Brookfield Partners and real estate website

Brookfield Corp., one of the world’s largest private equity firms formerly called Brookfield Asset Management, has chosen to default on $755 million in loans related to two Los Angeles office towers rather than refinance the debt in the face of weakening demand for office space.

The two buildings are owned by Brookfield’s DTLA Fund Office Trust Investor, a fund devoted to real estate in the U.S.’s second-largest city.

In November, the fund’s manager warned that the loans were poised to default and foreclosure was a growing possibility.

Brookfield’s DTLA fund also owes $500 million on the city’s Wells Fargo North Center and $293 million on the Wells Fargo SouthCenter. The loans are due this October and November, respectively.

The buildings together carry about $1.8 billion in debt with adjustable interest rates, which have gone up with each increase in the U.S. Federal Reserve’s fed funds rate.

“We believe DTLA’s decision to default on these two assets increases the risk for the remaining loans in their portfolio,” analysts at Barclays PLC wrote in a 14 February research note.

The office vacancy rate in downtown Los Angeles was 22.7 percent in last year’s fourth quarter property management firm Jones Lang Lasalle said last month.

According to Barclays analysts, the value of office buildings across the city has dropped notably as remote and hybrid work replaced commuting as the normal work pattern.

TREND FORECAST: Brookfield, with more than $600 billion in assets, can afford to walk away from buildings that are a blip on its overall portfolio. Other owners will not be so lucky.

These defaults are harbingers of the mounting crisis facing landlords that we explained in our Top Trend 2023 forecast of this next phase in the office building bust (3 Jan 2023): owners of older buildings needing maintenance and repairs will increasingly dump their properties for rock-bottom prices or simply default.

Owners lucky enough to hold newer, more desirable properties still will have to compete for tenants by offering free months’ rent, free redecoration, and other perks.

The office real estate business will recede to become a niche in real estate investing, not the cornerstone it has been for the last century.

We have also greatly detailed the “OFFICE BUILDING BUST,” in the ECONOMIC UPDATE section of this Trends Journal

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