Australia's Largest Pension Fund Feeling U.S. Office Market Distress

Brookfield Properties And Australiansuper Pty Are Preparing To Give The Keys To 1200 K St. Nw, Washington, D.c. Back To Lender Starwood Property Trust.

Australia’s largest pension fund is taking a hit on an eight-building U.S. office portfolio in which it has a 49% stake, including one building that is going back to the lender.

“In the US office sector in particular, we are holding assets at far less than what we bought them for several years earlier,” AustralianSuper head of Mid Risk Portfolios Jason Peasley told Bloomberg in an email.

AustralianSuper purchased the minority share in the portfolio from Brookfield Properties for $349M in 2015 as a way for the fund to enter the Washington, D.C., market.

The portfolio totals 2.2M SF and was 96% occupied at the time of the 2015 sale, according to Brookfield. It includes seven Northwest D.C. properties at 1250 Connecticut Ave., 650 Massachusetts Ave., 77 K St., 799 9th St., 1400 K St., 1200 K St. and 750 9th St., plus the three-building Bethesda Crescent property in Maryland.

The move was a way for the fund to “substantially increase its direct holdings in offshore property, in line with its strategy of investing in established assets with strong long-term growth potential,” AustralianSuper head of property Jack McGougan said in the 2015 release announcing the acquisition.

The office market has changed drastically since the fund made this bet, with the shift to remote work and flight to higher-quality assets putting many older buildings in distressed situations. In D.C., the office vacancy rate reached a record high last quarter of 20.9%, according to CBRE, and multiple buildings in the city have gone back to lenders.

One of AustralianSuper’s properties, a vacant 12-story office tower in the middle of downtown D.C., is set to be returned to lender Starwood Property Trust, the Washington Business Journal first reported in July. Brookfield is now marketing the 375K SF property for construction as well as leasing, an August brochure shows.

Additionally, AustralianSuper invested $1.1B in 2015 for $25% of the world's largest open-air shopping mall in Honolulu, which Brookfield took control of after it acquired General Growth Properties. The mall's valuation has dropped from $5.7M at the end of 2021 to $4.9B this year, Bloomberg reported.

Brookfield declined to comment, and AustralianSuper did not respond to request for comment by the time of publication.

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