Term Sheet: US debt ceiling extension passes House; Brookfield hits more LA office headwinds; California regulation opens multifamily and commercial conversion doors

The House passes US debt ceiling extension; another Brookfield LA office is heading into receivership; imminent California legislation opens the door to more affordable housing and asset conversion projects; and more in today’s Term Sheet, exclusively for our valued subscribers.

They said it

“We’re starting to see a thaw and more product coming to the market”

Gary Phillips, managing director of New York-based investment bank Eastdil Secured, told the Wall Street Journal (article here) this week how distressed transactions could bring more clarity to valuations across commercial real estate

June/July issue now live

The latest issue of Real Estate Capital USA is live now, featuring a cover story on what could be a generational reset across all asset classes as the reality of the post-covid-19 world and rising interest rates set in.

Also in the issue, lenders and analysts anticipate the office sector will be the first to see a far-reaching reset in valuations and, subsequently, use of leverage. The shift comes as a $900 billion wall of loan maturities is set to hit over the next two years, forcing lenders and borrowers to consider which assets will and will not be refinanced when loans come due.

Read the magazine here.

What’s new?

On its way
The House of Representatives on Wednesday night passed a bill that allows for an extension to the US debt ceiling before its June 5 deadline, paving the way for its advancement to the Senate and averting a potential default on US sovereign debt. “In the short-term, a resolution will bring benchmark Treasury yields down slightly, especially on the short end of the curve,” Nitin Chexal, chief executive of Austin-based manager Palladius Capital Management, told Real Estate Capital USA on Wednesday.

Chexal noted a deal on the debt ceiling does not negate other issues the market is facing. “The majority of institutional real estate market participants continue to focus on economic growth, inflation and employment data, which will ultimately drive the Federal Reserve’s next move – skip, pause, or hike rates,” he added.

Back-to-back receiverships
EY Plaza, a once-trophy office building in downtown Los Angeles owned by a Brookfield Properties-managed fund, was sent to receivership last week after the Toronto-based manager missed consecutive payments on a $275 million commercial mortgage-backed security loan.

EY Plaza is the second downtown Los Angeles-based Brookfield-controlled office property put into receivership this year, with the Gas Company Tower facing the same fate in late April after the firm defaulted on $350 million of CMBS debt. Still, the court-appointed receiver, Gregg Williams of Coronado, California-based consultancy Trident Pacific Real Estate, sees potential for EY Plaza and brought on Los Angeles-based brokerage Colliers to lease space at the 41-story, 968,184-square-foot office tower.

No loan is an island
New York-based manager RXR Realty is getting ready to hand back the keys to another office building this week after defaulting on a $240 million loan on 61 Broadway that matured May 1. The syndicated loan on the 330-story office, originated by Germany-based Aareal Bank, is being marketed by JLL. The Chicago-based brokerage is expected to start fielding bids for the loan on the Adams Express Building in June, The Real Deal reported. RXR chair and chief executive Scott Rechler has been vocal he will not allocate good capital toward assets the firm deems to be a bad fit for the overarching portfolio.

DE&I Survey

DE&I State of the Market Survey
Real Estate Capital USA‘s DE&I State of the Market Survey 2023, in association with sector association CRE Finance Council, is live. The survey – which is collecting responses now – can be filled in here. The report will obtain baseline information and provide analysis on the scope and impact of diversity, equity and inclusion policies and programs of organizations active in commercial real estate finance. The survey is scheduled to be published in January.


Golden Gateway
A bill in California’s state legislature slated to take effect on July 1 could supercharge the development of affordable housing and asset conversions. Assembly Bill 2011 provides a pathway for faster approvals for qualifying mixed-income and affordable housing projects in commercial zoning districts, a move expected to incentivize property owners to convert low-occupancy office buildings into residential projects with affordable units, according to San Francisco-based law firm Allen Matkins.

The legislation, which has a term of at least 10 years, could help solve the problem of what to do with underutilized office space and questions over how to develop more housing in cities such as San Francisco. It’s significant to note how many industry professionals feel this regulatory help will mitigate the cost of financing conversions in today’s market environment.

Low country
Office-focused real estate investment trust stocks are trading at levels on par with the depressed valuations seen in 2009 as the asset class continues battling return-to-work delays and interest rate headwinds. Bloomberg noted the S&P Composite 1500 Office REITs index was down 27 percent in 2023 as of May 25, its lowest level since July 2009. Comparatively, the S&P Composite Equity REITs index was down 5.2 percent during the same period.

The drag created by the office sector is hampering the broader index, which has already been negatively affected by a regional banking fallout seen at Signature Bank and Silicon Valley Bank, starting in March. “There’s two ways to lose money: You can own a boat, or you can own an office building,” Piper Sandler analyst Alexander Goldfarb said in the May 25 Bloomberg report. “At least with the boat, you can take your friends out on a sunset cruise.”

Data snapshot

Discount delay
The opportunity to acquire distressed assets has been muted despite market-wide anticipation of an increase during 2023. According to May data published by MSCI Real Assets last week, assets valued at $1.3 billion were purchased out of distress in the first quarter of 2023, accounting for just 1.4 percent of the total investment market.

Borrrower’s Corner

Thinking green
Imperium Development, a multifamily development company based in Atlanta, formed in April this year, is targeting more sustainable multifamily asset creation across the Southeast US and Sunbelt markets. Formed by Greg Power and Mike Handza, the firm is looking to carve out a niche in a sector with extreme supply-demand imbalance.

“Our business plan was one deal in our first year, and we now have two deals north of $100 million of development going,” Power told Real Estate Capital USA in a story published this week. “We are off to an exciting start, despite the recent turmoil in the markets.” The founding duo previously worked at Trammell Crow Residential and Terwilliger Pappas alongside longtime chairman Ron Terwilliger.

Loan in focus

San Diego charges on
Arkansas-based Bank OZK this week originated a $265 million construction loan for the first phase of a life sciences project helmed by Chicago-based developer Sterling Bay and Chicago-based alternatives manager Harrison Street.

The May 25 financing will go toward the creation of Pacific Center, which includes a 500,000-square-foot research center, 28,000-square-foot amenity center and a parking structure. The first phase of the $650 million Sorrento Mesa submarket project is expected to open in the fourth quarter of 2024. Bank OZK has been an active lender in the San Diego life sciences market and took the lead on a $575 million construction financing package in October 2022 to create a headquarters campus for Neurocrine Biosciences.

Today’s Term Sheet was prepared by Randy Plavajka, with Anna-Marie Beal, Shihao Feng and Samantha Rowan contributing