout negotiations.