A financially distressed office building in downtown Grand Rapids fits a trend major metros across the country are experiencing as large office buildings push delinquency rates to the highest levels in more than a decade.
Hertz Investment Group’s Bridgewater Place is among these “trophy assets” that are facing a higher probability of delinquency after hybrid and remote work upended the office market, said Stephen Buschbom, research director at Trepp, a New York City-based real estate analytics firm.
Hertz recently defaulted on a $37.3 million loan after its lender required a $1.52 million cash deposit following the exit of a major tenant.
A sample of loans from the fourth quarter of 2023 found that expected default rates on office properties increased to nearly 25% for the largest office properties with more than 500,000 square feet, according to research in April from the Federal Reserve Bank of Kansas City. Smaller office properties had substantially lower expected default rates, according to the study.
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The 17-story Bridgewater Place, located at 333 Bridge St. NW with 410,000 square feet of space, is one of the largest office buildings in downtown Grand Rapids. Office spaces with the same square footage have a default probability of about 15%, according to the Federal Reserve Bank of Kansas City.
Trophy assets in the office market have historically been underwritten as a flight to safety protection, Buschbom said. The “dramatic paradigm shift” to hybrid and remote work after the pandemic has increased the risk profile of those properties in comparison to the broader market, he added.
“If you look at the larger offices in any downtown, there is a decent chance there is some stress there,” Buschbom said.
For fixed-rate loans, “trigger events” can include maturity defaults as well as large tenant departures that disrupt cash flow, which is what drove Hertz Investment Group’s recent default on its $37.3 million loan. The building is collateral on the loan under a commercial mortgage-backed securities deal.
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Corewell Health moved out and declined to renew its lease at Bridgewater Place in February 2023 as the health system consolidated into its own nearby office campus. A 2020 securities filing shows that Corewell (then Spectrum Health) occupied 70,062 square feet in Bridgewater Place, second only to Varnum LLP, which occupied more than 86,000 square feet.
Midroog, the Israeli affiliate of credit rating agency Moody’s, cited the loss of Corewell Health as a tenant at Bridgewater Place in a Jan. 29 report downgrading Hertz Properties Group to its lowest credit rating. Midroog reserves the rating level for companies that it believes “have the weakest creditworthiness and are usually in a situation of default, with little prospect of recovery of principal and interest.”
It was the fourth time the agency downgraded its credit rating of Hertz Properties Group since January 2022.
In a report about its actions, Midroog noted that Hertz will need to invest in improvements to secure new tenants to the newly vacated spaces but has insufficient unrestricted cash on hand to make those changes. It expects the loss of Corewell Health to further strain Hertz Properties Group’s net operating income in the year ahead.
‘Slow moving train wreck’
Several factors appear to be at play as real estate analysts and economists attempt to forecast the future of the office sector’s health. Those include elevated interest rates and demand that has shifted as a result of the pandemic.
One particular problem could involve office loans that were converted into commercial mortgage backed securities (CMBS), as was the case with Bridgewater Place. About $17.4 billion in CMBS office loans are maturing over the next 12 months, a volume that’s more than double from 2023, according to Moody’s. About $13 billion, or 75%, of those have “current performance characteristics that would make them very difficult to refinance,” according to a March 22 Moody’s analysis.
As well, the rate at which CMBS office loans were paid off on time plummeted from 90% in 2021 to 35% last year, the worst payoff rate in the history of the data Moody’s collects. That payoff rate increased in January and February of 2024 to 48%, according to Moody’s.
Buschbom said he expects office loan defaults to continue building into a “slow moving trainwreck.”
Bridgewater’s volatile past
Grand Rapids-based Robert Grooters Development Co. tapped Pioneer Construction to build Bridgewater Place as a $40 million class A building that opened in 1993. It remains the only major office building on the west side of the Grand River.
In its more than three decades in existence, the building has gone through several tumultuous ownership changes. Previous majority owner Bridgewater Place LLC defaulted on a $36 million mortgage in 2010 when the property’s vacancy rose to around 25%, according to previous reports.
The property fell into foreclosure and was sold for $34 million in a 2011 sheriff’s auction sale to its lender, GMAC Commercial Mortgage Securities Inc., which was represented by Wells Fargo Bank, according to property records.
In April 2013, GMAC transferred the deed to Hertz Investment Group, which took out a $21 million mortgage with Wells Fargo. Hertz refinanced the property in September 2020, securing a $37.27 million mortgage from DBS Investments Co. Limited, an affiliate of Deutsche Bank based in the Cayman Islands.
DBS Investment Co. assigned the mortgage in December 2020 to Wilmington Trust, which is acting as trustee on behalf of the owners of a commercial mortgage backed security, including Benchmark 2020-B19 Mortgage Trust, according to property records on file with the Kent County Register of Deeds.
According to a federal securities filing from 2020, Hertz’s 60-month interest-only loan for Bridgewater Place is at a rate of 3.89% and will mature on Sept. 6, 2025. The building was appraised at $63.6 million in July 2020.
Troubles mount for Hertz
Hertz Investment Group’s default is the latest example of financial troubles that appear to be compounding for the company in recent months, according to its financial disclosures and credit agency reports.
Some clues into the company’s situation come from Hertz Properties Group Limited, an affiliated entity domiciled in the British Virgin Islands that issued bonds that are traded on the Tel Aviv Stock Exchange (TASE).
For the 2023 fiscal year, Hertz Properties Group said it generated $96.8 million in revenues and posted a net loss of nearly $304 million.
Through the first three months of 2024, Hertz said losses widened to $33.5 million on nearly $19.7 million in revenues, according to TASE filings. That compares to a net loss of nearly $5.2 million on $23.9 million in revenues in the same period a year ago.
As of March 30, the company reported $369.5 million in assets on its balance sheet, down from $800.9 million at the same time last year. In October 2023, Hertz lost control of Fifth Third Center in downtown Cleveland when its lender, Prime Finance, acquired the 27-story office tower at a foreclosure auction. Hertz had reportedly tried to sell the building in 2022. Crain’s Cleveland Business reported at the time of the auction that at least six downtown Cleveland office buildings were distressed or controlled by lenders or outside receivers.
Hertz Properties Group ended the first quarter with $315.7 million in current liabilities, up from $162 million a year ago.
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