By Wolf Richter for WOLF STREET.
We have been discussing here for a while how the massive losses in commercial real estate, particularly in the office sector, have been spread far and wide, spread over equity and debt, landlords and lenders. And those lenders are spread across several big investor classes globally, and they hold the majority of the debt, not banks, thankfully (in multifamily CRE, US government entities hold the majority of the debt). And those losses originated from the crazy deal-making, reckless lending, and ridiculous valuations during the era of ultra-low interest rates. So this here is a deal that went kaputt where the debt was held by a life insurer.
MetLife Investment Management foreclosed on a 12-story, 257,000 square-foot class A office building, completed in 1987, the “1960 East Grand Avenue” in El Segundo, CA, a submarket just south of the Los Angeles International Airport, according to The Real Deal, citing a trustee’s deed filed with Los Angeles County.
Starwood Capital and Artisan Ventures, through a partnership, owned the building and defaulted on the loan in February. A notice of default filed at the time with Los Angeles County said they were $960,800 behind on the loan.
As part of the non-judicial foreclosure, MetLife paid $72.8 million for the building, or about $283 per square foot, and now owns the building.
Starwood Capital and Artisan Ventures had bought the building in February 2020 for $132 million, or about $513 per square foot, from Brookfield, according to the Commercial Observer at the time, citing property records. Brookfield had paid $67 million for it in 2017! That $132 million price was just nuts!
There was quite a CRE frenzy underway at El Segundo at the time. JLL brokered that deal. JLL’s Steve Solomon told the Commercial Observer in March 2020:
“Now you have Blackstone, you have Starwood, you have the big, giant institutional investors here” in El Segundo. “It solidifies its standing as a top market. Look, Starwood used to just be hotels. Now, they own almost 2.3 million square feet in the office market in El Segundo. I think they’ve become the biggest landlord in El Segundo in the past three years, when they were never here before.”
Opps. Since February 2020, the transaction price of the property at 1960 East Grand Avenue has collapsed by 45%, even in thriving coastal Southern California.
“The building is located in the “superblock” in the heart of El Segundo, the premier business center of the South Bay,” LoopNet says (image via LoopNet):
Who lost or made what.
Brookfield: $65 million gain. The Canadian property and PE giant had bought the building in 2017 for about $67 million through Brookfield Premier Real Estate Partners, according to CompStak.
By selling the 30-year-old office building to Starwood Capital and Artisan Ventures in February 2020, for $132 million, Brookfield booked a profit of 97% ($65 million) in three years, which tells us – and we know this for sure now, without a scintilla of doubt – that the low interest rates caused some investors’ brains to go to mush.
Starwood Capital and Artisan Ventures: $47 million loss, 100% of the equity. They bought the building for $132 million in February 2020, financed it with a loan from MetLife for $84.8 million. So they had $47 million in equity in the building at the time of the purchase. And that $47 million in equity officially vanished with the foreclosure sale.
But Starwood Capital and Artisan Ventures are investment funds, they’re investing other investors’ money, and the risk is that they lose other investors’ money, while they extract their fees all along the way. What caused Starwood Capital and Artisan Ventures to pay $132 million for an office building that had sold for $67 million three years earlier? What kind of crazy times were these?
MetLife: $11.1 million loss, 13% of the debt. The insurer appears to have been the prudent entity here, by lending only $84.8 million on a building purchased for $132 million. But its losses haven’t been fully tallied yet until it sells the building. Or it might not sell it, but just keep it, praying that this too shall pass.
By the time of the foreclosure sale, the total loan outstanding was $83.9 million. So if the building is actually worth $72.8 million, the amount MetLife paid in the foreclosure sale, MetLife had a loss of $11.1 million, or 13%, on the loan. And now it owns the building, and the headaches it might bring. The building is about 70% leased, according to the Commercial Observer. The vacancy rate in the El Segundo office market was 25.8% in Q1, 2024, according to CBRE.
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