Few real estate investors helped fuel the frenzy of the 2010s quite like Ivanhoé Cambridge — and few are staring down today’s aftershocks like the major Canadian investor.
Over the last decade, the real estate arm of Quebec’s $300 billion pension fund tore through U.S. cities, paying top dollar to buy trophy properties.
In New York, it paid $2.2 billion in 2015 to buy the 1.2 million-square-foot 3 Bryant Park — at the time the second most-expensive office purchase ever in the U.S. — and acquired the News Corp.-anchored 1211 Sixth Avenue for $1.8 billion.
In 2015 it also teamed up with the Blackstone Group to buy Stuyvesant Town and Peter Cooper Village for $5.3 billion.
Now, nearly $5 billion worth of debt on those properties is set to mature over a 12-month span starting next year. It’ll be a big test for how prime properties bought at the height of the market fare in today’s challenging refi environment.
“I think there’s some resiliency we’re expecting to see from some of these stronger New York buildings, but they’re not immune,” said Mike Brotschol of KBRA Credit Profile.
In February, the company will have to refinance the $1.125 billion mortgage on 3 Bryant Park. The $1 billion loan on 1211 Sixth Avenue comes due in August, and the $2.7 billion Stuy Town debt matures five months later.
During that decade, the investor also scooped up Goldman Sachs’ former headquarters at 85 Broad Street in the Financial District, which the company bought for $650 million in 2017. Ivanhoé Cambridge was reportedly in talks two years ago to convert the building into rentals, but it appears nothing was ever finalized. The tower’s $359 million loan matures in June 2027.
The company also holds a 49.9 percent stake in 1411 Broadway, which it acquired in 2012 for more than $360 million. Ivanhoé and its partner on the building, The Swig Company, refinanced the building in 2020 with a $450 million loan from Bank of China. It’s not clear when the loan matures.
One of the big questions now is whether Ivanhoé Cambridge can refinance the full amounts of its loans when they come due. It’s as much a test of the prices it paid during the go-go days of the investment boom coming out of the financial crisis as it is of the challenging interest rate environment and office sector.
The fund’s CEO Nathalie Palladitcheff acknowledged the troubles facing offices in an interview in October with CNBC, where she announced the company was opening an office in New York to be close to its biggest cases.
“It’s us being realistic about what’s happening in the market,” she said. “We have a lot of issues, challenges and we have to be close to the assets and that’s why we’re here.”
Expensive business
Ivanhoé Cambridge’s portfolio represents some of the conundrums of the office market.
Take 1211 Sixth Avenue, for example. The property was cause for celebration at the start of 2023 when News Corp. and Fox renewed their 1.2 million square feet for the next 20 years. It’s still the largest lease of the pandemic era.
But the tower is facing trouble.
When the company acquired the building in 2013 (it paid $850 million for a majority stake, then bought the remaining interest in 2016 for $913 million), it financed it with a $1 billion CMBS loan based on an appraised value of $2 billion.
But now analysts at Kroll Credit Profile calculate that, based on the current income and property prices, the value could be at about $1.5 billion. If that figure were to hold, it would mean that Ivanhoé would most likely get a smaller loan when it goes to refinance.
Part of the issue is the operating cost: expenses at the building went from $57.3 million in 2013, when the loan was securitized, to $76.5 million in 2023.
“The rise in operating expenses seems to be the main driver weighing on cash flows,” Brotschol said.
The situation is somewhat similar at 3 Bryant Park, also known as the Salesforce Tower. Kroll analysts calculate the value to be $1.24 billion, compared to the $2.2 billion appraised value that its $1.125 billion mortgage was based on.
Brotschol said that at about 50 percent loan-to-value, the mortgage was conservatively leveraged. But he said it may still have to come out of pocket.
“Supplemental financing or additional borrower equity may be necessary to successfully refinance the loan,” he said.
Assets and liabilities
Ivanhoé Cambridge got its start in the 1950s when Montreal grocer Sam Steinberg started buying up local shopping centers. It was acquired in 1990 by Caisse de dépôt et placement du Québec — Canada’s second-largest pension fund.
In 2012 the company formed a partnership with Chicago-based Callahan Capital Partners to expand its U.S. office platform. The two went around buying up properties in places like New York, Chicago, Boston and Denver.
Ivanhoé Cambridge bought Callahan in 2018 for an undisclosed amount. The company’s CEO during the 2010s expansion, Daniel Fournier, left in 2019 and came out of retirement four years later to take the helm at another Canadian real estate firm, Oxford Properties Group, the real estate arm of Ontario’s OMERS pension fund. When he left, Palladitcheff took over.
Ivanhoé Cambridge has struggled recently. The Caisse pension fund reported a -6.2 percent return in 2023 from its real estate group, the only part of its portfolio to present a negative return. (Though the fund said it performed better than the -10 percent benchmark.)
In her interview with CNBC, Palladitcheff acknowledged the challenges that come today with refinancing.
“Office was bad already at the beginning of the pandemic,” she said. “It’s not just about bad assets; it’s also about bad liabilities. So when you have bad on both sides, it’s where the problem starts.”
Now, I don't know how I missed this article back in July but it's definitely worth posting on my blog for several reasons.
First, don't buy this nonsense on Ivanhoé Cambridge's "real estate binge" and that they were paying "top dollar to buy trophy assets."
Maybe they were but they most certainly weren't the only ones, something Rich Bockmann of The Real Deal omits in his article.
Second, the article is a bit unfair to former Ivanhoé Cambridge CEO Nathalie Palladitcheff blaming her for the binge. Only towards to the end does he mention Dan Fournier was in charge till 2019 and then came out of retirement to now head Oxford Properties.
Having said this, the article raises excellent points about what is happening more widely in the commercial real estate market where funds typically finance transactions via debt markets (CMBS) and now that values are dropping and operating costs are exploding, refinancing these properties is becoming a huge issue, one that will surely impact returns.
The article mentions this:
Now, nearly $5 billion worth of debt on those properties is set to mature over a 12-month span starting next year. It’ll be a big test for how prime properties bought at the height of the market fare in today’s challenging refi environment.
“I think there’s some resiliency we’re expecting to see from some of these stronger New York buildings, but they’re not immune,” said Mike Brotschol of KBRA Credit Profile. [...]
Ivanhoé Cambridge’s portfolio represents some of the conundrums of the office market.
Take 1211 Sixth Avenue, for example. The property was cause for celebration at the start of 2023 when News Corp. and Fox renewed their 1.2 million square feet for the next 20 years. It’s still the largest lease of the pandemic era.
But the tower is facing trouble.
When the company acquired the building in 2013 (it paid $850 million for a majority stake, then bought the remaining interest in 2016 for $913 million), it financed it with a $1 billion CMBS loan based on an appraised value of $2 billion.
But now analysts at Kroll Credit Profile calculate that, based on the current income and property prices, the value could be at about $1.5 billion. If that figure were to hold, it would mean that Ivanhoé would most likely get a smaller loan when it goes to refinance.
Part of the issue is the operating cost: expenses at the building went from $57.3 million in 2013, when the loan was securitized, to $76.5 million in 2023.
“The rise in operating expenses seems to be the main driver weighing on cash flows,” Brotschol said.
Again, I want to make it crystal clear here, this isn't just an Ivanhoé Cambridge issue, this refinancing wall is going to hit all of Canada's major pension funds and global institutional investors that invested massively in commercial real estate during the 2010s.
Some more than others, sure, but everyone will feel the pinch.
The unenviable job of muddling through this "refinancing hell" now falls under Ivanhoé Cambridge's new CEO, Rana Ghorayeb.
She and her team have to figure this out and they have the full support of CDPQ's senior executives.
Still, let's not kid each other, the next 12 to 24 months are critical, especially since the global recession is already upon us.
The thing with commercial real estate is everyone is too focused on rates, not enough people are focusing on the recession and how brutal it will get when unemployment rate surges in the US, Europe and elsewhere.
Anyways, that's my two cents on Ivanhoé Cambridge's real estate binge heading towards a reckoning.
It's a reckoning that will hit all major institutional investors, that I pretty much guarantee you.
If I was sitting on the board of directors of all these large pension funds, I'd be asking the same question: what is our refinancing exposure and are we prepared to sustain a major hit there?
Alright, let me wrap it up there, it's a short week and markets got clobbered today following this morning's weak manufacturing report (it's only the beginning).
Below, Warren Wachsberger of Eldridge Acre Partners says the short-term issues facing U.S. commercial real estate has made it an investment opportunity and that values have bottomed out.
Second, Ben Miller, CEO of Fundrise, discusses the state of commercial real estate on The Bloomberg Intelligence Podcast.
Lastly, Sonny Kalsi, Co-Chief Executive Officer of BGO, joins Bloomberg Intelligence with Abigail Doolittle, Bloomberg News Markets Reporter to discuss on the state of commercial real estate.