These Two Commercial Foreclosures Speak Volumes About How Bad The Market Is

These Two Commercial Foreclosures Speak Volumes About How Bad The Market Is

These two commercial seizures say a lot about the seriousness of the market

Two recent transactions involving bankrupt Class A office buildings in two different markets speak volumes about the scale of the crisis. commercial sectorcrisis. Fort Worth’s Burnett Plaza has dominated the city’s skyline as the tallest building since 1983. In San Jose, the property at 3100 North First Street was similar to one of the city’s premier shopping destinations. Both properties became distressed assets that sold for pennies on the dollar.

Standing over 500 feet tall, Burnett Plaza comprised 40 stories and one million square feet of Fort Worth’s most sought-after commercial and retail space. Surrounded by a public park, Burnett Plaza was the kind of building that businesses set up shop in to signal their arrival to the world. As is the case with any high-rise building, the upper floors were the most expensive and leases were normally triple net.

Burnett Plaza was a financial powerhouse for much of its life. In the years since its construction, its consistent rental yields helped it appreciate until 2021, when New York-based Opal Holdings LLC purchased it for $137.5 million . At the time, most people would have been confident that Burnett Plaza would continue to enjoy and make money for its new owners. However, this did not happen.

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COVID hit the commercial real estate market with all the force of a category five hurricane, and like most major cities, Fort Worth took it right on the chin. Burnett Plaza’s occupancy rate dropped to 78%, which is disastrous because the building needed 95-96% occupancy year-round to make money. There was no way Burnett Plaza could cover basic expenses with a 78% occupancy rate, and it didn’t take long before Opal Holdings fell behind.

Public records show $1.6 million in mechanic’s liens filed against Opal Holdings by unpaid contractors. Then, Opal Holdings defaulted on a $13 million loan to Pinnacle Bank, which entered foreclosure proceedings in early 2024. Although it was valued at $104 million by the state assessor’s office, Tarrant County, Burnett Plaza was purchased at auction by Pinnacle Bank for just $12.3 million. .

That works out to about $12.30 per square foot for a building that Opal Holdings originally purchased for $137.50 per square foot. It’s safe to say that even Pinnacle didn’t expect to purchase the entire building for less than the outstanding balance of the loan it foreclosed on. By all accounts, this was a financial disaster for Opal Holdings and its investors. However, Burnett Plaza is just one of many commercial assets in serious trouble.

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Fort Worth wasn’t the only declining business market in the country. Until recently, San Jose, California was one of the hottest commercial real estate markets in America. San Jose was conveniently located in Northern California, making it accessible to both tech giants and venture capital enthusiasts. For much of the 2000s, the office market reflected this reality, and the property at 3100 North First Street was at the epicenter of the city’s business district.

The property sat on the corner of Montague Highway and North First Street, providing its tenants with easy access to the adjacent light rail line. This meant that many people lucky enough to work at 3100 North First Street had the advantage of being able to take public transportation from their suburban homes to the office. 3100 North First Street housed approximately 100,000 square feet of the finest commercial space in San Jose.

It was such an attractive property that Vista Investment Group of Santa Monica, California, paid $25 million in 2018. The timing of this purchase seemed very good because Chinese electric automaker Nio USA leased much of the property. space at 3100 North First Street in the same year. Unfortunately for Vista Investment, Nio USA’s lease expired in October 2023 and they did not renew it.

At that time, commercial real estate vacancy rates were rising across the country and there was a huge glut of open office space throughout Northern California. It may not be a coincidence that October 2023 was also the first month that Vista Investment Group began missing its mortgage payments. Vista continued to miss payments until East West Bank financed the initial purchase and initiated foreclosure proceedings.

When the outstanding loan balance, late fees and interest were calculated, Vista Investment was $25 million in arrears. Echoing the Burnett Plaza foreclosure, an affiliate of the original lender purchased 3100 North First Street for just $18 million. The drop in cost per square foot isn’t the same as Burnett Plaza, but 3100 North First Street was a total disaster for all parties involved.

With nearly $1 trillion in commercial loans set to mature in 2024, many more foreclosures on high-end office buildings will likely occur nationwide. This will only drive their value down even further. While no one can know where the bottom lies, Burnett Plaza and 3100 North First Street are proof that commercial real estate might get worse before it gets better.

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