Behavioural economics are about to play a significant role in the private real estate market as examples of big-figure loans heading toward default begin to materialize.
In the past two weeks, the top two managers in our signature PERE 100 ranking of the biggest capital raisers were both subjects of reports relating to fast-approaching debt maturities.
At the start of the month, Blackstone informed Mount Street, a loan servicer, that it had requested a one-year extension to the maturity of a €297 million securitized loan, which is secured against a €513 million portfolio of mainly offices in Finland. Noteholders gathered on Tuesday to vote on the proposal, ahead of Wednesday’s loan maturity date. Fewer than the required 75 percent of noteholders voted in favor, but hours before the loan was due to mature, Mount Street approved a week-long extension allowing next steps to be discussed.
The underlying properties are part of Sponda, the Finnish property company that Blackstone privatized in 2018. Blackstone and Sponda had tabled a proposition including asset sales, an increased interest rate and an extra fee in return for the extension. Citi and Morgan Stanley were original lenders, but since the loan was subsequently securitized, it is down to noteholders of a commercial mortgage-backed security to determine its fate. Affiliate title Real Estate Capital Europe is monitoring events closely, so stay tuned.
Meanwhile, keep an eye on our affiliate across the pond, Real Estate Capital USA. They are covering defaults by Brookfield on a pair of skyscrapers in Los Angeles. Multiple news outlets reported on Tuesday how Brookfield DTLA Fund Office Trust Investor, a fund containing six offices, had notified the Securities and Exchange Commission that approximately $465 million of loans relating to the Gas Company Tower and $318 million of debt against the 777 Tower were in default as of last Friday. In these instances, lenders had yet to exercise any options at press time, but Brookfield was braced for the possibility of handing back the keys.
In the Blackstone-Sponda situation, the firms blamed “ongoing macroeconomic instability” and “market disruption,” while Brookfield DTLA said it was not able to meet “material financial covenants contained in the loan agreements.”
These situations further demonstrate how the most important nexus in private real estate nowadays is that between borrower and lender. Arguably, this relationship is now even more important than that between manager and investor; if equity has historically asked the questions about what investments are possible, debt has traditionally played the part of saying ‘yes’ or ‘no’ to them. Now that the recent cycle of cheap and accommodating debt has come to an end, the word ‘yes’ is harder to come by.
Both these situations could well end with private real estate’s biggest managers retaining control of the destinies of their portfolios – if not in these specific examples. But it is increasingly clear that control will not come mainly on their own terms.
Furthermore, and more broadly relevant, is how these new dynamics in their discussions play out, and how they set the tone for everyone else.