Bondholders Beware: Anchor Office Tenants Aren’t Safe

AAA bondholders of a well-known Manhattan office building faced devastating losses as Blackstone’s fire sale led to a bond devaluation.

Jordan B. & Han-Gwon Lung
May 24, 2024

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Good morning. AAA bondholders of a well-known Manhattan office building faced devastating losses as Blackstone’s fire sale led to a bond devaluation. Lower tranches were completely wiped out.

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CMBS MARKET

Even AAA-Rated CMBS Bonds Aren’t Safe From Office Distress

Bondholders of the highest-rated class of bonds in a CMBS loan for 1740 Broadway faced steep losses for the first time in 16 years.

Battered and bruised: Investors in the AAA-rated portion of Blackstone’s $308 million loan for 1740 Broadway received only 74 cents on the dollar after the building sold for half its prior value.

Tenant exit: Blackstone bought the 621K SF office tower for $605M in 2014 but defaulted on the loan in 2022 when the building lost its anchor tenant, which occupied 70% of the space. Blackstone then stopped covering operating shortfalls and worked with the CMBS trust to exit the property.

Take the loss: The special servicer marketed the loan, and Yellowstone Real Estate acquired the building for $186M last month, planning to convert it into apartments. At this price, bondholders recovered only $117M, resulting in a 26% loss for the AAA tranche and a total wipeout for lower-rated tranches.

Between the lines: “This deal was a perfect storm of an office building that relies on one tenant for the majority of the rent. We will see more bonds get hit related to the office space,” said John Kerschner, Janus Henderson’s Head of U.S. Securitized Products. Blackstone acknowledged the write-off three years ago, calling it a rare instance in their vast portfolio.

➥ THE TAKEAWAY

Rising delinquencies: The loss incurred by the AAA-rated class of CMBS bondholders was the first since the end of the Great Financial Crisis. Moody’s reported that over 6% of office loans inside CMBS were delinquent as of April, the highest figure since June 2018. KBRA Analytics noted a third of the $52B in office loans within CMBS were troubled in March, indicating even the most secure investments are not safe from the distress in office real estate.

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✍️ Editor’s Picks

Flaky Fed: Federal Reserve officials plan to wait longer for rate cuts due to inflation setbacks, maintaining their benchmark rate at 5.25–5.5%.
Credit crunch: Goldman Sachs (GS) finds resilient credit markets with available debt for borrowers. Credit performance and possible risks are up, but systemic risk remains low.
Suffolk success: Blackstone (BX) acquired a minority stake in a Lower East Side tower at 55 Suffolk for $171.4M, part of its $2.6B fund.
Rising rates: Auto insurance costs are skyrocketing at rates unseen since the 1970s, though Bank of America suggests relief may be on the horizon.
Banking on change: DC banks facing mounting CRE loan challenges are shifting their focus to C&I lending due to high interest rates.

🏘️ MULTIFAMILY

Rent rollercoaster: Rents for studios to 2BR apartments in Nashville dropped 8.4%, with Austin, San Antonio, and Houston also seeing declines.
Skyscraper dreams: 4D Development plans a six-story, mixed-use complex in Beverly Grove, with 90 residential units, 15% affordable, and 16KSF of commercial space.
Miami market musings: Despite challenges, Miami’s apartment market remains appealing, with strict building codes and high insurance premiums.
Sunny disposition: An LA family office paid $30M for Summerfield Apartments in Sunrise, adding 153 units to its South Florida portfolio.
Housing heroics: NYCERS invests $60M in partnership with Community Preservation Corp. to protect 35K rent-stabilized units from bank collapse.

🏭 Industrial

The bigger the better: Amazon (AMZN) is ramping up its logistics expansion, adding 16MSF of new warehouse space in the US as it aims to compete with Walmart (WMT), Shein, and Temu.
Airy expansion: Fini, an Italian air compressor company, expands in Charlotte, NC, by acquiring a Fort Mill warehouse for $10M.
A new crossroads: KBS (KBS) secured $38.4M in refinancing for Crossroads Distribution Center, a 496.7KSF industrial campus in Charlotte’s Airport submarket.

🏬 RETAIL

Retail rebirth: Florida-based TZ Capital acquired 680 Madison Avenue for $180M, a 35% discount from Thor Equities’ 2013 purchase.
Coliseum revamp: Oakland’s Coliseum could see up to $5B in redevelopment from African American Sports and Entertainment Group, which will include more retail offerings.

🏢 OFFICE

Kushner in the clutch: A struggling Dumbo office portfolio secured a $480M refinancing package even as its valuation plummeted from $640M to just $207M with 73% occupancy.
Office exodus: DC businesses struggle as workers hesitate to return to offices, impacting the local economy as the city remains reliant on federal employees.
Cozying up: Famed tech VC Andreessen Horowitz, with $42B in AUM, expands to DC, leasing 12KSF near the White House.
Facing foreclosure: TerraCap Management failed to pay a $20.3M loan for a 5-story, 159KSF Dunwoody building in Atlanta, leading to a June 4th auction.

🏨 HOSPITALITY

Making memories: Marriott (MAR) will manage all 504 acres of The Resort at Pelican Hill in Newport Beach starting July 1st, aiming for a 5-star experience.
Mayoral muddle: Hotel operator Weihong Hu bundled campaign funds for Mayor Eric Adams, then secured city contracts worth millions, sparking ethical concerns.

📈 CHART OF THE DAY

Total multifamily investment in the US plummeted to $19.8B in Q1, the second-lowest quarterly figure since the pandemic started in 2Q20, according to CBRE, and a mere fraction of the ~$160B seen in 4Q21.