A fund formed by Canadian real estate giant Brookfield to own office towers in downtown Los Angeles, seen as a measure of the market's health for almost a decade, is warning investors of a cash shortfall that may cause it to miss loan payments.

Brookfield DTLA Fund Office Trust Investor said in a Nov. 10 filing with the Securities and Exchange Commission that it may not be able to meet "material financial covenants contained in the loan agreements" because of its declining cash flows, net operating income and value of its properties, leading to the possibility of foreclosure. The fund said it was in compliance with all its loan agreements as of Sept. 30.

The warning involving buildings in the downtown of the nation's second-largest city comes amid a backdrop of some reduced office use after remote working policies were put in place in some workplaces during the pandemic. The fund, partially owned by Brookfield, owns six Class A office properties and a retail center in downtown Los Angeles totaling roughly 7.6 million square feet. Those properties include the mall FIGat7th, the 1.4 million-square-foot Bank of America Plaza and the 1 million-square-foot 777 Tower, in which CoStar Group leases space. A representative for Brookfield declined to comment to CoStar News.

"Given the uncertainty in the economy, current office leasing volume, volatile financial markets created by the continued rise in interest rates in the near future and the war in the Ukraine, and the company’s upcoming debt maturities, management believes that access to liquidity will be challenging and is planning accordingly," according to the SEC filing.

It added that "we are also working to proactively address challenges to our long-term liquidity position. However, if uncertainty in the economy and financial and leasing markets do not improve, or the company is not able to find additional sources of liquidity, the property-owning subsidiary debt obligors may not be able to successfully refinance the debt obligations when they fall due, which could result in foreclosure on the encumbered properties."

The fund had roughly $2.3 billion of total consolidated debt as of Sept. 30 and its "substantial indebtedness" required it to use "a material portion of our cash flow to service interest on our debt." The company's debt matures in 2023 and 2026 with $821.7 million due by the end of 2023, according to the SEC filing.

The fund reported a net loss of $116.1 million for the quarter ending Sept. 30, according to the SEC filing. That deepened from a $14.4 million loss in the year-earlier period. The fund reported revenue of $74.5 million for the quarter ending Sept. 30, according to the SEC filing, up from $68.8 million in the year-ago quarter.

Brookfield DTLA Fund Office Trust Investor has been tracked for years by real estate industry analysts as a bellwether for the Los Angeles downtown office market. It was was formed in 2013 after Brookfield's acquisition of longtime downtown L.A. office tower owner MPG Office Trust in a deal valued at more than $2 billion, according to The Wall Street Journal.

At the time, downtown L.A. was experiencing high office vacancies but there was hope for its struggling office properties as the market attracted a surge of new residents. Dennis Friedrich, then-CEO of Brookfield Office Properties, said in a statement that Brookfield was bullish on downtown's transportation infrastructure, residential population and diverse labor pool.

At the time of its formation, Brookfied was expected to own roughly 47% of the fund and institutional partners would own the remaining interest, according to the statement.

The most recent regulatory filings show Kawa Capital Management owned roughly 9.65% of Series A cumulative redeemable preferred stock as of February 2022 and Angelo Gordon & Co. and a group of other investors owned roughly 9% of Series A cumulative redeemable preferred stock as of January 2021.

Shares of the thinly traded fund were trading around $7, down from a 2022 high of $12.20 reached in April.

The fund's office buildings now are between 63% and 88.7% leased, according to the SEC filing. Its mall is nearly 90% leased.

Brookfield's downtown L.A. holdings extend beyond the fund. It is marketing for sale the 52-story, 1 million-square-foot office tower at 601 S. Figueroa St. as vacancies rise and demand falls. It joins at least five other office properties for sale in downtown L.A. as owners look to divest from the struggling office market.

The 69.3 million-square-foot downtown L.A.office market has seen its office vacancy rate grow to 18.3% from 17.1% a year ago, according to CoStar data. It's the highest vacancy CoStar has tracked for the downtown market in the past decade.

Accordingly, market rents downtown haven't changed much in the past two years, said Sean Fulp, vice chair and head of office capital markets in the Southwest for Colliers. Downtown's office leasing has suffered as nearby amenities such as restaurants shuttered and people preferred working from home, Fulp said.

Further, tenants interested in office space are demanding more amenities, outdoor space and high ceilings, something that many downtown high-rise towers don't have, he said.

Fulp, who is not working with the Brookfield fund, said that downtown office landlords face numerous obstacles in attempting to convert properties to different uses, including soaring construction costs. That may mean more of the status quo for office buildings in downtown Los Angeles in the months to come.

"If construction costs and construction financing continue to remain high, DTLA office buildings will likely remain office buildings, albeit with a higher vacancy," Fulp said in an email.