The two-tower property sold at a 75% discount. ING’s loss was much smaller. Investors took a bigger loss.
By Wolf Richter for WOLF STREET.
Banks have been trying to get rid of bad commercial real estate loans to make room on their balance sheets for new loans that they can show income from. To avoid ending up with the property, banks have extended mortgages when landlords could not pay off the mortgage at due date because they could not get a new mortgage, and banks have been modifying existing mortgages such as to lower payments to avoid a default.
This “extend and pretend” has been the standard method, where possible, to provide for more time and runway to deal with this stuff. For all lenders, not just banks, 40% ($384 billion) of the loans that mature in 2025 already matured in prior years and were extended, and another $205 billion were extended to 2026, according to a report by Colliers in March. These loan maturities in 2025 and 2026 are in addition to the scheduled loan maturities. And they all have to be refinanced.
Meanwhile, banks have been setting aside substantial amounts to cover expected CRE losses, and those amounts have already hit their income statements on a quarterly basis.
Foreign banks were among the banks that heavily invested in US CRE, especially in trophy office buildings in trophy office markets in the US, including Dutch megabank ING.
So here is a defaulted large two-tower office property in San Francisco that ING now got rid of at a big loss. But investors took an even bigger loss.
In 2019, New York-based Paramount Group acquired Market Center, a 770,000-square-foot two-tower office property on Market St., for $722 million, according to Paramount’s press release at the time. The deal was hailed as “one of the biggest single sales in San Francisco history” by the local media.
ING provided a $402 million fixed-rate loan at 3.07%, on the premise that a trophy office property in a trophy office market with a huge office shortage was a nearly risk-free proposition. The loan had an initial term of five years and two one-year extensions. At the time, ING said that it planned to syndicate the loan in “early 2020.”
In its December 2019 announcement of the loan, ING gushed about its CRE activities in the US, especially on the West Coast:
“The closing of the Market Center financing caps a busy year for ING’s Real Estate Finance team in the U.S. In 2019, the team will have originated $2.75 billion of new loan commitments secured by commercial properties in primary markets across the country. The West Coast continues to be a focus for the team. Since hiring Lynch to ING’s Los Angeles office in 2018, the team has closed transactions in Seattle, San Francisco, Los Angeles, Anaheim, and Dallas.”
Three months later, Covid came. In August 2024, Paramount defaulted on the loan, and ING took possession of the property via a “deed in lieu of foreclosure” process.
So now it’s time to clean up the mess. ING recently sold the loan, along with the property, for $177 million to Flynn Properties, headed by Bay Area real-estate investor Greg Flynn. DRA Advisors is the primary investment partner on the deal, according to the San Francisco Standard.
The transaction value of $177 million ($238 per square foot) represents a discount of 75% from the last transaction value in 2019 of $722 million.
There has been a slew of office property sales in 2024 and 2025 at discounts from pre-covid transaction prices of round 70%, give or take some. That seems to be the going rate now, as the market has completely reset, and sellers understand it.
ING lost about $235 million. The original loan was for $402 million. On top of that was unpaid interest, bringing the outstanding balance to $412 million. If that was still the outstanding loan balance when the loan was sold for $177 million, ING would have written off $235 million, or 57%.
ING likely set aside an amount covering the expected loss in some prior quarter, and there may be no additional hit on its financial statements for the current quarter. But it got rid of a bad loan that wasn’t producing any income. And the clean-up makes room on its balance sheet for new loans that it can show current income from.
Investors lost about $320 million, or 100% of their equity in the property: Paramount’s acquisition costs of $722 minus the original loan of $402 million.
And the new investors can do something with the property. They came in at a much lower cost basis ($177 million), and they plan to invest in the property and offer deals to make it more attractive to current tenants (which include Waymo) and new tenants.
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Good. This stuff needs to shake out. This about the discount needed for office to multifamily conversion and even then it is really, really hard to know from a planning and code perspective.
Without any real insight on the conversion to residential, it seems quite market dependent.
As the article states, it would seem that the property in question would be continued for use as office.
The market in question has myriad factors against any conversion: the “California effect” of codes, environmental considerations, permits and the rest;
The urban effect: SF in particular being an older, densely populated and difficult to build city,
The price cut: this alone means the breakeven point of the property is at least attainable.
Will residential sellers begin to see this? I’m sure not to the tune of 70%… but maybe 30-50% in some markets?
Residential RE, especially in places that saw 50% or more increases last five years or so could very well go down 70% at some point.
Saw a couple of ranchers on a canal, w sailboat water to the gulf, go from asking $900K each to $225K in the ’06 to ’09 period, and many others similar on west coast of FL. Also folx walking away from large deposits on new construction because they could pay less by buying at new prices…
Then, in ’14, saw many SFRs down by huge amounts start right back up again and now way above then.
Besides ”location X3,” it’s also ”timing time and again.”
Just like EVERY market, especially every market subject to interference from outside factors, eh?
TBH they never let it fully clear either. It had much further to fall. They let hte banks keep marking loans as good and never foreclosing for years (we all know people who lived in their house for years despite not paying) and the Fed brutally repressed interest rates to cause sales to go up. Now we have an even bigger bubble.
Great insight. Clearing CRE trades finally happening. No time for fine whiskey or expensive cordials at the Top of the Mark.
Excellent news as you say opens the possibilities for investment and growth in new tenants at competitive rates for the new pricing .
I want to see activity either business growth or upgrades in the facility or both
I wonder if it’s the right time for investing. Seismic changes are going on under the surface of things, and these are leveraging the existing variables to a new plateau. What we can’t know is when the arc of changes will terminate. Further change may open up better investment vistas still.
The arch of change is very great, but it is also very fast. Your investment time horizon is very close. You need a lot of low cost investments well distributed to make a buck. Opinion
Folks who off handily say convert to residential have no clue shout the dynamics involved. It is simply a feel good comment, as if they are contributing and solving the CRE problem. Sorry, you are way off base. Most towers are not conducive to conversion. Not to mention who do you think will be renting all these apartments? You also need amenities for folks, like grocery store, drug store, doctors, dentists etc. You don’t simply live in a tower and never leave!The conversation is bigger and complex. The first step, as written here by Wolf, getting pricing inline to attract new business. The entire business model has changed, wfh, is not dead. Pickle ball courts isn’t the end all solution either, but it may help. The demographics have changed since covid. Many boomers retiring, younger generation taking over. Work/living communities need to be rethought. Boston is slacking. The cities budget gets a huge proportion from commercial real estate tax, and as these buildings lose valuation, so down goes the budget. Boston also has higher rates for commercial, so this city is in trouble!
Not sure if at me, but yeah that is my point. Office to apartment conversion is not a big business and never will be.
Same thing needs to happen to residential real estate.
It’s already happening slowly but surely though. Just read WR previous articles.
when shtf then truth in real estate will be revealed. It remains to be seen whether the 177m buy was good or….?
I know of a commercial/res investor in LA that accumulated a hefty portfolio of somewhat leveraged CRE backed by extensive Res portfolio in LA.
Covid took his CRE to the woodshed, Covid rental controls blew away his Res safety valve. Fortunately he had his $20m free and clear home in Pacific Palisades since he is 88 years old and that was his “gold”. Then 3 months before the fire his insurance was canceled like 1,800 other homeowners in PP. Now he and his wife live at his sister’s house in a 10×10 bedroom while the attys comb through the ashes of his former financial glory. Billable hours will insure no scraps are left for him.
File under: “I’m smarter than he was.”
He is 88 years old thats something to be grateful for. The old expression; when you are younger you give your time for money and when you are older you would gladly give your money for time. To life! May we all live well.
Too true DD.
Real estate collapse vids are dominating youtube, all over Drudge, etc. Let the fun(and pain) begin.
When my 91 year old Dad passed 88 he told me that only ~25% of American Men make it to 89. I don’t get having leverage at an older age. I live as modest a life as my wife will allow me and hope to change my Wolf Street user name to “Debt Free ApartmentInvestor” before I turn 75.
Surprising how many “investors” think a sandwich lease is safe….or that commercial loans at 3-5 year balloon are prudent.
It’s a higher end version of the car dealer or furniture ads, “No payments for 90 days” – as if Day 91 will never arrive, or that lottery ticket will surely pay off by then.
Between insurance, and a mtn. of regulations I’m guessing for sale signs outnumber the building permits by at least 20 to 1.
Good article. Wolf.
The narrative is fairly clear about how loan risk/loan losses are actually partitioned across multiple lenders, under differing terms – which is something I don’t think the general public really appreciates (the old style, one asset/one borrower/one lender model has been fading for decades but is still likely the primary model in the general public’s minds).
Only a numbered list/flow chart could make it clearer than your narrative did.
The upside of the tranched-risk lender model is that (theoretically) risk gets spread across multiple parties, under differing terms/rates according to their risk appetite.
1) The downside is that the loan originators (still mostly unitary) have become more reckless/ruthless in their “moral hazard” originations – they are selling most of the crap they originate off…so they care less and less about how crappy it is. So the market becomes more and more polluted.
2) Another downside is that while loan risks are sliced and diced into a zillion pieces coming to rest in a zillion pockets, the systemic crappiness of #1 really isn’t reduced and the diffusion of the poison throughout the system becomes much harder for regulators to track/aggregate.
After all, even if a bank offloads a ton of toxic originated CRE loans to half a dozen hophead hedge funds…that very same bank may *still* have exposure if the bank is lending (under a different department) to those very same hophead hedge funds.
In terms of your paragraphs #1-3, there is a misconception here — please re-read the article carefully: Paramount wasn’t a lender but the property owner (equity). They lost 100% of their equity ($320 million) in the deal. ING was the lender and lost 57% ($235 million) of the loan value.
these losses seem staggering
reminds me of a video
15 apartment buildings in china
each 20 stories tall
controlled demolition
all buildings collapsed into dust over 10 seconds
wealth destruction!!
That’s not wealth destruction, that’s not falling into the sunken cost fallacy as a city.
Firstly: China’s population has grown by over 420M since 1980, so naturally there’s going to be a manyfold of RE projects, inevitably there’s going to be some extreme cases.
Regardless, there are many reasons for RE projects to fail: financing issues, demand collapse, faulty construction, regulatory issues, etc etc. Once a project gets stalled, the costs to finish mounts rapidly as unfinished construction is vulnerable. If the original investor is gone, and no other can be found, the city is left with an unusable plot, often in the middle of other projects that were started at the same time. Better to take the loss as the cost for demolishing are a fraction of the cost to finish, and find it a new purpose.
I recently visited Playa del Carmen.
There’s a few “framed up” larger buildings (concrete and steel, up several stories). Literally beach front.
Obviously not in continuing development (evidenced by the graffiti, lack of active work, and the dilapidated state of the fence around the “job” site).
I saw the same where I currently live: bare steel or tyvek/ plastic wrapped buildings for 5-10 years, eventually picked up and completed (because the RE valuation here is stupid).
I can see why it wouldn’t be the same everywhere.
Not so “real” estate.
Of interest to me and related to comments regarding office space repurposing or demolition is this article https://www.cnbc.com/2025/06/02/office-space-net-reduction.html
It reports the results from commercial real estate services firm CBRE Group of its survey across 58 of the largest markets. It found that 23.3 million sq. ft. of space is slated for demolition or conversion to other uses by the end of this year. In comparison developers are projected to complete construction of 12.7 million sq. ft. in those same markets.
“Survive to ‘25” on its way to “Deep Six in ‘26,” eh?
I see bag-holders …
Well said!
Spokane is having similar problems with downtown office buildings, partly from the lockdown/WFH changes but MOSTLY from uncontrolled crime. Downtown no longer feels safe, so some big companies are moving out. Until the city decides to enforce basic laws, nothing will improve.
https://www.spokesman.com/stories/2025/jun/03/downtown-spokanes-empty-office-buildings-have-lost/
GOOD! Let mark-to-market return! DEFLATE THAT BUBBLE already!