Nearly $3 billion worth of mortgage bonds tied to office buildings in Orange County is coming due in the next five years, with about $200 million due this year alone, according to local market trackers.
The bulk of $2.7 billion in debt—most of it issued near the peak of the commercial real estate market in 2007 and 2008—is expected to go into default as building prices remain as much as 50% lower than during the boom.
The owners “will be under a lot of pressure to find financing in the next five years, and many will not be able to (refinance) because of the overvalued debt they have,” said one office owner here on the condition of anonymity.
It’s “not going to be pretty by the time you get to 2015,” he said.
That’s when close to $900 million worth of office mortgage debt comes due.
The looming debt suggests that the county’s office market hasn’t yet seen the worst of its debt troubles and could be in for a prolonged period of depressed prices as buildings continue to revert to lenders.
Maguire
Los Angeles-based Maguire Properties Inc., which during the boom was the county’s second largest office landlord after Irvine Company, is among the first big landlords here to try to sort its way out of debt issues.
Last fall, Maguire said it was giving back to lenders five OC office buildings and another in Los Angeles. Most of the buildings were acquired in early 2007 in a $2.9 billion gamble on the local office market.
Maguire is in the “unintended role of being the first one to start to work our way through this minefield,” Chief Executive Nelson Rising told analysts during a March conference call.
The six buildings had about $830 million of debt tied to them. It is one of the country’s more notable givebacks of office buildings during the current downturn.
With the givebacks and building sales in the past year, Maguire now has about 1.2 million square feet of space in the county, down from about 8 million square feet near the peak of the market.
Now, special servicers are overseeing the six forfeited Maguire buildings and dealing with the complicated debt tied to each, the company said during the conference call.
Special servicers are tapped by debt holders to handle loans if delinquencies or other problems arise. They can opt to try to work out or extend a loan, or move to foreclose on a property and sell it, among other options.
There’s no uniform way servicers are dealing with the Maguire buildings, based on what’s being seen in OC.
Among Maguire’s five OC properties returned to lenders last year, offices and retail properties at its Park Place campus in Irvine appear likely to be sold first, the company said.
San Francisco-based Helios AMC LLC is the special servicer for the Park Place properties. The company is said to have selected a buyer with sales of the buildings expected to close in the next three months, Maguire officials said.
Last year, Maguire turned over a large portion of offices it owned at Park Place to Irvine’s LBA Realty. Those buildings had close to $170 million of debt tied to them, according to broker data.
After Park Place, the next buildings put up for sale could be Costa Mesa’s 827,000-square-foot Pacific Arts Plaza.
Miami-based LNR Property Corp.—said to be the country’s most active indebted office special servicer—is handling the two-building complex.
LNR has appointed Jones Lang LaSalle as the receiver for Pacific Arts Plaza, and the brokerage is authorized to market the property for sale, according to Maguire.
If a sale doesn’t happen in a year, LNR is obligated to pursue a foreclosure, the company told analysts.
LNR is servicing close to $17 billion worth of commercial real estate debt across the country after it invested in subordinate classes of mortgage bonds, according to Horsham, Pa.-based research firm Realpoint LLC.
The heavy exposure to mortgage bonds has LNR rumored to be considering its own bankruptcy filing, according to a Bloomberg report in January.
Also being watched is Maguire’s former 2600 Michelson tower in Irvine. It has been run by a court-appointed receiver since late last year.
ING Groep NV’s ING Clarion Partners is the special servicer for the office. The building earlier was rumored to be an acquisition target of neighboring Allergan Inc., a drug maker whose campus is on the same block.
Decisions on the next moves for the building, including a potential sale, were expected to be made at a meeting last month, officials said.
Boston’s CWCapital Asset Management LLC is acting as special servicer for bonds tied to two other former Maguire properties in Central County and another in Los Angeles. No decisions have been made yet on what to do with those.
Slow Going
Slow decision-making has been common among special servicers, according to Brian Corrigan, senior vice president for the Newport Beach office of CB Richard Ellis Group Inc.
“There were a lot of presumptions that (sales of foreclosed buildings) would have happened sooner than they have,” Corrigan said. “But it looks like it’s going to go on longer than expected.”
Part of the delay is due to the complicated structure of the debt—and it’s partly due to servicer hopes of a market recovery and potential refinancing.
“They’re all hoping that the economy will start to improve and that users of space (will start growing),” Corrigan said.
