Colorado-Real-Estate-Journal_352917

Page 30 - July 19-August 1, 2023 www.crej.com Law & Accounting M any real estate inves- tors are finding that now is a hard time to own an office building. Across countless parts of the country, including areas of Colorado, once-premium office space is now uncomfortably in the middle of a confluence of negative market forces that will undoubtedly mean the coming years will be lean, if not out- right painful, for their owners (and lenders). But that does not mean it is all doom and gloom. In many circumstanc- es, office building owners can pursue options that could help them rise above the likely tur- bulence of the next few years. This article discusses the chal- lenges facing owners of office buildings and outlines some possible solutions that owners of distressed office buildings may want to consider. What is happening with office buildings? In Colorado and across the country, owners of office buildings are being battered on multiple fronts: n Hybrid and remote work are reducing demand. Work- ers have embraced remote work as enthusiastically as employ- ers seem to have begrudgingly accepted it. That means there is considerably less demand for office space and a glut of space avail- able for sub- lease. Sources differ as to exact vacancy rates, but all agree on one thing – they are concern- ingly high. For example, C o m m e r c i - alEdge reports that, as of June, Denver’s office building vacan- cy rate was 20.24%. The Down- town Denver Partnership puts that same figure at 25.5% – a far cry from the recent-memory low of 11.3% in the second quarter of 2019. Of the vari- ous factors, this may be the one that weighs most heavily on owners since tepid tenant demand greatly compounds the difficulty presented by the other factors. n More than $1.5 trillion in commercial real estate debt is coming due in a higher interest-rate environment. Morgan Stanley estimates that $1.5 trillion in commer- cial real estate debt will come due before the end of 2025. Commercial Edge reports that 10 percent of Denver’s office stock is subject to a maturing loan in 2023, one of the high- est levels among the country’s largest office markets. Owners with maturing loans customarily refinance them with new debt, sell the assets to pay off the loans or infuse new equity to repay the debt. Many markets have seen significant declines in the value of office properties (due to increased vacancies), which, in some cases, have pushed property values below their out- standing debt. On top of that, 10 consecutive interest hikes by the Federal Reserve over the past year have increased borrow- ing costs substantially, making advantageous (or, in some cases, any) refinancing of maturing loans a less-likely bet. n Constrained capital and increased operating costs. Small and regional banks com- monly extend credit to the com- mercial real estate sector, but in the wake of the failure of Sili- con Valley Bank in March and the other negative market fac- tors described above, these same banks have retrenched as their own clients have pulled back. As owners of many office buildings are having a harder time access- ing credit, the cost of operat- ing office properties has steadily increased, requiring more capital to manage the same properties. What can be done? The best strategic approach to address these issues depends greatly on the very specific aspects of the particular project and parties involved. There is no one-size- fits-all or cookie-cutter solution. That being said, here are a few options owners of office build- ings may want to explore. n Loan modification. In cir- cumstances where there is an opportunity to do so, a loan mod- ification can buy the owner valu- able time and breathing space. Sometimes, a loan modification can be as simple as an extension of the maturity date. Other loan modifications can be more com- plex and include, for example, broader restructuring of the pay- ment terms, financial covenants or other material loan terms, loan splits, discounted payoffs and loan resizing, among others. n Conversion to residential or other use. With floor plates that may lend themselves well to conversion, older office build- ings may be attractive candi- dates for transition from office to other uses, such as multifamily housing or entertainment uses. This strategy has attracted a lot of interest in the western half of the country, including Colorado, where housing is in short supply. The cost of conversion and local regulations can present hurdles but, for owners of office build- ings that are not competitive in today’s market, evolving to another use may well be worth exploring. n Divestiture of property. When other options are not via- ble for an office property, dives- titure of the property can make sense. A divestiture can take the form of a straight sale, sale with a discounted payoff, deed- in-lieu of foreclosure or fore- closure. While this may at first blush seem unappealing, there are times when such an arrange- ment may be the best option for the owner and its equity holders. As a final thought, remember that all things pass in time. We have been through challeng- ing eras before, and Denver – where office buildings had until recently been experiencing a pro- longed period of success – has had its ups and downs but has seen its way through other try- ing periods. What might matter most right now is a willingness to think openly and creatively about what avenues are avail- able to pursue, and which of those makes the most sense for achieving your goals. s clarka@ballardspahr.com Distressed office owners face challenges, opportunities GTL AW.COM Helping our Clients keep their property tax valuations on course 1144 15th Street | Suite 3300 Denver, CO 80202 | 303.572.6500 Greenberg Traurig is a service mark and trade name of Greenberg Traurig, LLP and GreenbergTraurig,P.A.©2023 GreenbergTraurig,LLP.Attorneys at Law.All rights reserved. AttorneyAdvertising.°These numbers are subject to uctuation. 38357 GREENBERG TRAURIG, LLP | 2650 AT TORNEYS | 45 LOCATIONS WORLDWIDE ° WORLDWIDE LOCATIONS United States, Europe and the Middle East, Asia, Latin America Greenberg Traurig lawyers are prepared to assist Colorado property owners in seeking a fair market value assessment for properties impacted by the current sustained growth, including pursuing a tax abatement or refund. For questions, please call Neil Oberfeld | 303.685.7414 | oberfeldn@gtlaw.com Carlos Schidlow | 303.572.6580 | carlos.schidlow@gtlaw.com Alicia Clark Co-leader, Distressed Office Buildings, Ballard Spahr