Two recent transactions involving failed class-A office properties in two different markets speak volumes about the depth of the commercial sector‘s crisis. Fort Worth's Burnett Plaza has dominated the city's skyline as its tallest building since 1983. In San Jose, the property at 3100 North First Street was similar to one of the city's premier commercial destinations. Both properties became distressed assets that sold for pennies on the dollar.
Standing over 500 feet tall, Burnett Plaza included 40 stories and one million square feet of Fort Worth's most desirable commercial and retail space. Surrounded by a public park, Burnett Plaza was the kind of building businesses moved into as a signal to the world that they had arrived. As is the case with any high-rise, the higher floors were the most expensive and the leases were normally triple net.
Burnett Plaza was a bona fide financial powerhouse for much of its life. In the years since its construction, its consistent rental returns helped it appreciate until 2021 when NYC-based Opal Holdings LLC bought it for $137.5 million. At the time, most people would have felt confident Burnett Plaza would continue to appreciate and earn money for its new owners. However, that didn't happen.
COVID hit the commercial real estate market with all the force of a Category five hurricane, and like most big cities, Fort Worth took it right on the chin. Burnett Plaza's occupancy plunged to 78%, which is disastrous because the building needed 95-96% occupancy year-round to make money. There was no way Burnett Plaza could even cover basic expenses at 78% occupancy, and it wasn't 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 initiated foreclosure proceedings in early 2024. Despite being assessed as worth $104 million by the Tarrant County Assessor’s Office, Burnett Plaza was bought back at auction by Pinnacle Bank for only $12.3 million.
That translates to about $12.30 per square foot for a building 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 loan’s outstanding balance they foreclosed on. By all accounts, it was a financial disaster for Opal Holdings and their investors. However, Burnett Plaza is just one of many deeply distressed commercial assets.
Fort Worth wasn't the only down commercial market in the country. Until recently, San Jose, California was one of America's strongest commercial real estate markets. San Jose was ideally situated in a Northern California location that made it accessible to both tech giants and venture capital mavens. For much of the 2000s, its office market reflected that reality and the property at 3100 North First Street was in the epicenter of the city's business district.
The property was on the corner of Montague Expressway and North First Street, giving its tenants easy access to the adjacent light rail line. That meant many people lucky enough to work at 3100 North First Street had the bonus of being able to take public transportation from their homes in the suburbs to the office. 3100 North First Street featured roughly 100,000 square feet of San Jose's finest commercial space.
It was such an appealing property that Vista Investment Group of Santa Monica, California paid $25 million in 2018. The timing of that purchase looked very good because Chinese Electric Automaker Nio USA leased out a large chunk of space at 3100 North First Street in the same year. Unfortunately for Vista Investment, Nio USA's lease expired in October 2023, and they didn't renew it.
By then, commercial real estate vacancy rates were climbing nationwide and there was a huge glut of open office space all over Northern California. Perhaps not coincidentally, October 2023 was also the first month Vista Investment Group began missing mortgage payments. Vista continued missing payments until East West Bank financed the original purchase and initiated foreclosure proceedings.
When past due loan balance, late fees, and interest were calculated, Vista Investment was $25 million in arrears. In an echo of the Burnett Plaza foreclosure, a subsidiary of the original lender bought 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 an unmitigated disaster for all parties involved.
Considering nearly $1 trillion in commercial loan debt is set to mature in 2024, many more foreclosure fire sales on premium office properties will likely be nationwide. That's only going to push their value down even further. While no one can be certain where the bottom is, Burnett Plaza and 3100 North First Street are evidence that commercial real estate could get much worse before it gets better.
https://finance.yahoo.com/news/two-commercial-foreclosures-speak-volumes-173011103.html
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