Maguire Properties Inc., one of the largest office-building owners in Southern California, is planning to hand over control of seven buildings with some $1.06 billion in debt to creditors, the latest sign that rising vacancies and falling rents are causing stress in the commercial real-estate sector.

Maguire, which borrowed heavily during the go-go years to make disastrous top-of-the-market investments, mostly in Orange County, notified the buildings' mortgage holders Friday that it expected “imminent default” on the loans. The buildings are all worth less then their mortgages and aren't generating enough cash to pay debt service and finance leasing expenses.
Maguire's problems are an example of the mounting pain among owners and lenders to office buildings, stores, hotels and other commercial real estate that is causing concern among banks and regulators that the sector may drag down a hoped-for economic recovery just as it is getting started. Initially, a dearth of financing caused the distress. But Maguire's problems show that falling rents and rising vacancies are causing landlords to run out of cash.
Chief Executive Nelson Rising, who was brought in by the company's board last year to succeed Mr. Maguire, said in an interview that restructuring the debt on six of the buildings, located in Orange County and Los Angeles, is one possibility. But he said the most likely scenario is that the mortgage holders will take over the properties and try to sell them.
Maguire already has a deal to turn over one of the buildings, Park Place One, in Irvine, Calif., to LBA Realty, a real-estate company that acquired the debt on the property at a discount in the spring. A telephone call placed to LBA's principal wasn't returned.
Mr. Rising has succeeded in reducing Maguire's debt by about $1.6 billion. His plan has been to sell or give back to lenders troubled properties and shore up Maguire's balance sheet to the point that it is able to raise capital like other real-estate investment trusts have been doing.
Maguire's stock, which traded around $12 a share one year ago, has been trading below $1 a share in recent months, a sign that many investors expect the company to fail.
Mr. Rising acknowledged that Maguire is encumbered with properties that are cash-flow negative, including three recently constructed buildings. But he expressed cautious optimism that the company would be able to dig out of its problems. “With this particular initiative we've made a big step,” he said. Landlords throughout the country are watching the cash flows of their buildings dwindle. Office vacancies nationally hit 15.4% as of June 30, up one percentage point from a year earlier, as businesses dumped 25 million square feet of space on the market, according to Colliers International.
Not only are vacancies rising, but landlords often have to cut rents when tenants renew their leases to keep the tenants. Owners also have to lay out incentive packages to attract tenants by offering them interior build-outs and months of free rent. Mr. Rising estimated that it would have cost Maguire about $31 million a year to keep the seven buildings because they weren't generating enough money to pay these and other expenses and debt service.
(Source: The WSJ)