Shorestein taking Ls
Shorestein does not appear to be doing good in recent news... (1) taking a loss on a Houston property they bought back in 2013, (2) Twitter HQ building not paying rent, (3) now they're trying to market a Downtown LA building due to pressure for a lender.
GreenStreet Article - Shorestein Aims to Cut Loss on LA Offices
Shorenstein, facing pressure from its lender, is shopping a Downtown Los Angeles
skyscraper that’s expected to command about $220 million. The 1.1 million-sf Aon Center, at 707 Wilshire Boulevard, is just 64% leased, which could appeal to value-added investors. The estimated value translates to about $200/sf, a steep discount to peak pricing for Class-A office properties in Downtown Los Angeles, which topped $500/sf before the pandemic.
The lender, Mesa West Capital, is offering to provide financing to sweeten the
deal for a buyer. Newmark has the listing. Aon Center is just a block away from the PacMutual Building, which also is up for grabs and expected to fetch bids around $100 million — half the amount it last traded for in 2015. Ivanhoe Cambridge is shopping that property via Cushman &
Wakefield (see article on Page 8).
For Shorenstein’s offering, the pitch is a buyer could scoop up the 62-story tower, the third-tallest building in Los Angeles, at a bargain price and benefit from a strong existing rent roll while focusing on stabilization. The property has 53 tenants with a weighted average remaining lease term of 4.9 years and limited near-term rollover. The San Francisco-based investment shop paid Beacon Capital Partners $271 million, or $244/sf, for the property in 2014, when it was 55% leased.
In June 2018, the firm refinanced the debt that funded the acquisition with a $246 million bridge loan from Mesa West. The floating-rate mortgage had a three-year term and two single-year extension options, which would put final maturity at this year.
Newmark is describing the offering as a “lender-facilitated sale,” which could catch the attention of investors seeking to capitalize on dislocation in the office market. A sale would allow Shorenstein to cover its existing debt, market pros said.
In 2020, Shorenstein completed a multimillion-dollar renovation of the 1974-vintage skyscraper. It has an upgraded lobby, a 90-person auditorium, a 45-person training lounge and a fitness center operated by Kinema Fitness. Amenities also include valet parking, a car-washing service, car-charging stations and a coffee shop that serves breakfast and lunch.
Marketing materials peg replacement costs for the property at $900/sf, providing a “massive basis advantage” to new construction for a buyer. Rents in Downtown Los Angeles would have to rise 70% to justify new office construction, according to the seller.
The sales campaign also touts the investment-grade credit ratings of the building’s two largest tenants: Insurer Aon has 77,000 sf under a lease that matures in June 2027, while Wells Fargo occupies 66,000 sf under an agreement that expires in October 2026. No tenant occupies more than 7% of the building.Leases on just 15% of the space mature by 2026, with an additional 13% expiring in 2027. That should provide a new owner with stable income over the next five years, according to marketing materials.
Downtown Los Angeles has 39.1 million sf of office space that was 77% leased at the end of the year, according to a Newmark report. Asking rents for Class-A space averaged $44/sf
Can anyone provide insight on why Shorestein decided to refinance the acquisition loan with a bridge loan from Mesa? I'm assuming it was to use loan proceeds to renovate the building??
Yeah, office is tough, they're not the only ones.
Following.
I didn't real off the details above. But to the OP comment at the bottom, they likely wanted a bridge loan as there was/is 64% leased. So there was significant tenant roll or it was 64% occupied when they purchased it. Floating rate loans were extremely attractive before the past year, as libor was like 10-50 bps and spreads were like 150-200 bps for trophy office buildings. Try getting that with fixed rate money at the time. Also, loan docs likely could have had a springing cap in place, or hedges were cheap against rising interest rates.
Just the beginning of the pain to come in office. What could also exacerbate the issue with office is overzealous investors who will buy offices in this environment because they think the basis is attractive and that they can operate better than others.
So for example, ABC Fund buying an underwater asset from Shorenstein thinking they can turn it around. They buy with expensive capital and embark on a renovation plan that entails heavy capex. Then when they try to lease up, they realize firms are not interesting in leasing more office space, but actually leasing less (even after recession). An unexpected consequence of this recession I think will be that many tech firms will downsize office space (Facebook, Twitter, Amazon, etc.) and realize that they never really needed that much space and their P&L is better by just shedding space. Look up how Facebook recently announced that they plan on spending billions to break leases rather than just occupying the spaces. Then as the economy improves, they’ll realize that they should not make the same mistake of aggressively leasing space in the name of expansion.
But, they collect the asset management fee!
LOL and offer “superior risk-adjusted returns”
agreed.
BUT, in all seriousness I don't think office will fall as far as people think. I believe there will be a huge drive to work from office for companies in 2023. It really does make most people more productive.
Depends on the product. I can see brand new, Class A office space doing better than it ever has. The firms that want office space will want it, and they'll be willing to pay for it. I think some of the older Class A and Class B is where things will get hairy. For example, why is a law firm renewing in expensive but extremely dated office space on Sixth Ave when they could reduce their footprint by 20%, pay 25% more, and move to Hudson Yards or 7 WTC? Those buildings represent massive investments, but aren't really capable of being converted or renovated, just because the floor plates and ceiling heights are insurmountable obstacles. That kind of space is going to get absolutely wrecked. There will still be a healthy market for small floor plate offices in the hundred thousand tiny office buildings scattered around.
Suburban office parks will also likely get slaughtered, though I have less insight in those markets. It just feels like all of that was overbuilt for what it was anyway, and was reflective of a different era in the 80s and 90s when the suburbs were thriving instead of today. If I live in the suburb of a major metro, why the hell am I going into the office with like 5 other people instead of working from home?
I agree with most of what you said. Class B in Major Metro, unless it is transit adjacent will hurt a more. BUT, the delta from rents in Class A and Class B is huge. Hard to see that it will be abysmal. Obviously the biggest pain point is the cash flow from the floating rate debt service getting squeezed by higher intrest rates. I've seen insane concessions given for new and renewing tenants in Class B, much less in class A. But the way the Debt Yield threshold are calculated for extension options, most calcs include Free Rent in NOI, and that is all some owners want now, to be able to extend until the market gets better. Great time to lock in a long term lease, and some businesses have.
For example, why is a law firm renewing in expensive but extremely dated office space on Sixth Ave when they could reduce their footprint by 20%, pay 25% more, and move to Hudson Yards or 7 WTC? - This sounds like Anchin & Block who vacated from a Class B owned by Savanah and is taking space in Rudin's newly to be redeveloped 3 Times Square.
Kinda disagree about surburban, I know owners who wanted to push big amenity space during covid for their surburban. It was a failed investment thesis. Surburban office rents are generally cyclical on a 10-20 year horizon. I don't see anything drastic happening, but a small slump down for them. THe surburban with warehouse with flex office should do okay.
Is the incremental production worth the cost of rent though? I think that’s the golden question for a lot of these mid size groups
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This is just the beginning. Sounds like forced sellers that could not refinance at par or at terrible terms.
This reminds me of the old adage, when you owe the bank 1 million dollars that is your problem, when you owe the bank 1 billion dollars that is THEIR problem. Meaning, banks need and want these loans to refinance. (This can mean a number of different scenarios e.g. cash-in, extension, etc). BUT, they certainly won't be able to sell most of these loans as margin is 150 bps, and if they do it will be to distressed shops. That isn't a great way to keep a client when times are better.
In this instance I don't think I agree with this. It sounds like Mesa is actually coming out of this in a pretty good spot. They get 5 years of interest payments and will end up owning the asset for something close to par value on the debt, if not slightly above.
It's genuinely hard to see how Shorenstein has their lender by the balls. The adage you quoted has a lot more relevance when you're talking about 95% leverage or something insane, where the lender is staring down a write off of tens of millions of dollars no matter what - at that point, you have a ton of leverage and you may as well work it out. In this case, the collateral is doing exactly what it should, and protecting Mesa from a real Armageddon situation. Would they rather have the building perform and make their 7%+ debt yield? I'm sure. But getting 95 cents on the dollar plus five years of interest payments isn't exactly the end of the world.
Mesa's cost basis is $246mm and they are selling the building for $220mm (maybe), that doesn't seem like a great spot to be in.
I know of another Shorenstein apt deal that completely shit the bed. Talking building falling apart and having to kick everyone out to basically rebuild it bad. ~2018 vintage.
2018 vintage? what the fuck. What city
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