If commercial real estate has proven anything in 2024, it’s that the highest-rated securities backed by solid real estate assets can collapse and leave investors crying.
What a shame to have to teach this lesson again since the last tutorial during the Great Recession.
A major review shows that a AAA tranche of $308 million in debt backed by 1740 Broadway in midtown Manhattan allowed investors to recover only 74% of their investment after the loan was sold at a deep discount. It started in May when it became clear that there was no such thing. The bottom five groups of creditors were completely wiped out.
Bloomberg has since listed other investment disasters involving real estate and deals that should have been blameless. The deal is likely to be structured as a single-asset single-borrower (SASB) bond.
Bloomberg analyzed “nearly all” of these SASBs, 150 in total, related to U.S. offices. The study showed that in many of these transactions, creditors are likely to receive only a portion of their original investment back. “In multiple cases, losses are likely to extend to buyers of the AAA portion of the debt,” Bloomberg said.
One is 1407 Broadway, also in Manhattan, a 43-story tower with solid corporate tenants. In 2019, the owner offered bonds with an AAA rating. As Bloomberg pointed out, this is even better than U.S. Treasuries. What could go wrong with an office building of this quality? The answer became clear when the building’s owner failed to pay the full $1 million in interest. Wells Fargo Bank, acting as trustee for the bond investors, filed for foreclosure earlier this year.
“As described below, Borrower agrees to pay, among other things, interest payments due in August 2023 and principal and interest payments due at the maturity of the Loan (as defined herein). without limitation, failed to make payments under the loan documents,” the complaint said. “To date, these Events of Default (as defined in the Loan Agreement) continue to exist.” The foreclosure notice states that $350 million in unpaid principal, interest and attorneys They were seeking payment of expenses and miscellaneous expenses.
Another property is River North Point in Chicago, where 28% of the A tranche is underwater. At 555 W. 5th St. in Los Angeles, 51% of A tranches are in distress. The Aspiria office campus in Overland Park, Kansas, is experiencing problems only from the C tranche, but things are improving.
There are risks associated with the structure of these loans. Traditional CMBS loans can span hundreds of real estate loans. A single asset and a single borrower concentrate risk.
This does not mean all SASBs are doomed. Demand will still increase if the collateral is new and located in a prime location.
