The Latest Commercial Real Estate Truth

Todd Moses
May 11, 2024

2023 saw the highly publicized collapse of First Republic Bank; the institution had nearly $6 billion in assets and $4 billion in deposits.

Inputs that matter: "Multifamily now is in the crosshairs," Barry Sternlicht, who runs Starwood Capital Group, said at the Milken Institute's annual conference at the Beverly Hills Hilton in Los Angeles on Tuesday.

  • Sternlicht has recently stated his expectation of one bank failure per week in the United States.
  • "This is a balance sheet crisis," he said.
  • "We've gotten calls: 'How can you help? Can you take over banks' assets?' They're trying to arrange recaps before they fail," Sternlicht concluded.

The opportunity: Pinnacle Bank Texas bought back the 40-story Burnett Plaza, Fort Worth's tallest building, for $12.3 million at a recent foreclosure auction, just $12.30 per square foot and less than 1 percent of its previous sale price, the Dallas Business Journal reported.

  • The previous owner, a New York-based Opal Holdings affiliate, defaulted on a $13 million loan from Pinnacle, triggering foreclosure proceedings.
  • The Opal affiliate bought the one-million-square-foot Burnett Plaza at 801 Cherry Street for $137.5 million in 2021.
  • Adding to Opal's troubles, contractors have filed ten mechanic's liens totaling more than $1.6 million against the firm over the past year, alleging unpaid renovation work at the downtown site.

Zoom in: Burnett Plaza's staggering drop in value and foreclosure sale reflect the beleaguered state of Dallas-Fort Worth's office market, which remote-work trends have hammered since the pandemic.

  • The outlet reported that Opal sued Pinnacle on April 2, alleging the lender pushed the building into default.
  • According to the Tarrant Appraisal District, the building's taxable value is $104.5 million.
  • Its tenants include General Motors Financial, engineering and design firm Kimley-Horn, and architecture firm Huckabee.

Between the lines: "The Fed is very aware that it has a teetering regional banking system that loads about $700 billion in real estate loans [originated] in a low-interest rate environment, and the small borrowers are going to have a hard time refinancing."

  • Sternlicht sees more than $1 trillion of losses for office real estate, calling the properties "one asset class that never recovered" from the pandemic.
  • "Sternlicht said Tuesday at the iConnections Global Alts conference in Miami Beach that the office market has an existential crisis right now," which is essentially a U.S. phenomenon because workers haven't returned to their desks.
  • Ken Simonson, chief economist for the Associated General Contractors of America (AGC), predicted likely steep drops in multifamily, warehouse, and office in the medium term as vacancies and costs climb.

Follow the money: Kermit Baker, chief economist with the American Institute of Architects, said there is concern the commercial sector may be in for a broader "meltdown."

  • On the real estate front, what is happening in the office market is not unlike what has been going on with regional malls over the past seven to eight years, according to Richard Barkham, global chief economist for Dallas-based brokerage CBRE.
  • "There is a clear parallel there with the digital economy affecting patterns of real estate usage. In the case of regional malls, it was about trade diversion with goods going directly to the consumer," Barkham said.
  • He added that in the U.S. office market, "it's about people getting back a bit more of their day and technology allowing remote work."
  • Barkham said that until then, it would be a long, hard grind down, but over the next ten or possibly even 15 or 20 years, some office stock will be demolished, some will be repurposed, and some will be redeveloped.

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  1. https://twitter.com/unusual_whales/status/1788627437414383678
  2. https://www.bizjournals.com/dallas/news/2024/05/07/pinnacle-bank-buys-back-burnett-plaza.html
  3. https://therealdeal.com/texas/fort-worth/2024/05/09/pinnacle-bank-buys-back-fort-worth-office-tower-for-12-per-sf/
  4. https://therealdeal.com/national/2024/05/09/barry-sternlicht-other-execs-at-milken-conference-see-multifamily-distress-on-rise/
  5. https://watcher.guru/news/billionaire-barry-sternlicht-expects-one-bank-failure-per-week
  6. https://www.bloomberg.com/news/articles/2024-01-30/billionaire-sternlicht-sees-1-trillion-loss-in-office-values
  7. https://www.costar.com/article/338468743/some-real-estate-professionals-say-us-office-market-may-still-have-room-to-fall
  8. https://canada.constructconnect.com/dcn/news/economic/2024/05/commercial-real-estate-doldrums-concern-construction-economists