Once deemed an investment that produced a stable income stream, office buildings in the US are causing a headache for Korean investors as they wrestle with defaults on loans amid weakening demand and increased interest rates.

With their investments turning sour, investors should come up with “creative ways to handle defaulted loans to draw a path to recovery," US commercial real estate investment firm BridgeRock Capital’s founder and managing director Jin Kim said.

“Korean institutional investors have been a major, active player in the US commercial real estate market over the last decade. With billions of dollars invested in both loans and equity,” he said during an interview with The Korea Herald at the New York-based firm’s newly launched Korean unit in Yeouido, western Seoul, on Tuesday.

The pandemic spawned tenants with unpaid rent, causing many building owners to default on their interest payments on loans because they were not able to refinance those loans due to lower property values and higher interest rates with the existing cash flows.

“Unfortunately, what were once the strongest parts of the commercial real estate market— Class A buildings in major metropolitan areas, have been the hardest hit. What was once thought to be the safest of investments, Class A offices with credit tenants, are struggling most,” he said.

New York City's vacancy rate has increased to over 20 percent, driven by companies' adoption of remote working policy, propelling an overall reduction in rents.

Consequently, Korean lenders have faced a mountain of defaults on their loan investments.

“In many cases, Korean lenders have also invested in mezzanine loans which are junior to senior mortgages. This puts additional pressure, as mezzanine lenders face pressure from both the borrowers who may not be willing to put in additional capital into the properties when the existing loan balance exceeds the current property values and senior lenders who are threatening to foreclose out the junior lenders,” he said.

Expectations that the US Federal Reserve will lower borrowing costs soon have been rising but the negative consequences of previous rate hikes to commercial real estate will linger for a long time.

“Reduction in interest rates will take some time and it may not come fast enough for many properties currently facing loan maturities,” Kim said.

Turnaround strategy

There are three basic ways to handle defaulted loans -- foreclose and take over the property, sell the defaulted loans in the secondary market, or restructure the loan with the borrower, according to Kim, who earned a juris doctor degree from Yale University and worked as a Goldman Sachs banker before founding BridgeRock Capital in 2018.

Of the three options, BridgeRock Capital has specialized capabilities in a loan workout process, which is aimed at putting the borrower's loan payments back on track.

Handling workouts is an inherently difficult process that requires intimate knowledge of the capital market, property market conditions, legal knowledge, borrower behaviors, and, in the case of Korean capital, Korean institutional behaviors.

"All this work cannot be done unless the adviser has significant experience with restructurings in the past," Kim said.

Working in the Special Assets Group at Goldman Sachs that was set up specially to handle the workout of $15 billion of legacy commercial real estate assets in the post-2008 financial crisis, Kim has personally handled the restructurings of a significant number of loans.

"Not only is it important to have done many restructurings, but most importantly, one must have experienced the outcomes years down the line of those restructurings to see what was most effective," he said. "Sometimes, even what seems like a small, innocuous provision in the loan agreement or restructuring amendment can have a profound effect on the outcome."

In November 2023, BridgeRock Capital established its Korean unit with Oh Jong-yoon taking the role of chief executive officer. Launch of the Seoul office would enable the firm to offer its services in a more expedited manner, Oh said.

Prior to joining Bridgerock Korea, Oh served as a team leader of global alternative investments at Hyundai Investments, raising a 1 trillion won worth of loan and equity funds for properties in the US and Europe. He also worked at Savills Korea, the Korean unit of the British real estate services company in charge of logistics real estate development consulting and transaction advice for domestic and foreign investors.