Brookfield Default is $1 Billion of the $1 Trillion in CMBS Loans Due

What You'll Learn In This Article: 

• Brookfield defaulted on over $1 billion in loans for LA properties, signaling a broader office market crisis.
• The default is part of a looming $1 trillion CMBS loan crisis that could lead to bank bailouts.
• Commercial real estate's non-recourse loans allow firms like Brookfield to walk away without further penalties.
• Widespread property devaluation and changing work habits are reshaping commercial real estate values.

In February, Brookfield defaulted on loans worth over $1 billion tied to its downtown LA properties. The global investment firm faces another $763 million in potential defaults.

Their situation highlights the complete and utter crisis taking place in the office market right now. Low demand for office space from tenants, amplified by high interest rates, has made it difficult for landlords (even massive ones) to pay the debt on their properties. 

The Brookfield corporation is only one of the real estate giants that would have been deemed too big to fail in the past. But now? Properties across the country are defaulting at rapid rates, going into special servicing, and making the path forward extremely murky.

So, let's explore how and why Brookfield defaulted on $1 billion in loans, thus putting a face to 0.1% of the faceless $1 trillion in CMBS coming due and holding the real estate market hostage.

This risky environment is indicative of a post-pandemic, apocalyptic office market. With landlord default risk around every corner, tenants need to take more action than ever to safeguard their interests. Download your copy of Surviving the Office Apocalypse to receive the tenant's blueprint to managing your portfolio in this unprecedented era. 

Brookfield's Troubled Properties in Los Angeles

Brookfield Properties owned several major office buildings in Downtown Los Angeles. Key assets include the America Plaza and the tower at 777 S. Figueroa St. These buildings, once bustling hubs of business activity, have seen an overwhelming decline in office values and tenant occupancy rates.

In total, Brookfield defaulted on loans worth over $1 billion tied to its downtown LA properties. The increasing debt costs have outpaced revenues from these offices, making it difficult for the firm to meet its financial obligations. Let's look at their worst offenders.

Brookfield's Gas Company Tower has faced a dramatic decline in value, with its original 2021 valuation of $675 million dropping to $270 million, marking an approximately 60% decrease.

This significant devaluation was precipitated by Brookfield defaulting on $465 million in loans tied to this property, leading to its placement into receivership.

Similarly, its EY Plaza has experienced substantial devaluation, although the exact current value has not been explicitly stated. Brookfield's default on a $275 million loan for this 41-story tower suggests a significant reduction in its market worth, further exacerbating the challenges faced by the firm's Los Angeles office portfolio.

And most recently, the 777 Tower at 777 S. Figueroa St. also illustrates Brookfield's financial difficulties. Originally burdened with $289 million in debt, the property was slated to be sold for $145 million, reflecting an approximately 50% decrease in value. However, the deal fell through when the would-be buyer, a South Korean investment firm, pulled out of the debt-riddled location. 

And on top of this, another key property, the Wells Fargo Center, is saddled with $763 million in loans due in October.

Non-Recourse Loans

One might assume that Brookfield would be shaking in their proverbial boots because of the massive debt obligations and bad press. But the investment firm worth over $825 billion in assets is simply shrugging off their involvement in the properties. How are they getting away with this?

This is largely because commercial real estate (CRE) loans are typically non-recourse, meaning that if a borrower defaults on debt, the lender can only seize the property pledged as collateral and cannot go after the borrower’s other assets.

Brookfield has effectively leveraged this structure to their advantage, meaning Brookfield can abandon the buildings without further financial obligation... And this wouldn't be the first time.

In 2023, the company walked away from suburban office assets in Washington, D.C., and stopped payments on $886 million in loans for retail properties.

Of course, these major defaults are piling on to the massive wall of debt held by the CMBS.

Brookfield's Portfolio Distress

Brookfield maintains that these problematic assets are a tiny part of their vast and valuable real estate portfolio. But the situation isn't as neat as the corporation would like to paint to investors.

In fact, in 2023, a website was launched to disclose just how infected the company's portfolio was by distress. Research by UNITE HERE created BrookfieldRealEstateWoes.org, (although no longer in service), as a response to the growing concerns about the financial health of Brookfield’s commercial real estate holdings.

The site was created as a resource for regulators, the public, and other stakeholders to provide information on the distress signals coming from Brookfield's properties, including defaults, debt downgrades, and other financial issues.

It indicates that Brookfield affiliates have encountered problems far more widespread than it leads on. Approximately $5.8 billion worth of office and retail loans linked to Brookfield are either in default, surrendered to lenders, or at risk of default.

Implications for Commercial Real Estate and Beyond

Brookfield’s defaults raise serious concerns, particularly relating to CMBS, and highlight the interconnectedness of the real estate market, potentially causing ripple effects throughout the industry.

Because they're coming at the same time as other shockwave-inducing defaults. Pimco’s Columbia Property Trust defaulted on $1.7 billion in office loans associated with seven buildings nationwide. Meanwhile, Blackstone handed over the keys to its 26-story building at 1740 Broadway in Midtown to its lender.

So, Brookfield's property devaluations in Los Angeles are a microcosm of a larger trend affecting CRE across major urban markets. The combination of rising interest rates and changing work habits has led to a reassessment of property values nationwide. This environment poses challenges for property owners, tenants, investors, and lenders.

As office properties continue to face mass devaluation, it becomes increasingly difficult for owners to meet their debt obligations. The phenomenon of "extend and pretend," where lenders extend the terms of loans in the hope that conditions will improve, only postpones the inevitable reckoning. Again, in many cases, these loans are non-recourse, allowing owners to walk away from their debt without further financial penalty.

However, this shifts the burden onto lenders, often banks, which may then be forced to absorb the losses.

Such a scenario could trigger a potential bailout situation, as the banks' balance sheets become overloaded with devalued assets. If defaults continue to rise across the commercial real estate sector, the ripple effects could prompt government intervention to stabilize the financial system. This potential crisis underscores the fragility of the current market and the need for careful management and oversight of commercial real estate assets.

Newsflash for Tenants

In light of these challenges, corporate tenants must prioritize safeguarding their interests with unprecedented diligence.

As major landlords face increasing default risks, even the most reputable players may struggle to meet their financial obligations, potentially leaving tenants vulnerable to disruptions in lease agreements and property management.

On top of this, the prospect of a bailout scenario looms large as banks grapple with mounting debt from devalued assets, heightening the urgency for tenants to ensure their lease agreements include robust protections. Clauses ensuring continuity of services, clear protocols for handling defaults, and options for lease termination or renegotiation in adverse scenarios are essential.

Moreover, thorough due diligence into landlords' financial stability and real estate portfolios before entering into lease agreements is crucial.

The escalating defaults in commercial real estate underscore the fragility of the market and the potential systemic risks it poses. And in such a volatile environment, corporate tenants should engage proactively with advisors like True Tenant Reps™ to strengthen lease terms that safeguard against landlord defaults.

Luckily, the True Tenant Reps™ at iOptimize Realty® wrote the book on how to survive a leasing environment marked by landlord defaults. It is chock full of invaluable information for tenants navigating this office market. Get your free copy today!