OC Office Loan Special Servicing

The commercial mortgage-backed securities debt connected to an office park located in Westminster went to special servicing after the borrower defaulted on about $16 million debt after eight months of delinquency, according to Morningstar Credit and Trepp.

You won’t hear a lot about office woes in Orange County, but nowhere is perfect.

Introduction to the Issue

The three-building, mid-rise, office campus at 5405, 5455 and 5555 Garden Grove Boulevard, with a total of 150,000 square feet, is owned by Younan Properties, which did not immediately respond to a request for comment. The property is worth $28 million, or $187 per square foot, according to a pre-pandemic appraisal, although keeping tenants has been an issue: The campus was 98 percent full at underwriting, but had fallen to 64 percent by June 2024, per the latest available data.

Leases over Losses

The special servicer notified the borrower but had not received a response as of October, according to servicer commentary via Morningstar. Hudson Pacific Properties’ chairman and chief executive Victor Coleman can tout an office recovery all he wants, but the company is still bleeding money. The Los Angeles-based real estate investment trust reported losses of $294 million in the nine months ended September 30 compared with $197 million a year earlier. The company mostly blamed the studio business, which is lagging throughout Los Angeles, for losses.

Technology and Artificial Intelligence

Coleman took the opportunity of the third-quarter earnings call to boast about technology and artificial intelligence companies and their need for office space in the Bay Area—although he missed a chance to name-drop Elon Musk, whose company leased 100,000 square feet at a Hudson Pacific office property in Palo Alto. In all fairness, the company has inked 1.7 million square feet of leases in the nine months ending September, which it said is its best year-to-date leasing performance since before the pandemic. But office revenues are still declining and total occupancy is lower than 80 percent.

Earnings Elsewhere

It remains to be seen whether the losses or leases will win out when it comes to Coleman’s compensation. Last year, he raked in about $25 million worth of salary, stocks and bonuses while his company’s losses ballooned to $364 million. By the numbers: Office-and-apartment REIT Douglas Emmett reported a net loss of $11 million in the third quarter compared to a $5 million profit a year earlier. Revenues were unchanged at $251 million.

Retail and Commercial Investors

Retail developer and landlord Macerich reported a $87 million loss compared to $108 million loss the year before — and revenue increased to $253 million from $220 million. Commercial investor Kennedy Wilson reported a net loss of $21 million compared to $77 million during the same period, but revenues declined to $116 million from $127.5 million.

A Lincoln Buy

Lincoln Property Company purchased a Manhattan Beach office building for $70 million to knock it down and replace it with apartments — and the seller, Continental Development Corporation, issued a $45 million note to make it happen. The deal for the 123,000-square-foot property at 1500 Rosecrans Avenue came out to $569 per square foot. The Beach Cities office sector, which encompasses Manhattan Beach, Hermosa Beach and Redondo Beach, has a 15 percent vacancy rate — much better than downtown Los Angeles’ 33.3 percent.

Beach Cities Office Sector

But the average Manhattan Beach home value is $3 million and the average rent is $5,500 a month, so it seems Lincoln thought apartments were a better bang for its buck.

Conclusion

The OC office loan special servicing highlights the challenges faced by the office sector in Orange County, with borrowers defaulting on loans and properties experiencing high vacancy rates. Despite efforts to recover, companies like Hudson Pacific Properties are still reporting significant losses. The trend of converting office buildings to apartments, as seen in Lincoln Property Company’s purchase of a Manhattan Beach office building, may become more prevalent as the demand for office space continues to decline.

FAQs

• Q: What happened to the commercial mortgage-backed securities debt connected to the Westminster office park?
  A: The debt went to special servicing after the borrower defaulted on about $16 million debt after eight months of delinquency.
• Q: How much did Lincoln Property Company purchase the Manhattan Beach office building for?
  A: $70 million.
• Q: What is the average vacancy rate in the Beach Cities office sector?
  A: 15 percent.
• Q: How much did Hudson Pacific Properties report in losses in the nine months ended September 30?
  A: $294 million.

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