“They Say the Neon Lights Are Bright on Broadway………..when the glitter rubs off, you’re nowhere.”
Blackstone paid $605M for an office building located at 1740 Broadway (55th Street) in NYC, a class-B building built in 1950’s. L Brands the anchor tenant leasing 70% of the building then vacated. The most successful global CRE fund manager in the world couldn’t re-lease the space, so it flipped the keys to the lender, defaulting on the $308M loan.
The $308M loan resided within a SASB (Single Asset/Single Borrower) deal, comprised of 6 tranches rated from AAA to BB. Last week, the securitization was wound down with a 100% wipeout to the AA, A, BBB & BB trances. The AAA lost $40M/26% of its par. Total recovery value for the trust was a mere $117M, representing 19% of original purchase price for the property which equates to 38% of loan balance (62% loss severity for loan). The Servicer paid expenses/took fees, held the property for 2 years as values declined; while the property was sold for ~$180M in proceeds (enough to cover 100% of the AAA principal), the trust received only $117M, as it paid back advances to servicer (see table below).
There are >$50B problem office loans embedded within the $1T+ CMBS market (~1/3 of the loans, according to KBRA analytics). Chicago office taking the top spot. Higher interest rates to service debt + higher capitalization rates which reduces property value + less office demand in most locations/buildings + declining cash flow = toxic mix for office. The office market will stabilize at some point, and as the market goes through this massive correction, significant opportunity will present itself for opportunistic CRE investors.
As a lender, Marathon Asset Management will continue to avoid the office sector until we see the pig pass through the python, a process that is still taking place. Joseph Griffin & our CRE team has been hugely active lending to strong sponsors in sectors with growth and demand.
Here are my take-a-ways:
– 1740 Broadway is the first AAA-rated CMBS since the GFC to take a par hit. Of 460 SASB deals outstanding within the CMBS market there are 6 problem SASB deals (2 bad-Office/4-Mall deals), AAA’s at risk.
– While it is rare for a AAA to get hit, when it does happen, it will be isolated within SASB. SASB carry huge concentration risk (single property); property/projected cash flow analysis is essential.
– There has never been a loss to AAA-rated CLO (BSL) tranche ever.
– Class B/C office properties in non-prime locations will see further losses -> collision course with maturity walls.
– The cost of capital (lending) is higher for CRE loans as banks underwrite new loans with conservative LTVs; banks own $3T of CRE loans.
– It’s an amazing time for CRE lenders, Higher for Longer, Wider Spreads.
– The CMBS market is comprise of 1,560 distinct securitizations, I love the opportunity to capitalize from dislocation: it’s a compelling investment opportunity!
1740 Broadway Proceeds:
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