Historic Loss: First AAA CMBS Default Since 2008 Financial Crisis!

May 24, 2024 | Economic Collapse | 0 comments

Investors in a top-rated commercial mortgage-backed bond tied to 1740 Broadway faced significant losses, highlighting the vulnerability of the commercial real estate market amid ongoing economic challenges.

For the first time since the 2008 Financial Crisis, a top-rated commercial mortgage-backed bond has experienced a significant loss. Investors in the AAA-rated portion of a $308 million Commercial Mortgage-Backed Security (CMBS) tied to the 1740 Broadway building in midtown Manhattan faced a $40 million loss, amounting to a 26% hit. The five lower-rated tranches of the CMBS were completely wiped out, resulting in a $150.5 million loss.

The broader context underscores the vulnerability of the commercial real estate (CRE) market, which still needs substantial support. Currently, there is approximately $700 billion in CMBS backed by the US government and $3 trillion of commercial mortgages on US bank balance sheets. The present scenario is alarming, as it combines the “duration risk” from longer-term loans with the emerging “credit risk,” creating a “perfect storm” reminiscent of both the late 1980s Savings & Loan Crisis and the 2008 Global Financial Crisis, forming a “bomb cyclone” of economic destruction.

The market was further rattled when Blackstone Group transferred a $308 million loan on 1740 Broadway to a special servicer, catching the real estate community off guard. This move raised eyebrows, especially given Blackstone’s stature as one of the world’s largest landlords. Observers were puzzled as to why Blackstone would abandon a relatively modest loan after investing heavily in modernizing the building with a new lobby and a restaurant.

Despite fears that Blackstone’s potential exit from 1740 Broadway might signal a broader retreat by landlords from the pandemic-battered office market, insiders asserted it was a unique case. They attributed the decision to an unusual miscalculation by Blackstone’s EQ Office division. Blackstone’s representative stated, “We are working diligently to find a solution that is in the best interests of all parties involved, including our investors and lender.”

An informed source noted, “They overpaid for the building by at least $100 million, and the loan terms left them no room to negotiate for lower rents. End of story.” EQ Office had acquired the 26-story, 600,000-square-foot tower from Vornado in 2014 for $605 million. Although fully occupied at the time, tenants were paying below-market rents. The purchase price of slightly more than $1,000 per square foot for a 1950s-era building in the West 50s that needed significant work was deemed excessive.

In response to lease expirations and planned move-outs by major tenants like L Brands and the law firm Davis+Gilbert, EQ embarked on a major redesign to make the former MONY tower more attractive to modern tenants. This included an impressive lobby redesign and a 15,000-square-foot private tenants’ club on the mezzanine. EQ also sought to generate buzz by bringing in renowned chef John Fraser’s restaurant Iris, which has received critical acclaim and attracted large crowds since its opening last year.

Despite these enhancements, the improvements did not attract new office tenants quickly enough. “They wanted rents in the $80s per square foot,” said one dealmaker. “The numbers didn’t fly in a secondary location and in a market with 20 percent availability.”

A Blackstone source emphasized that the situation with 1740 Broadway was an “isolated situation” and did not reflect the company’s overall view of the Manhattan office market.


Will Blackstone’s handling of the 1740 Broadway loan signal a broader retreat by landlords from the pandemic-battered office market? Leave a comment…


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