Shorenstein Properties couldn’t refinance its $400 million loan on Market Square, better known as the Twitter building, by the deadline in September, and now has until January to refinance or negotiate with its lenders, according to loan documents.
The fate of the loan has attracted attention for a number of reasons, including billionaire Elon Musk’s recent takeover of Twitter, the majority tenant at 1355 Market Street in San Francisco, where the social media company maintains its headquarters.
The loan also represents a bellwether for the entire commercial mortgage-backed securities industry. It offers a window on what could happen with debt on similar large office properties in cities nationwide facing “somewhat unprecedented” lending headwinds, said Trepp Senior Managing Director Manus Clancy.
“This is the kind of loan that everybody is watching around the country,” he said. “How do big loans like this — reaching the maturity date, that have hair on them — how do these go through?”
The headwinds include an uncertain future for office properties given remote work trends, in addition to higher interest rates sparked by the Federal Reserve Bank.
TIcking clock
Before the pandemic, it would have taken just two or three months to refinance the loan, said Clancy at Trepp, a provider of CMBS financing.
Instead, Trepp data shows that the borrower, a Shorenstein-related LLC, has worked on a refi since at least June, when it believed it would close on or before the September maturity date. It got a four-month extension in September, and now has until Jan. 9 to refinance or work out a new deal on the loan, which was originated by Barclays in August 2015.
Shorenstein — which sold 98 percent of its interest in the two Mid-market buildings that make up Market Square to JP Morgan for $900 million in 2015, shortly before opening the interest-only loan — declined to comment on the status of the refinance. The investment and management company bought the properties for $110 million in 2011 and spent approximately $300 million turning the properties into what became Twitter’s headquarters. The buildings were constructed in 1937 and 1974 to house the Western Furniture Exchange and Merchandise Mart.
As Clancy sees it, there are four main barriers to a refinance: Higher interest rates impacting commercial property values nationwide; a general disinterest in lending on office properties; an even greater disinterest in lending on office properties in San Francisco in particular; and the fact that the 1.1 million-square-foot property is 75 percent leased to Twitter, which recently laid off 50 percent of its workforce and whose new leader, Musk, has openly mused about turning the 10- and 11-story office buildings into a homeless shelter.
“Because there are so many headlines on this thing, it could just be toxic,” Clancy said.
Interest rate questions
The interest rates offered on a refi would surely be higher than the going rate of about 6 percent for a “clean loan, without entanglements,” he said, if they’re being offered at all. The current rate on the 2015 loan is just under 4 percent.
“I’m not sure there is a number” that makes sense for lenders given the additional complications involved, Clancy said. He added that agents “could be taking a career risk” just bringing the idea of taking on the debt to their higher-ups.
In what Clancy sees as the most likely scenario, rather than refinancing by January, a special servicer will negotiate the terms of a longer-term extension. The arrangements could involve higher interest rates, a large investment into the property to attract new tenants, a repayment of some of the principal, or some combination of these strategies.
Such negotiations have been used often for debt on failing mall properties over the last five years, Clancy said, and the outcome of this loan could serve as an indicator of whether what has happened on large retail-backed loans might begin happening in the office market as well.
“Sometimes there’s an agreement and sometimes you’re going to get a FedEx package tomorrow with the keys,” Clancy said, a practice that has become so common it is known in industry shorthand as “jingle mail.”
Clancy said it’s unlikely Shorenstein will give up its interest in the property, especially since Twitter still has substantial leases until 2028 and the buildings have an annual net operating income of about $60 million.
“As long as Twitter is in there and paying their leases, this thing is profitable,” he said. “My guess is that the owners go back and say, ‘Look, this building is cash flow positive, if you give us two or three more years we can do things to replace these tenants down the road.’”
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