(Bloomberg) — Cress Capital, a real estate investment manager, said it acquired a $113 million mortgage on a Denver office tower from an Ares Management Corp. affiliate for the equivalent of the land cost.
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Cress bought the mortgage at “a major discount” for a “level approaching or at the pre-Covid land value” of the property, according to Ryan Parkin, managing partner of the real estate company based in Newport Beach, California.
Parkin declined to disclose the exact price. Ares declined to comment.
Investors have been seeking to sell office buildings as prices plunge after vacancies and borrowing costs increased. Prices of offices in US central business districts fell 30% in the year through February, almost double the drop for US offices broadly, according to MSCI Real Assets.
In downtown Denver, more than 37% of office space was available for lease at the end of 2023 compared with 29% for the greater Denver area, according to Savills Plc.
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The building backing the loan that Cress bought is located at 410 17th St., a few blocks from the Colorado state capitol building. The tower has 24 floors with 439,000 square feet (41,000 square meters) of office space. It was recently renovated and includes a new fitness center and a wine bar in the lobby.
Cress expects to invest $1 billion over the next 12 to 18 months in US office buildings, taking advantage of “a historic opportunity” to acquire well-located and high-quality properties at deeply discounted prices, Parkin said.
He expects more deals to come to market as borrowers are unable or unwilling to hold buildings and as lenders are forced to grapple with the losses.
Read More: Ares Management Real Estate Partner Gerber Said to Depart Firm
Acquiring properties on a low-cost basis enables a new owner to offer cheaper rents to help attract new tenants or convert a building to a different use, such as apartments.
“When they’re trading at land value, there are multiple options you can pursue,” Parkin said.
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The timing couldn’t be worse for Donald Trump as he faces the prospect of having to sell property to cover a massive verdict against him.
The former president said in a court filing Wednesday he may soon need “to raise capital under exigent circumstances” to push ahead with an appeal of New York state’s $454 million civil fraud verdict against him. A brutal market for many commercial property owners means he faces significant losses in his real estate empire if he unloads assets.
The billionaire has few options. He must pay the full judgment by March 25 or arrange a bond for at least 110% of the amount in order to put the fine on hold while he appeals. To get an appeal bond, Trump will need to hand over cash, sell properties or use them as collateral, tying up most if not all of his liquid assets for months or longer.
Unless Trump can convince the appeals court to put the verdict on hold during his entire appeal, he could find himself in a financial squeeze.
If he’s forced to sell, “there would be no way to recover any property sold following a successful appeal and no means to recover the resulting financial losses,” Trump attorney Alina Habba said in the filing. Meanwhile, New York Attorney General Letitia James has made clear that she’s prepared to seize Trump’s assets if he doesn’t pay the verdict or post an appeals bond on time.
Brutal Market
Making matters worse is a brutal market for many commercial real estate owners. Property values plunged as borrowing costs rose, and the remote work trend that started during the pandemic continues to cut into demand for office space. Prices slumped 22% in the year through January, according to real estate analytics firm Green Street.
Habba didn’t immediately respond to a request for comment.
Many sellers have been forced to accept drastically lower prices. The Aon Center, a Los Angeles office tower, recently sold for $147.8 million, about 45% less than its previous purchase price in 2014. A Los Angeles office building located near Century City and Beverly Hills sold for about 52% less than its price five years ago.
The Trump Organization owns or invests in multiple office towers from New York to San Francisco. One of its key Manhattan properties, 40 Wall St., was purchased by Trump in what his business hails as “one of the great real estate deals of all time” back in 1995. In 2015, it was valued at $540 million, according to commercial mortgage-backed securities data. That has since fallen to $270 million, the Bloomberg Billionaires Index estimates.
Trump’s filing with the appeals court was the first time he’s hinted publicly that he may not have enough liquid assets to cover the verdict in the fraud case, where a judge ruled Feb. 16 that the former president had misled banks for years in violation of New York law. Trump also owes $83.3 million to writer E. Jean Carroll, who won a defamation suit against him last month, making matters even worse for the presidential candidate.
In testimony last year, Trump claimed to have more than $400 million in cash. While that’s a hefty sum, it wouldn’t be enough to cover the bonds he’d need to post with the court while appealing the back-to-back verdicts.
Trump SPAC Shares
Meanwhile, Trump’s finances could get a boost from his Trump Media & Technology Group — which operates the Truth Social platform he posts on daily. In 2021, it agreed to merge with a special purpose acquisition company called Digital World Acquisition to become a publicly traded company.
A frenetic rally in a stock tied to Trump Media & Technology Group has minted a nearly $4 billion windfall for Trump. But that won’t help him for now. The profit is only on paper and he’ll have to wait months to monetize it. If the stock stays up, he could use it replenish his coffers down the road.
Meanwhile on Wednesday, the co-founders of Trump’s media company accused the former president of trying to water down the value of their shares. The lawsuit, filed in Delaware, could delay the merger deal even more, depriving him of billions as a fresh source of cash to pay down his verdicts.
Trump has proposed posting a smaller $100 million bond while he appeals the New York fraud verdict, arguing that the judgment against him was “more than adequately secured” without posting a full bond to appeal. Trump said his “vast ownership interests in New York real estate” was sufficient to ensure he’ll pay the fine if his appeal failed. After all, he argued, “trophy properties” like 40 Wall Street cannot be “removed from the jurisdiction in secret.”
In the appeals court filing, Trump’s attorney said other properties could be used for collateral, including Trump Tower and Trump Park Avenue in Manhattan, his Seven Springs estate outside New York City, and Trump National Golf Club.
‘Insufficient’ Assets
James balked at Trump’s offer for a smaller bond, arguing in a letter to the appeals court that risked leaving the state empty handed if Trump’s appeal failed.
Trump and the other defendants in the case, including his two grown sons, “all but concede that Mr. Trump has insufficient liquid assets to satisfy the judgment,” James said in the letter. “A prevailing plaintiff is entitled to have her award secured, and defendants have never demonstrated that Mr. Trump’s liquid assets could satisfy the full amount of the judgment.”
James has made clear that she’s prepared to seize Trump’s assets if he doesn’t pay the verdict or post an appeals bond on time, mentioning 40 Wall Street explicitly as a potential target in a recent interview with ABC News. Habba, Trump’s attorney, criticized those remarks in her letter to the court, accusing James of “shamelessly” threatening to seize Trump’s assets “if she is not paid quickly enough.”
Despite Trump’s warnings about his financial condition, an appeals court judge in Manhattan denied his emergency request Wednesday for a temporary halt to enforcement of the verdict in the fraud case, at least for now.
But the former president will get another shot at arguing for a delay that would last throughout his legal challenge to the civil fraud judgment. James will file a response to that request by March 11, with any response by Trump due March 18. A full appeals court panel could rule any time after that.
The changing nature of how we work is driving up office vacancy rates, and at the same time, there is a shortage of residential housing.
Converting office buildings to multifamily dwellings is one potential solution to the imbalance — but right now, the price is too high for the option to be appealing to developers, according to a note by Goldman Sachs’ economics team released earlier this week.
Office vacancies increased to 13.5%, the highest level since 2000, according to Goldman. And over the next decade, economists at the firm expect the office vacancy rate to climb to 18%.
Goldman Sachs estimates that overall about 4% of US office buildings may no longer be viable. These structures were most likely built 30 or more years ago, have not been renovated since 2000, and are currently facing vacancy rates above 30%.
However, just 0.4% of office space was converted into multifamily units before the pandemic. That has only ticked up slightly to 0.5% last year despite major shifts in office use.
“The office-to-multifamily conversion rate is quite low, suggesting that there may be substantial financial and physical hurdles to conversion,” Goldman Sachs economists Jan Hatzius and Alec Phillips wrote in a note.
Office prices haven’t fallen enough to spur up developers to do these conversion projects.
Goldman Sachs found, “For the top 5 metropolitan areas that are most affected by remote work, we estimate that office acquisition prices would need to fall almost 50% for conversion to be financially feasible. This suggests that most of these offices will likely remain underutilized in the near term.”
Another part of the equation is safety codes. Residential buildings require bedrooms to have certain sizes of windows, but it is impossible to restructure some office buildings in a way that satisfies those demands, Goldman Sachs economists explained. And transforming an office’s existing plumbing, ventilation, and electric system for each residential unit can also be a challenge.
“Because the conversion process is slow and costly, available office space is likely to remain excessive and many buildings are likely to remain underutilized,” the economists wrote, noting that “as a result, we expect new office investment to remain sluggish in the next few years.”
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.
Canadian pension funds have been among the world’s most prolific buyers of real estate, starting a revolution that inspired retirement plans around the globe to emulate them. Now the largest of them is taking steps to limit its exposure to the most-beleaguered property type — office buildings.
Canada Pension Plan Investment Board has done three deals at discounted prices, selling its interests in a pair of Vancouver towers, a business park in Southern California and a redevelopment project in Manhattan, with the New York stake offloaded for the eyebrow-raising price of just $1. The worry is those deals may set an example for other major investors seeking a way out of the turmoil too.
“It’s the opposite of a vote of confidence for office,” said John Kim, an analyst tracking real estate companies for BMO Capital Markets. “My question is, who could be next?”
Anxiety over office buildings has swept the financial world as the persistence of both remote work and higher borrowing costs undercuts the economic fundamentals that made the properties good investments in the first place. A wave of banks from New York to Tokyo recently conceded that loans they made against offices may never be fully repaid, sending their share prices plunging and prompting fears of a broader credit crunch.
But the real test will be what price office buildings actually trade for, and there have been precious few examples since interest rates started rising. That’s why industry-watchers see discounted deals like CPPIB’s as an ominous sign for the market.
Redeploying Cash
The pension fund isn’t actively backing away from offices, but it’s not looking to increase its office holdings either, according to a person with knowledge of its strategy. And where a property requires additional investment, CPPIB might simply look to sell so it can put that cash somewhere it can get higher returns instead, said the person, who asked not to be identified discussing a private matter.
Peter Ballon, CPPIB’s global head of real estate, declined to comment on the recent deals, but said the fund has continued to invest in office buildings, including a recently completed, 37-story tower in Vancouver.
“Selling is an integral part of our investment process,” Ballon said in an emailed statement. “We exit when the asset has maximized its value and we are able to redeploy proceeds into higher and better returns in other assets, sectors and markets, including office buildings.”
CPPIB’s C$590.8 billion ($436.9 billion) fund is one of the world’s largest pools of capital, and its C$41.4 billion portfolio of real estate — stretching from Stockholm to Bengaluru — includes almost every property type, from warehouses, to life sciences complexes, to apartment blocks. While that scale would mitigate any potential losses from individual transactions, it also means even a small shift in CPPIB’s office appetite has the power to cause ripple effects in the market.
Manhattan Tower
At the end of last year, the fund sold its 29% stake in Manhattan’s 360 Park Avenue South for $1 to one of its partners, Boston Properties Inc., which also agreed to assume CPPIB’s share of the project’s debt. The investors, along with Singapore sovereign wealth fund GIC Pte., bought the 20-story building in 2021 with plans to redevelop it into a modern workspace.
Boston Properties said last month that the selling partner — which the company didn’t name — had already spent $71 million on the project, but severing its ties released it from an obligation to commit an additional $46 million to the effort.
Around the same time, CPPIB sold its 45% stake in Santa Monica Business Park, which the fund also owned with Boston Properties, for $38 million. That’s a discount of almost 75% to what CPPIB paid for its share of the property in 2018. The deal came just after the landlords signed a lease with social media company Snap Inc. that required they spend additional capital to improve the campus, Boston Properties Chief Executive Officer Owen Thomas said on a conference call.
The two Vancouver towers, co-owned with another Canadian pension fund, were different in that they didn’t need substantial new investment and had Amazon.com Inc. already in place as the major tenant. But last month’s sale price of about C$300 million was down more than 20% from where the property’s value was assessed at in 2023, data from Altus Group shows.
That sale coincided with the completion last year of a new office tower in Vancouver that CPPIB developed with the same pension fund, and the partners wanted to keep their overall exposure to the city’s office market from increasing, a person familiar with their thinking said.
With hybrid work schedules set to depress demand for office space in the long term, and higher interest rates increasing the cost of the constant upgrades needed to attract and keep tenants, even the best office buildings may not be able to compete with investment opportunities elsewhere.
“To get even better returns in your office investment you’re going to have to modernize, you’re going to have to put a lot more money into that office,” said Matt Hershey, a partner at real estate capital advisory firm Hodes Weill & Associates. “Sometimes it’s better to just take your losses and reinvest in something that’s going to perform much better.”