$1.6B in LA Suburban Office Loans Face Lease-Rollover Test
Los Angeles' suburban office market has so far avoided much of the distress affecting major urban towers, but upcoming tenant decisions could put nearly half of its securitized loan balance to the test. Of the $3.5 billion across 111 suburban office loans tracked by Trepp, $1.6 billion, or roughly 46%, has its largest tenant's lease scheduled to expire before the associated loan matures.
The most concentrated exposure consists of $236 million in loans where the expiring tenant occupies more than half of the building. Within that group, the largest tenant occupies an average 89% of the property, leaving cash flow particularly vulnerable to a departure or significant reduction in space.
Suburban Fundamentals
Suburban properties enter that period from a stronger position than their urban counterparts. Median suburban occupancy is 93%, compared with 83% for urban properties. The suburban special servicing rate is 6.2%, substantially below the 19.7% rate for urban office loans.
Trepp tracks 73 Los Angeles urban office loans with a combined balance of $7.8 billion. Roughly 20.4% of that balance fails at least one of three credit tests involving debt-service coverage, loan-to-value ratios and debt yield, compared with 11.9% of suburban balances.
Current urban distress is concentrated in several large towers where tenants have vacated or reduced their footprints. Wilshire Courtyard, One California Plaza and EY Plaza secure loans totaling $959.3 million and have reported occupancies of 52%, 55% and 64%, respectively.
The $384.3 million Wilshire Courtyard loan is in special servicing for imminent maturity default. The $300 million One California Plaza loan reached maturity without refinancing and transferred to special servicing, while the $275 million EY Plaza loan is in foreclosure following a payment default.
Refinancing Challenges
Those properties demonstrate how tenant reductions can weaken income, debt-service coverage and valuations, ultimately making refinancing more difficult, Trepp said.
Suburban properties with concentrated tenancy do not necessarily face the same outcome. Of the $1.1 billion in suburban loans where one tenant occupies more than half the building, $884 million has a major lease extending beyond loan maturity. That gives prospective refinancing lenders greater certainty that the income will remain in place.
Second Century, for example, is fully occupied, with Warner Bros. leasing 56% of the building through 2039. Its $475 million loan matures in 2028.
The timing is considerably tighter at 5454 Beethoven Street. Activision occupies the entire building, but its lease expires in March 2029, one month before the $33 million loan matures. A renewal would preserve the property's income, while a downsizing or departure could quickly create an occupancy and refinancing problem.
Trepp said the urban experience should be viewed as a cautionary example rather than a predetermined outcome for suburban offices. Properties with major tenants committed beyond loan maturity have more protection, while those facing a lease decision first remain vulnerable to the same pressures affecting urban towers.
Source: GlobeSt/ALM