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Los Angeles Office Vacancy Hits Record High As Defaults Grow

Troubles are mounting for downtown Los Angeles’ office market, as more owners default on properties and the market’s vacancy rate is at an all-time high. One of the city’s largest office owners, Brookfield Properties, defaulted on $784 million in loans on two trophy office towers in downtown Los Angeles earlier this year. Just this week, EY Plaza became the second tower owned by a Brookfield affiliate to go into receivership, after The Gas Co. Tower was placed in receivership in April. At the same time, other downtown property owners are facing potential foreclosure or have sold their buildings at a loss. Union Bank Plaza, a 42-story building in downtown Los Angeles that was once the tallest building in the city, sold this past March for $104 million, just half of what it sold for in 2010. “In terms of distressed borrowers in the market, downtown LA might win the prize,” said Barclays Capital Analyst Lea Overby. “The product is old, tenants are downsizing and the area isn’t appealing.”

The growing distress in Los Angeles is being felt in other downtown areas around the country, especially among older, Class B and Class C office buildings that have struggled to compete with newer buildings and the amenities many of them offer. On top of the struggle many building owners are facing to fill empty spaces given the continued popularity of remote work, an estimated $728 billion commercial and multifamily mortgages are maturing this year in the U.S., according to the Mortgage Bankers Association. Rising interest rates have made it difficult for owners to refinance, but in its place, a lot of borrowers have been pushing for loan extensions. What effect the growing number of distressed properties will have on markets could depend on the steps owners decide to take in the face of these challenging conditions. While costly, converting to another use has been a popular option and upgrading could make sense in some places, but don’t always pencil. The scary part is that what might determine the fate of the office markets in most cities is what city officials and agencies do to help revitalize struggling downtown areas.

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