Even Some Of The “Safest’ CRE Bonds Are Getting Hammered
In 2024, one thing has become abundantly clear in commercial real estate: even top-rated securities backed by high-quality real estate assets can collapse, leaving investors with significant losses.
It’s a hard lesson that many had hoped wouldn’t need to be repeated after the financial turmoil of the Great Recession.
The current wave of problems began in May when it became evident that investors holding the AAA-rated tranche of a $308 million loan tied to 1740 Broadway in midtown Manhattan were only able to recover 74% of their original investment after the loan was sold at a steep discount. Creditors in the lower tranches were completely wiped out.
Since then, Bloomberg has highlighted a series of similar high-profile investment failures involving properties and deals once thought to be solid. These deals, often structured as single-asset, single-borrower (SASB) bonds, have turned out to be riskier than expected.
Bloomberg‘s analysis of nearly 150 SASBs tied to U.S. office buildings showed that many creditors could receive only a fraction of their original investment. In some cases, even investors holding the AAA-rated portions of the debt are expected to suffer significant losses.
One notable example is 1407 Broadway, a 43-story office tower in Manhattan that had a strong lineup of corporate tenants. In 2019, the building’s owners issued bonds that earned a AAA rating—comparable to U.S. Treasury bonds in terms of safety. But things took a turn when the building’s owners failed to make an interest payment of over $1 million. As a result, Wells Fargo, acting as trustee for the bondholders, filed for foreclosure earlier this year.
The foreclosure filing outlined the failure to make required payments under the loan, including an unpaid interest payment in August 2023, and the non-payment of principal and interest due upon the loan’s maturity. The outstanding debt, including principal, interest, attorney fees, and other costs, amounted to $350 million.
Other troubled properties include River North Point in Chicago, where the A tranche is 28% underwater, and 555 W. 5th St. in Los Angeles, where 51% of the A tranche is in distress. On a more positive note, the Aspiria Office Campus in Overland Park, Kansas, has only started seeing issues with the C tranche.
The underlying issue with these loans is their structure. Unlike conventional CMBS loans, which are typically diversified across multiple properties, SASBs are tied to a single asset and a single borrower, concentrating risk. This makes these loans more vulnerable to issues affecting the specific property or borrower.
That said, not all of these loans are doomed to fail. There is still strong demand for loans tied to properties in prime locations with high-quality collateral, particularly when the assets are new and well-maintained.
Source: GlobeSt.
