Whoever buys the defaulted loan gets the tower. So far, investors and specialized lenders have been on the hook, not commercial banks.
By Wolf Richter for WOLF STREET.
The market for office towers is starting to thaw just a tiny bit, and some sales have now occurred or are on the horizon, with massive markdowns that serve as benchmarks for future deals. Until these sales occur, no one really knows what older office towers are worth in the new era of working from home and vacant office towers.
In Manhattan, sales of office buildings have collapsed from $5 billion in Q1 2022 to just $489 million in Q1 2023, the lowest sales since 2009, according to MSCI, cited by the Wall Street Journal.
Some of the future sales come with a twist: The defaulted loans get sold, not the properties, and the new holder of the loan can then take possession of the building and do something different with it. And it’s the big landlords that are sending the jingle mail to the lenders.
The lenders that are getting caught by the defaults of big office towers and multi-family properties that have come to my attention and that I have discussed so far were investors, primarily holders of Commercial Mortgage-Backed Securities (CMBS) and specialized CRE lenders – not US commercial banks; their turn will eventually come.
50% off the 2016 valuation. RXR, which describes itself as “one of the top landlords in New York City” with 83 office and residential properties under management, defaulted on the $240 million loan on its 33-story 1914 office tower at 61 Broadway, in the Financial District. It will let the lender have the property through a deed-in-lieu-of-foreclosure in July.
RXR had purchased the property in 2014 for $330 million and invested some money to update it. RXR CEO Scott Rechler told The Real Deal that the firm had already gotten its money out: in 2016, at the peak of the Chinese overseas investment binge, RXR had sold a 49% stake of the tower to China Orient Asset Management at a valuation of $440 million.
RXR and China Orient then refinanced the tower in 2019 with $325 million in debt, including some junior debt and this now defaulted $240 million mortgage from a syndicate led by Aareal Capital Corporation, a subsidiary of German property lender and structured finance specialist Aereal Bank. The mortgage is non-recourse, and the lenders can only get the collateral.
Aareal is now trying to sell the mortgage and has hired commercial real-estate firm JLL to market it. Whoever buys the loan will get the tower. According to market participants cited by the WSJ, the tower may sell at half the price of its $440 million valuation in 2016.
38% off the 2020 refinance valuation. Or 45% off if renovation costs are included? Silverstein Properties has agreed to sell the 20-story 1958 tower at 529 Fifth Avenue for $105 million, to Empire Capital Holdings. The price is down 38% from the $171 million at which it refinanced the tower in 2020. Silverstein started on a $20 million renovation project of the tower. If those costs are included, the discount would amount to 45%. Silverstein has owned the tower since 1978.
33% off 2018 sales price, or 41% off 2020 asking price. PE firm Blackstone sold its 49% stake in One Liberty Plaza at 165 Broadway back to PE firm Brookfield at a price that values the tower at $1 billion, after having bought the stake from Brookfield in 2018 at a valuation of $1.5 billion. Brookfield now owns the whole tower again. The tower dates from the 1970s. In early 2020, Brookfield and Blackstone were trying to sell the tower for $1.6 to $1.7 billion.
While at it… Both PE firms have serially defaulted on loans backed by office CRE and have already dumped or are trying to dump office towers.
Blackstone’s list includes two office towers in Southern California which it dumped for a 36% loss. Last year, Blackstone walked away from the 26-story, 1950s tower at 1740 Broadway in Midtown Manhattan, letting the lenders – CMBS holders – to deal with it and take the remaining loss.
Blackstone defaulted on €531 million ($570 million) in CMBS backed by a portfolio of office properties and retail stores in Finland. And it is set to default on a $270 million variable-rate loan backed by 11 apartment buildings in Manhattan. The loan, which was securitized into CMBS, comes due in August and has been sent to special servicing. All these loans are non-recourse – jingle mail material.
Brookfield defaulted on a $161 million floating-rate mortgage for a group of office buildings, mostly in the Washington, DC, area. The loan had been securitized into CMBS. It also defaulted on $784 million of debt backed by two Los Angeles office towers, the Gas Company Tower and the 777 Tower. And the loan backed by another one of its towers in Los Angeles was sent to a special servicer.
The Manhattan haircuts appear to be less severe than the San Francisco haircuts. San Francisco’s office market is in far worse shape than Manhattan, with about one-third of the total office space on the market for lease. But now there was finally the first sale of the new era that broke the ice and became the first benchmark deal: Union Bank sold its 300,000-square-foot headquarters tower for $60 million to $67 million, after having originally listed if at $250 million in 2020, amounting to a 75% haircut from the 2020 listing price.
And yet, office construction continues. In Manhattan, 13 million square feet of new construction is scheduled to be delivered by the end of 2023, including Brookfield’s 2-million square-foot 935-foot-tall Two Manhattan West and Vornado’s 1.6 million square-foot PENN 2 (new construction and major renovation of existing buildings) at Penn Station and Madison Square Garden.
And the flight to quality sees to it that these trophy towers will attract tenants that are bailing out of their old digs for top-notch and often smaller office space with the latest and greatest amenities. This flight to quality is helping to empty out and doom the old towers, while the newest towers fare better.
These major construction projects that will be delivered over the next few years were planned years in advance, when the sudden structural change in the office market wasn’t even on the horizon. So there is this flow of new office towers in the pipeline, and they will keep coming for years, and they will keep pulling tenants out of older towers.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.