Cracks in the Quartz
Brokers have a name for them. They're called "zombie buildings" - commercial properties leaking tenants and staggering under a load of debt. The L.A. market is full of properties that investment trusts bought when vacancies were low and cash flow rich. Now some of those buildings are zombies, not looking for brains but for buyers.
A worrying example of zombie-ism is MPG Office Trust (formerly Maguire Properties). Robert Maguire was once the biggest player in the making of a City of Quartz, as Mike Davis memorably called the cold acropolis of office towers on top of Bunker Hill. But as the century waned, so did Robert Maguire's reach. He was pushed out as his company's chief in 2008.
Three years later, a court-appointed receiver is trying to sell two "Class A" buildings in central Orange County once owned by MPG: Stadium Towers, a 262,360-square-foot office building next to Angel Stadium, and 500 Orange Tower, a 280,340-square-foot building in nearby. The company defaulted on loans tied to Stadium Towers in mid-2009 and on 500 Orange Tower in early 2010. The two buildings have a total debt load of $210 million.
Another office MPG building will be the next to go into receivership. The 21-story, 410,000-square-foot City Tower in Orange is about $140 million in debt. MPG defaulted on those loans in September.
What happens in Orange County, unfortunately, won't stay in Orange County. MPG is one of the largest holders of prime real estate in downtown Los Angeles, and it's struggling to retain control of its landmark properties there. One of the best known is U.S. Bank Tower, the tallest building in the West.
Loan defaults are only part of MPG's problem. So is the company's disturbing pattern of leadership change. MPG's replacement chief executive Nelson C. Rising abruptly resigned in November, leading one analyst to comment that "MPG now has a crisis of leadership to go along with being a financial zombie - not dead, but not really alive either. This is very bad news."
The news hasn't gotten any better. MPG announced last week that its loans on US Bank Tower ($250 million of debt) and Wells Fargo Tower ($550 million of debt) have been placed in "special servicing." The company also delivered a notice of imminent default to the master servicer of its loan on Gas Company Tower, requesting that it too be placed in special servicing status. The mortgage on Gas Company Tower totals $458 million.
(Special servicers negotiate with lenders on buildings that are close to default, although these three buildings are not in currently in default, according to MPG.)
Another downtown asset tied to MPG is Two California Plaza. In its recent annual report, MPG said that the special purpose entity that owns Two California Plaza had defaulted on its $470 million mortgage in March.
Mayor Tom Bradley liked to say that the towers downtown were symbols of Los Angeles as the newest "global city." The towers faced our West, toward the then-booming economies of Japan and Taiwan. Los Angeles was destined - Bradley said - to become a commercial hub of the Pacific Rim, in part because those towers, clustered on Bunker Hill in the 1980s, concentrated talent, wealth, influence, and power downtown.
By 2000, all the bold-face names of international capital had left the towers built for them. Various bubble economies filled the towers with lesser quantities of wealth and talent, until those bubbles deflated. The 2007 recession shut down the back offices of sub-prime lenders, leaving even more offices empty.
Zombie buildings began to haunt the streets of L.A.
Tom Bradley and Robert Maguire thought that the Los Angeles of tomorrow looked a lot like New York, and they enabled, with many partners, the building of our City of Quartz in partial imitation. MPG's troubled future questions the wisdom of their choice.
