Page 12 — Office & Industrial Quarterly — March 2023 OFFICE — L ANDLORD DEFAULTS E very day, in cities across the country, more office land- lords are defaulting on their loans, further evidence that office markets, particularly in urban environments, have been per- manently transformed by the shift to remote and hybrid work models. U.S. cities are seeing on average just 50% of their workforce returning to urban offices on a regular basis, fueling rising vacancy rates. This post-pandemic reality is coming to a head for property owners across the country, as loans assembled during times of lower interest rates come due simultaneously. Global investment firm Brook- field Asset Management recently defaulted on over $750 million in debt for two 52-story office towers in Los Angeles. Similarly, in Denver, owners of five office buildings – the “Cash Register” building, Republic Plaza, Writer Square, Columbine Place and Capitol Center – have recently surrendered building man- agement to receivers. Low occupancy rates, expir- ing leases and maturing debt are among myriad factors contributing to a historic high level of buildings in receivership. As commercial real estate loans reach maturity – which often happens over a five- to 10-year cycle – owners are being forced to refinance at higher interest rates. This higher interest payment, further exacerbated by low cash flow, creates balloon debt for building owners that often forces their hand in negotiating with lenders. Historically, the risk to office land- lords has been relatively low. Low vacancy rates and longer lease terms – 10 years or more – have created consistent cash flow for landlords, allowing them to stay current on their mortgages, especially in economically strong markets like Denver. Furthermore, until recently and in more stable market condi- tions, lenders had been willing to extend expiring mortgages rather than forcing landlords to refinance at higher interest rates. Buildings going into receivership have wide-ranging ripple effects throughout both the commercial real estate and financial sectors. Because many landlords structure their assets as separate financial entities, their risk is generally limited to the asset they default on; creditors otherwise have no recourse against the rest of the company. Lenders, by contrast, may negotiate with the owner on financing options, turn the build- ing over for receivership, or fore- close on the building in question. Foreclosure, however, has numer- ous disadvantages for lenders and figures massively in our national debt ($1.2 trillion of debt nationally was backed by office buildings at the end of third-quarter 2022, and banks anticipate additional trou- bled loans in the coming months). As a result, loan officers are severely limiting the underwriting of new mortgages backed by office buildings. So, what does this mean for ten- ants? For businesses currently in a lease or looking to sign a new lease, understanding the implica- tions of receivership scenarios is increasingly important to miti- gate exposure and even leverage opportunities for more competitive leases. n Role of receiverships. Receivers are third-party entities appointed by the courts to preserve and enhance the value of real estate properties and realize secured debts when landlords default on their mortgage payments. While landlords retain ownership of the buildings, receivers take over immediate property management responsibilities to ensure that ten- ants’ rental payments aren’t divert- ed away from the landlord’s loan obligations. Receivers are also responsible for producing periodic reports for the court, lender and borrower, includ- ing regular accountings of financial Empowering tenants to navigate landlord defaults Amy Aldridge Partner, Tributary Real Estate Denver skyline Please see Aldridge, Page 14 Join us to connect with your fellow chapter members in our first social event of the new year! 2023 MEMBER HAPPY HOUR March 23 rd | 4:30 - 7:00 PM Tabor Center Lobby 1200 17th St, Denver, CO Admission is free for this Member’s Only Event. Register today! Drinks & hor d’oeuvres will be served. Member Mixer 2023 Kick-Off DU Student Social MAR Property Tour End User Mixer APR Future of Cherry Creek MAY Young Leader Networking Event JUN Property Tour JUL Annual Bocce Bash AUG Golf Tournament Innovation Forum SEP Property Tour CORENET Global Summit Denver OCT Speed Networking - Young Leader + Student Event End User Mixer NOV Member Only Holiday Party DEC