As the local economy cools and investors remain mired in uncertainty, some commercial real estate loans in Washington are again beginning to give lenders and ratings agencies reason for concern — a dour sign for more than $1 trillion worth of debt that will be coming due in the area over the next four years.
Potential trouble with loans can affect even properties that appear well on the way back to recovery, an indication of the yawning gap between pre- and post-recession business expectations.
Take the Ritz-Carlton hotels in the West End and Georgetown. The hotels, with 300 rooms in the West End and 86 in Georgetown, are enjoying one of their most impressive years ever, according to Elizabeth Mullins, Ritz-Carlton area vice president and general manager. She said average room rates were up about 6 percent and total sales were up 6.3 percent from 2010 to 2011 for the two hotels. Room occupancy, event business and restaurant revenue also climbed. “Literally everything was up across the board,” Mullins said.
And yet the loan backed by the two D.C. Ritz-Carltons — as well as two in New York — was placed on a servicer’s “watch list” in January because of concern that its owners were at risk of defaulting on payments, according to the ratings firm Morningstar. The borrowers, including Millennium Partners, the German insurance group ERGO Versicherungsgruppe AG and Provinzial Rheinland Lebensversicherung AG have cited an ongoing “lack of business travel” for the problems, according to Morningstar. Millennium Partners, based in New York, did not return multiple phone calls.
“It’s perplexing to me because the hotels, particularly the one in [the West End], had the best financial year in its history,” Mullins said.
Other Washington hotels, although often still popular with travelers, have endured tenuous ownership situations and some changed hands in the years following the recession. The owner of the St. Regis Washington nearly landed in foreclosure before the hotel was purchased in May by the private equity firm Westbrook Partners. Owners of the Mayflower Hotel, under water after buying the property for $260 million in 2007, managed to re-work the terms of their loan.
With new austerity measures and political gridlock on the Hill, other property types are similarly being affected, and some owners that rely heavily on government tenants have begun to encounter problems.
After the Defense Information Systems Agency vacated a 403,000-square-foot office building in Bailey’s Crossroads, Skyline 7, a servicer of that loan raised concerns in October about whether the borrower would have trouble making loan payments, according to the research firm Trepp.
Most recently, Advance Realty, based in New Jersey, fell behind on loan payments after losing a state agency as a tenant at the Avion Business Park, a seven-building complex in Chantilly, according to Morningstar. The seven buildings were built between 1988 and 2001. Morningstar analysts reported in January that, “negotiations with the borrower will be dual-tracked with the foreclosure action until a resolution is achieved.”
A spokeswoman for Advance Realty declined to comment.
For investors waiting on the sidelines, situations of distressed ownership and expiring debt can present opportunities. Ernie D. Jarvis, president of the D.C. Building Industry Association and senior vice president at First Potomac Realty Trust, said that even with a reduction in federal spending on General Services Administration-managed properties, there remain interested buyers worldwide when it comes to Washington real estate.
“Even if GSA slows down, corporate profits are at an all-time high,” Jarvis said. “Many companies have a great deal of cash. They’re waiting for a little bit of certainty in the economy.”