One of America’s largest office owners — with gleaming high-rises in cities across the nation — is struggling to hold on to properties, a situation culminating with a bondholder uprising that’s followed a string of failed sales and unsuccessful financing deals.

It’s another sign of distress for an office property market dealing with sinking demand as a result of companies both shifting toward hybrid work patterns and cutting costs with interest rates climbing.

Hertz Investment Group, based in Los Angeles, faces a fate to be decided by Israeli bondholders in votes scheduled this week and next. The bondholders, who own debt on Hertz properties, are expected to choose whether to seek immediate payment from a Hertz subsidiary that issued bonds in Israel back in 2018.

The move, known as calling in bonds, is an unusual decision for bond investors, real estate analysts say, and is a dramatic turn in the typically dry world of bond deals. It also comes as some U.S. real estate companies have faced issues with the Israeli bond market in recent years.

The bonds are backed by U.S. office properties owned by Hertz, and the decision will affect millions of square feet of office properties in midsize U.S. cities including Jacksonville, Florida; Birmingham, Alabama; and Cleveland. Hertz is the 25th-largest owner of central business district office buildings nationally, according to CoStar data, and is unaffiliated with the car rental company with the same name.

Mark Silverman, partner of law firm Locke Lord who works in distressed real estate, said he has not seen bond investors call back bonds before a maturity date. The move to do so reflects the anxiety around investing in office real estate, as working from home and company cost reductions have weakened demand, Silverman said.

"Folks are getting nervous with their investments," Silverman told CoStar News. "I don't think anyone has come to the table with an option for what to do with the massive amount of office space that is unused and unusable."

American firms sought out Israeli bonds due to the flexible terms and low interest rates, according to The Wall Street Journal. But Israel and investors there have stood up to U.S. loan issuers, exemplified when the country's securities regulator supported a class-action lawsuit involving a Starwood Capital Group bond deal.

In the Starwood case, Starwood agreed to the appointment of a receiver, which continued to operate the properties with proceeds going to the bondholders. The receiver renegotiated debt refinancings including commercial mortgage-backed securities debt and has overseen the sale of some of the properties. That receivership is still ongoing.

Starwood said it believes the allegations in the lawsuit to be without merit, The Journal reported.

Before selling bonds to Israeli investors, Hertz grew its U.S. business by acquiring office space in cities. Hertz, founded in 1977 by Judah Hertz, found success and expanded its portfolio to 16.5 million square feet across 21 cities, according to the company's website. His son, William, is now the company's CEO.

As it continued to grow, Hertz in 2017 said it wanted to sell bonds in Israel. Then, in 2019, the company attempted to go public with its shares listed on the Tel Aviv Stock Exchange, according to filings with the Securities and Exchange Commission. Hertz said in the filings that it wanted to buy and operate Class A office properties in central business districts. At the time, the company had more than 300 employees.

However, demand soured for offices when the pandemic started, and the national office market now has a 13.3% vacancy rate, the highest level in a decade, according to CoStar data. Meanwhile, the average sales price per square foot for office space in the United States has fallen more than 6% year over year. In January 2022, Hertz said it no longer was pursuing an initial public offering, according to SEC filings.

Investors can make higher returns buying offices in midsized U.S. cities if they time the market right, said Dave Wald, president of real estate firm Wald Realty Advisors in Los Angeles. That said, the risk is that central business district office space in smaller markets appeals mostly to local businesses and not as much to firms with regional, national or international footprints, Wald said. That, of course, limits demand for these office buildings.

"Second-tier markets tend to be the first to go vacant and the last to re-lease," Wald said.

The office leasing market has continued to struggle nationally, and office attendance has been so steady it raises questions of whether it has plateaued — an ominous sign for future demand, according to Wald. If office usage remains stuck around the 50% level that Kastle Systems building access data is currently showing, then he expects some office owners will keep experiencing financial distress.

"You're going to see office buildings imploding year after year after year," Wald said.

Trouble has been brewing for weeks for Hertz in Israel. The company reported on Aug. 31 that it had significant doubts about its ability to continue operating, and loans on at least a handful of properties that back the Israeli bonds are now in default, according to public filings.

On Sept. 7, Israeli bond rating firm Midroog downgraded the Hertz bonds to its two lowest rungs of ratings. Those ratings indicate that in Midroog’s judgment, Hertz has extremely weak creditworthiness and is very near default.

In response to Hertz's financial issues, Reznik Paz Nevo Trusts, a trust service provider in Israel, filed notice of bondholder meetings set up for each of two classes of bonds, one class for Sept. 28 and the other for Oct. 3. Bondholders will discuss and vote on whether to call in the bonds. Only 50% of bondholders need to approve the vote to have the bonds fully and immediately redeemable.

Hertz sent a letter to Reznik Paz Nevo and the bondholders, committing to full cooperation and transparency in an analysis of the company, including providing financial disclosures if requested.

Hertz also agreed not to undertake any major transactions in the days leading up to the bondholder meetings without prior notification.

The company did not respond to multiple emailed requests to comment from CoStar News.

Properties Hertz financed through Israeli bonds include the Energy Centre in New Orleans. Hertz secured a refinancing of the office building in an agreement meant to produce excess cash. The $56.7 million loan is securitized in a commercial mortgage-backed securities deal scheduled to mature Sunday.

But Hertz anticipates the loan will go into maturity default, according to a Tel Aviv Stock Exchange filing. The company said it is working on a six-month to one-year extension with the loan holder.

In Lake Charles, Louisiana, Hertz disclosed in a filing that a contract to acquire its 358,197-square-foot Capital One Tower has been terminated. The previously announced agreement was expected to generate net proceeds of $8 million. The cancellation of the purchase contract now means Hertz does not have the means to meet fully its bond payments due in January, the company said. The property was heavily damaged in 2020 due to Hurricane Laura and has sat empty since.

In Pittsburgh, Hertz was anticipating the sale of air rights above its four office towers that make up the Gateway Center in December. That agreement was contingent upon Hertz completing a refinancing of a $96.6 million CMBS deal on the complex. However, Hertz said in a filing that the refinancing of Gateway Center is not going to happen, and the sale of the air rights is no longer expected to occur.

In Jackson, Mississippi, Hertz wanted to sell its two-tower City Centre property in the first quarter of 2024. However, offer prices for the property are coming in lower than projected, Hertz said in public filings. The company said it would continue to take offers on the property through Wednesday.

Hertz also said it was in default on a $14.2 million loan on another Jackson property. The company said it failed to make a September interest payment on its One Jackson Place CMBS loan.