Smaller Office Buildings Also Need Scrutiny

Flashy is catchy. When it comes to analyses of the office sector and failing loans that are a warning sign of danger, often the biggest examples that draw attention are the most dramatic ones, Jack LaForge, associate manager, advisory services at Trepp recently wrote.

“When thinking about the commercial real estate (CRE) office problem, many attribute it to the excess of space in overvalued office assets, and the subsequent reset of office valuations that are due to occur when accounting for post-pandemic demand,” he said. “It is scary, and certainly noteworthy to talk about a $400 million downtown office losing 50% of its appraised value and a top-five tenant before a 2024 loan maturity date, and assets such as these have been front-and-center of Trepp’s recent research.”

But then, as he continued, what is happening with smaller properties, deals, and loans that receive less attention? Move beyond giant single-asset, single-borrower (SASB) examples and there are still many properties showing signs of stress.

Trepp pointed to three examples of how “smaller-sized office loans facing near-term lease expirations … serve as examples of the structural issues that the sector is facing.”

The first was 379 West Broadway in New York City. It’s five stories, just under 70,000 square feet, in Soho. Built in 1889 and renovated about a hundred years later, it was valued in 2017 at $80 million. There’s an outstanding $42 million loan. A big red flat? WeWork leased 88% of the building and the company, now in bankruptcy, has been carrying on tough negotiations, trying to undo pricing from existing leases. The property owner is trying to attract new tenants, including for street-level retail space.

Shoreline Center in Redwood City, Calif. is 81,569 square feet of medical office. The 2018 valuation was $60 million, and the outstanding loan is $38.3 million. It’s a single-tenant property, leased by Auris Surgical Robots. “Last year in TreppWire, we noted of an SFGate story announcing that more than 340 Bay Area employees are being laid off from Johnson & Johnson subsidiaries,” they wrote. “Exactly 292 positions came from Auris Health, which was purchased by J&J in 2019.” It’s an example of how a single tenant, even owned by a high-credit parent, can become problematic.

The third spot was 400 Atlantic Avenue on Boston’s waterfront. The valuation of the 100,000 square foot building is $52 million, and the loan is $25 million. Once again, it’s a single tenant — Goulston & Storrs — which is in serious talking about moving from this Class B location to a Class A one at another Boston location. The law firm will be leaving at the end of its lease according to servicer commentary.

Trepp noted that “as more companies flock to amenity-laden class-A buildings for a better work experience and better chances at attracting talent, the lower-class office buildings could see increased vacancies.”

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