Spike of defaults in January was triggered by two Manhattan office towers; one of them is heading to a foreclosure sale.
By Wolf Richter for WOLF STREET.
The delinquency rate of office mortgages that have been securitized into commercial mortgage-backed securities (CMBS) spiked by over a percentage point in January to 12.3%, once again the worst ever, and 1.6 percentage point above the worst moments of the Financial Crisis, according to data by Trepp , which tracks and analyzes CMBS.
The CMBS were sold to institutional investors around the world, such as pension funds, bond funds, insurers, etc. The banks that originated the loans are off the hook.
High vacancy rates in new fancy office towers allow companies to move from an old tower to a new tower when the lease expires, thereby upgrading and downsizing at the same time. This “flight to quality” is pulling the rug out from under older office buildings.
Spike of defaults was triggered by two huge Manhattan office towers.
One Worldwide Plaza, $1.2 billion of debt: The 49-story 2.05-million-square-foot tower on 825 Eighth Avenue in Manhattan, built in 1989, includes 1.8 million sf of office space, 30,000 sf of retail space, a five-stage off-Broadway theater, a 38,000-sf fitness center, and a 132,000-sf parking garage.
The $1.2 billion in debt is composed of a $940 million senior CMBS loan and a $260 million mezzanine loan. In January, the property had insufficient cash flow to pay the January 2026 tax bill and make the note payment that was due in December and is now 30 days delinquent.
The landlord – an entity of RXR, SL Green, and New York REIT (New York REIT itself is liquidating) – is already facing a UCC foreclosure auction, triggered by Extell Development which had acquired the $260 million mezzanine debt to position itself to foreclose on the property.
This strategy, and the foreclosure auction originally scheduled for mid-January, got tangled up when the landlord sued to stop the foreclosure auction, calling it a “sham.” Last week, a New York judge ruled for Extell and rejected the landlord’s request to stop the foreclosure auction, and the auction can go forward. Extell is currently the only qualified bidder for the property.
The vacancy rate jumped to 37% in 2025, from 10% in 2024, after the global headquarters of law firm Cravath, Swaine & Moore, with 617,135 sf, vacated the property; and after the Americas headquarters of Nomura Holdings exercised the option to downsize by 75,000 sf to 705,089 sf.
The collateral had been appraised at $1.7 billion in 2017 for purposes of refinancing the building and securitizing the loan in 2017 and 2018.
Last fall, Trepp reported that the collateral was re-appraised at $390 million, a 77% haircut from the 2017 appraisal, and far less than the outstanding $1.2 billion in debt (image via NYRT).
Extend and pretend didn’t work. The CMBS loan was modified in March 2025, allowing it to tap into reserves to fund the property’s operating expenses and debt-service shortfalls, Trepp reported at the time.
The $940 million loan is split across several CMBS deals:
- $705 million, in four slices, make up the single-asset WPT 2017-WWP
- $100 million makes up 11.01% of GSMS 2017-GS8 (part of CMBX 11)
- $50 million makes up 6.09% of BMARK 2018-B1;
- $50 million makes up 4.69% of BMARK 2018-B2;
- $35 million makes up 4.26% of GSMS 2018-GS9 (part of CMBX 12).
One New York Plaza, $835 million loan. The 50-story 2.6-million-sf tower in Manhattan’s Financial District, completed in 1970 and renovated in 1994, went into maturity default in January, when the balloon payment of the loan, due in December, was not made. Until December, the property was current on the interest.
The loan backs the single-asset ONYP 2020-1NYP deal.
Extend and pretend didn’t solve anything. But Brookfield Properties, the landlord, with no further extension options remaining, is still seeking an additional extension, according to CoStar.
The vacancy rate rose to 35% most recently, according to CoStar. The largest tenant is Morgan Stanley (44% of the space), which is trying to sublease a 46,913-sf portion. Its lease runs through 2034. The second largest tenant is the law firm Fried Frank (16%), with the lease running to 2039.
Several smaller loans were “cured” and came off the delinquency list in January. The largest one was the $211 million loan backed by an office property Plainsboro, NJ, leased by Novo Nordisk US headquarters.
The 770,000-sf location made the news in October with the NJ labor department’s WARN Act disclosures that Novo Nordisk, the Danish pharma giant, would cut 811 jobs at its Plainsboro office by the end of 2025, more than tripling the 265 layoffs Novo Nordisk had publicly announced a month earlier as part of the 9,000 job cuts globally.
The loan had become delinquent for the November and December payments amid borrower disputes over force-placed insurance (FPI), according to special servicer commentary in December, cited by Trepp. The special servicer has advanced funds for the canceled FPI, with over $1.68 million outstanding. A settlement to resolve the insurance dispute has been circulated, and a resolution is expected, according to Trepp.
Who is on the hook for office mortgages? A big part is spread across investors around the world via office CMBS (see above), mezzanine loans (see above), CLOs, and mortgages that are held by bond funds, insurers, private or publicly traded office REITs and mortgage REITS, and by PE firms, private credit firms, and other investment vehicles.
Banks hold only a portion of office CRE loans and have been disclosing write-downs and losses for three years, and have been busy selling their bad office loans to investors at big discounts to get them off their books. All this dented their earnings, and some of these banks were big foreign banks that had been pursuing the glories of US office CRE in trophy cities.
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Holy Crap!
Well, when you have a media empire (Wolfstreet) being run out of a basement room, what do you expect? Empty buildings.
Top floor executive suite!
I wonder how many billions of dollars are invested in CMBS by pension funds?
Is the Titanic heading straight for the iceberg?
Be interesting what happens in long run. These building continue to have significant costs even when empty I assume. Too expensive to convert, too expensive to tear down. Perhaps cities have to ” eat” it after long enough.
I might consider a loan for backstage passes to a really good show, but not for mezzanine tickets.
Yep, it’s all easily explainable by that physical office occupancy chart from yesterday’s post on WS.
Occupancy dropped to 14% of the pre-pandemic rate in March 2020, then steadily worked its way up until it hit a brick wall at about 48% right after Labor Day 2022. Since then it’s only gone up to about 55%.
The leases involved here are very long duration. In other words, there’s more pain to come in the office sector.