With Banks Pulling Back, Who’s Financing Office Deals?

Wall Street debt funds are seeking to capitalize on the troubled office market in Boston. iStock illustration

The full effects of the office market’s post-pandemic exodus have yet to materialize publicly, as only a handful of office properties have changed ownership at deep discounts in Boston this year.

But behind the scenes, landlords and lenders are seeking ways to restructure their existing debt, keep control of properties and avoid foreclosure.

Many deals will include Wall Street investors taking preferred equity stakes in troubled office properties, lending short-term debt at rates as high as 18 percent to pay down existing mortgages, said Michael Buckley, a principal at Avison Young in Boston.

“For the marquee, class A assets, it’s likely that a better lending source will come in as preferred equity piece and bridge the lender relationship,” Buckley said.

The office market shows no signs of a recovery, with direct vacancies rising to over 16 percent in Boston during the first quarter, according to CBRE data released last week.

As tenants downsize and depart from Boston office buildings, many landlords are at risk of default related to loan covenants requiring them to maintain certain financial targets such as minimum income.

As an alternative to foreclosure or handing ownership back to the lender to avoid future losses, a third option is available in an infusion of preferred equity from private investors. Funds focusing on “opportunistic” investments now have more than $100 billion to invest in distressed real estate, according to brokerage Colliers.

With billions of dollars at stake in the city’s 68 million-square-foot office market, the preferred equity path is attractive to many office landlords and lenders seeking to minimize future losses on office properties, Buckley said.

“Unequivocally, there will be more of this until the interest rate environment changes dramatically,” Buckley said. “Boston is one of the top six office markets in the country. Unfortunately for both sides, these are big dollars and big exposures. The next 18 months are going to be very rugged.”

Preferred equity deals and mortgage restructurings typically don’t become public records, but the market for them is “very active,” he added.

With regional banks reluctant to lend on office buildings, debt funds are instead taking preferred equity positions in distressed properties that otherwise might face foreclosure. iStock photo

Opportunity Knocks at Lower Prices

Traditional office investment sales activity continues to decline across the nation as lenders pull back from an out-of-favor sector, and Boston has been no exception. But a series of recent local transactions point to potential models for future deals.

Some buyers have agreed to take on existing mortgage debt, or bought smaller-ticket properties at deep discounts by paying in cash or receiving loans from private lenders.

“One word to describe the current office financing environment is ‘creative,’” said Mark Fallon, director of research and strategy at brokerage Hunneman in Boston. “Lenders are not keen to offer conventional financing on office properties.”

Boston-based Synergy Investments has been one of the most active office investors in the past year, acquiring properties including 179 Lincoln St. through assumption of existing debt and 101 Arch St. with $65 million in acquisition financing from three lenders. Synergy did not respond to requests for comment.

“They made their bones during the global financial crisis and it’s worked out for them. Now they are seizing on opportunities, and they are able to execute on these deals where they see some opportunities,” Hunneman’s Fallon said.

As office transaction volume has risen in recent months, several buyers scooped up class B office properties at deep discounts from previous sales prices, reflecting the minimal demand for older office properties in the post-pandemic work environment. Such transactions are typically financed by regional banks, which have pulled back from office lending locally and nationally, intent on diversifying their loan books away from commercial real estate and toward business lending.

One of the few deals financed under a traditional structure was City Realty Group’s acquisition of 186 Lincoln St. The Boston developer received $10.1 million in mortgage financing from Taunton-based Mechanics Cooperative Bank for its $11 million acquisition, with plans for capital improvements and new amenities to attract tenants to the Leather District property.

Lowell-based Jeanne D’Arc Credit Union lent $2.9 million toward another class B acquisition, the $4.1 million sale of 33-41 West St. at Downtown Crossing.

The downward reset in office values also has enabled local investors to buy into the office market through opportunistic investments in discounted and distressed properties previously owned by larger developers.

Braintree auto dealer Daniel Quirk bought 100-150 Grossman Drive in Braintree for $8.7 million while manufacturing executive Ali Lotfi paid $5.5 million for 400 Crown Colony Drive in Quincy, respectively, after lenders put the suburban office buildings up for auction last year.

Steve Adams

Transaction Activity Declines Nationally

On the national level, office investment sales activity has continued to plummet in early 2024. Investment sales volume dropped nearly 55 percent compared with 2023, according to Avison Young data, while debt originations to the office sector declined nearly 49 percent.

Regional banks, typically a key source of financing, have stepped away from the sector “with no clear alternative in sight,” Avison Young noted in its first-quarter capital markets report.

Some traditional lending sources such as life insurers remain active, but only for low-risk transactions. Insurers are still looking to finance office deals with good credit and lease terms, according to Chad Littell, CoStar’s national director of capital markets analytics.

Banks currently hold nearly 50 percent of all outstanding office debt nationally, with nearly two-thirds of that amount on the books of regional and community banks, according to the Mortgage Bankers Association.

“Banks are largely out of the market to finance new office acquisition,” but debt funds are partly filling the gap, Littell said.

Source link

With Banks Pulling Back, Who’s Financing Office Deals? #Banks #Pulling #Whos #Financing #Office #Deals

Source link Google News

Source Link: https://bankerandtradesman.com/with-banks-pulling-back-whos-financing-office-deals/

With Banks Pulling Back, Who’s Financing Office Deals?:

Wall Street debt funds are seeking to capitalize on the troubled office market in Bosto…