DTLA's Gas Company Tower Has Lost 57% of Its Value

It looks like the lenders who foreclosed on Brookfield’s Gas Company Tower in April as a prelude to a sale of the landmark 52-story office building in DTLA may have to sell the building at a loss.

The landmark trophy tower, which was valued at $623M in 2021, has seen its value plunge to $270M, according to new data from Trepp and Morningstar.

When Gas Company Tower, located at 555 West Fifth Street, was placed in receivership by the Los Angeles Superior Court in April, the total outstanding debt package on the property totaled $465M.

In February, Brookfield’s DTLA REIT defaulted on a $350M senior loan backed by the tower. According to court filings, the REIT failed to pay off the loan by the maturity date of Feb. 9 and it failed to pay an advance of $3.6M in property taxes by April 10.

The two CMBS lenders who originated the senior loan, Citi Real Estate Funding and Morgan Stanley, filed a lawsuit asking the court to appoint a receiver to pave the way for the sale of the property, in lieu of a bankruptcy proceeding.

In addition to the two-year, floating-rate $350M mortgage, a $65M mezzanine loan and a $50M junior mezzanine loan are backed by the tower, which is the headquarters of the Southern California Gas Co. The mezzanine loans were provided by Principal Financial Group.

Greg Williams of Trident Real Estate Group was appointed receiver for the Gas Company Tower and given the authority by the court to “market, advertise, promote and negotiate the sale of the property,” with proceeds from any sale used to pay creditors. Williams has awarded the exclusive leasing and property management assignment to a Colliers team.

The skyrocketing cost of debt combined with the widespread adoption of hybrid work patterns is squeezing office building owners in urban centers across the country and driving valuations down. According to Green Street data, Class-A office property values are down 35% on average from their pre-pandemic peak.

The overall office vacancy rate in greater Los Angeles is hovering at 22.4% while office availability increased by 10 bps to 27.3% in the second quarter, according to a Colliers market report. There is now more than 10.7M SF of available sublease space in the market, the report said.

Trophy office buildings have become an albatross for Brookfield, a Canadian real estate giant based in Toronto. This week, PincusCo. reported that the company is giving back the keys to a lender on the historic Brill Building, the first asset the company has surrendered in Manhattan.

Brookfield transferred the deed, valued at $216M, for the building to Mack Real Estate Group. The 11-story Brill Building, built during the Great Depression, was home to offices and recording studios where some of the leading musical acts of the 20^th century cut their tracks.

Brookfield acquired the Broadway landmark six years ago in a UCC foreclosure with the transfer valued at $213M. Mack acquired the mezzanine debt on the property from Bank OZK in 2019, according to city records disclosed by Pincus.

At the beginning of May, Trepp reported that Brookfield defaulted on a $275M loan backed by EY Plaza. The loan was originated in 2020 by Morgan Stanley and Wells Fargo and then sold to CMBS investors. The delinquent CMBS package includes a $220M and a $35M mezzanine loan.

Brookfield’s DTLA REIT also defaulted in February on $319M in loans for 777 South Figueroa St., also known as the 777 Tower. The financing that came due on 777 South Figueroa—also a 52-story tower—includes a $269M mortgage provided by Wells Fargo and a $50M mezzanine loan.

The DTLA REIT, formed in 2013 after Brookfield’s $2B acquisition of office tower owner MPG Office Trust, has been considered a bellwether for the DTLA office market in the past 10 years. The fund owns nearly 8M SF of DTLA office space.

The REIT warned in a November SEC filing that it was running out of cash and might start missing loan payments. The fund said it was in compliance with all of its loan agreements as of Sept. 30, but declining cash flows, net operating income and the declining value of the office towers were putting it on the precipice of foreclosures.

The Gas Company Tower default was the third involving DTLA trophy office towers this year. Oaktree initiated a foreclosure on its equity stake in Coretrust Capital Partners’ 48-story DTLA tower at 444 South Flower Street, a building made famous as the fictional HQ in the hit 1990s television show L.A. Law.

Coretrust’s $65M mezzanine loan from Oaktree—with an interest rate of nearly 9%—initially came due in December 2021, but Oaktree and Coretrust reached a forbearance agreement that extended the loan until the middle of last year.