Two recent transactions involving bankrupt Class A office properties in two different markets speak volumes about the depth of the crisis in the commercial sector. 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 looked like one of the city’s premier commercial destinations. Both properties became distressed assets that sold for pennies on the dollar.
Burnett Plaza stood over 500 feet tall and included 40 floors 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 construction companies they moved into to signal to the world that they had arrived. As with any high-rise building, the higher floors were the most expensive and leases were normally triple net.
Burnett Plaza was a bona fide financial powerhouse for much of its life. In the years since its construction, consistent rental income helped it increase in value until 2021, when NYC-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 appreciate and make money from its new owners. However, that didn’t 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 the hit. Burnett Plaza’s occupancy dropped to 78%, which is disastrous because the building needed a 95-96% occupancy rate year-round to make money. There was no way Burnett Plaza could cover even basic costs at 78% occupancy, and it wasn’t long before Opal Holdings fell behind.
Public records show that $1.6 million in mechanic’s liens have been filed against Opal Holdings by unpaid contractors. Subsequently, Opal Holdings defaulted on a $13 million loan to Pinnacle Bank, which initiated foreclosure proceedings in early 2024. Despite being assessed at a value of $104 million by the Tarrant County Assessor’s Office, Burnett Plaza was repurchased by Pinnacle Bank at auction for just $12.3 million. .
That translates 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 buy the entire building for less than the outstanding balance of the loan 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.
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Fort Worth wasn’t the only commercial market in the country. Until recently, San Jose, California was one of America’s strongest commercial real estate markets. San Jose was ideally located in a Northern California location, making it accessible to both tech giants and venture capital experts. For much of the 2000s, the office market reflected that reality, and the property at 3100 North First Street was at the epicenter of the city’s business district.
The property was located on the corner of Montague Expressway and North First Street, giving tenants easy access to the adjacent light rail line. That meant that many people fortunate enough to work at 3100 North First Street had the bonus of being able to take public transportation from their suburban homes to their offices. 3100 North First Street contained approximately 100,000 square feet of San Jose’s finest commercial space.
It was such an attractive property that Santa Monica, California-based Vista Investment Group paid $25 million in 2018. The timing of that purchase looked very good, as Chinese electric car maker Nio USA leased much of the space at 3100 North First Street on the same street. year. Unfortunately for Vista Investment, Nio USA’s lease expired in October 2023 and was not renewed.
By then, commercial real estate vacancy rates were rising across the country and there was a huge glut of open office space throughout Northern California. Perhaps not coincidentally, October 2023 was also the first month Vista Investment Group started missing mortgage payments. Vista continued to miss payments until East West Bank financed the original purchase and initiated foreclosure proceedings.
When the delinquent loan balance, late fees and interest were calculated, Vista Investment was $25 million in arrears. Following the Burnett Plaza foreclosure, a subsidiary 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 an unmitigated disaster for all parties involved.
Given that nearly $1 trillion in commercial loan debt will mature in 2024, many more foreclosures on premium office properties are likely to occur nationwide. That will only push their value down further. While no one can be sure where the bottom lies, Burnett Plaza and 3100 North First Street are proof that commercial real estate can get a lot worse before it gets better.
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This article These Two Commercial Bankruptcies Speak Volumes About How Bad The Market Is originally appeared on Benzinga.com
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