by Wolf Richter, Wolf Street:
Whoever buys the defaulted loan gets the tower. So far, investors and specialized lenders have been on the hook, not commercial banks.
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.
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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.
