Home News Marquee downtown office towers land in lending ‘purgatory’

Marquee downtown office towers land in lending ‘purgatory’

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Republic Plaza and Wells Fargo Center on the left are the two tallest buildings in this drone shot of downtown Denver. (Courtesy of Guerrilla Capture)

Rising interest rates and the lingering impact of the pandemic have resulted in up to two marquee office towers downtown.

Loans secured by Republic Plaza and the Wells Fargo Center, two of Denver’s tallest towers and two of the skyline’s landmarks, have entered special service in recent months. It leads to the owner giving up the key to the lessor.

At 370 17th St., the 56-story Republic Plaza is Denver’s tallest building. Two blocks away at 1700 Lincoln Street, the 52-story Wells Fargo Center is his third tallest in the city and one of his most famous locations thanks to his cashier-like crown.

Both structures date from the early 1980s and are owned by New York-based Brookfield Properties.

Brookfield has owned Republic Plaza since the early 1990s, according to Public Records. The company announced in 2014 that he would sell his 50% stake in the building to MetLife in a deal that would value the structure at $480 million.

Brookfield purchased the Wells Fargo Center from Boston-based Beacon Capital Partners in 2020. The deal was structured such that the sale price was not made public. Beacon said he paid $387.5 million for the property in 2012, records show.

Commercial real estate loans are different from loans issued to typical homeowners. A fixed interest rate of 30 years is generally applicable. Commercial loans are short term and are not set to be repaid by the end of that term. Owners often borrow as much as possible for their assets.

The Republic Plaza and Wells Fargo Center loans went into special servicing late last year, according to Trep, which tracks commercial real estate loans.

Manus Clancy

Manus Clancy

“It’s in CMBS purgatory right now,” said Manus Clancy, senior managing director at Trepp, referring to commercial mortgage-backed securities. “I’m sitting there, waiting for the next step to take place.”

A special servicer is basically a negotiator brought in when a landlord has concerns about a property. It is generally caused by the owner being late with payments or being unable to pay off the loan at maturity. A building may receive special services if it loses a key tenant.

For Republic Plaza, the building’s $243 million loan matured in December, Trepp said. Brookfield had to repay the loan in full, and the owner often did so by securing a new loan, but did not. According to CoStar data, the interest rate on the loan he has is 4.24%.

Meanwhile, Clancy said Brookfield has a $277 million loan backed by the Wells Fargo Center. The loan is due in his 2019 and will mature in two years, with multiple extension options. In 2021, Brookfield extended his loan until 2022, but its maturity dates have come and gone.

“Theoretically it could have been extended to 2024, but so far it’s not,” Clancy said.

According to CoStar, the interest rate on the Wells Fargo Center loan is 5.4%.

Clancy said there are two possibilities as a result of the special servicer process.

First: the special servicer and the borrower agree to modify the loan in some way. For example, a lender may ask the owner to renovate the building in the hope that it can secure additional tenants in exchange for agreeing to provide funding for the renovation of the building in order to attract new businesses. We may agree to give you an extension of the loan.

Second: The owner decides to cut his losses and walk away from the property, losing all of the property he owns.

“The second option is owners who say, ‘We’re just throwing good money around.’ Here’s the key,” Clancy said.

Republic Plaza and Wells Fargo Center 3

The downtown skyline as seen from the Golden Triangle district. (Courtesy of Guerrilla Capture)

Clancy said Republic Plaza has 1.3 million square feet of office space, 79% of which is leased. That number is likely to decline in the future. Current tenant DCP Midstream, which leases approximately 170,000 sf, Moved to Denver Tech CenterAlso, this figure does not include companies looking to sub-lease space. CoStar indicates a total of approximately 500,000 square feet available for rent within the building.

Meanwhile, the Wells Fargo Center is about 80% leased, according to sources familiar with the 1.2 million-square-foot building. Tenants include Wells Fargo, WeWork and Code Energy, formerly known as Whiting Petroleum.

Denver isn’t the only two buildings in a dead end these days. Last year, the Denver Energy Center Office Complex, his 28-story and his 29-story twin towers at 1625 Broadway and 1675 Broadway, were sold to a lender. at a foreclosure auctionNo one bids.

Clancy said the situation is not unique to Denver.

“Every city has two or three of these,” he said.

A combination of factors is creating headwinds for commercial property owners with looming loans. First, interest rates have skyrocketed over the past year, thanks to actions taken by the Federal Reserve.

Mike Kershval

Mike Kershval

Mike Kercheval, Executive Director of Real Estate Center at CU Boulders Leeds School of Business, said:

Additionally, the pandemic has prompted many businesses to scale back the amount of office space they lease. This lowered the value of the office building and made it less likely that the owner would be able to sell it at a high price when the loan was due.

Clancy also said lenders know more businesses are likely to cut office leases in the future, which won’t necessarily extend to other commercial real estate such as large condominiums. There is no added element of uncertainty.

“People are really worried about that space right now and it’s very difficult to get funding,” Clancy said, referring to the office department.

Over the past decade, borrowers have often refinanced cash-outs, Clancy said. Now he sees a cash-in refinancing where the owner has to pay money just to secure a new loan for an existing asset.

It may be some time before it becomes clear which possibilities will be realized at Republic Plaza and Wells Fargo Center. But Clancy thinks it’s unlikely Brookfield will move away from either property: he said the building has strong cash flow, and the Republic says the Plaza’s debt service ratio is He said a solid 1.3x.

The fact that Brookfield has not extended its financing for Wells Fargo through 2024 could indicate that the company is exiting. However, Clancy believes it is likely that the company currently does not meet some criteria for an easy extension, and extensions could be granted through special servicer negotiations.

“I’d be surprised if a borrower said, ‘That’s it.’ Here’s the key,” Clancy said, though he cautioned that it was speculation.

Kershval, who worked in loan origination and modification and headed the world’s largest commercial real estate industry group before joining CU, also said he expects Brookfield to be able to close the deal.

“Lenders don’t want to own the building,” he said. “They want cash flow.”

A view of downtown Denver from the top of the Capitol. (Courtesy of Guerrilla Capture)

However, Brookfield occasionally walks away from the property. The company bailed out Chicago’s Water Tower Place mall last year. According to Crane.

In Denver, Brookfield also owns the 29-story Johns Manville Plaza building. 717 17th Streeta 42-story building in 707 17th Street 49% stake in 54 stories 1801 california, the second tallest building in the city. The company also co-owns the Clayton Lane development in Cherry Creek. being shopped.

Both Republic Plaza and Wells Fargo Center are in Upper Downtown, a city center with typically older office buildings, vacant rooms, and vacant stores. McDonald’s and TJ Maxx these days closed place A place that has been in operation for decades.

Many other downtown office buildings have higher vacancy rates than Republic Plaza and Wells Fargo Center. For example, the rink at 1490 Curtis Street, which is 12 stories tall and much smaller at 224,000 square feet, was completed by the owner and he failed to get his tenant for the office for two years. major overhaulThe 24-story, 275,000-square-foot Denver Club building at 518 17th Street was only 31% occupied at the time. sold at auction last year It sold for $14.5 million, or $52.80 per square foot.

“There will probably be more of this,” says Kercheval.

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