According to the Wall Street Journal, prominent New York real estate developers are offloading their office buildings with less-than-desirable amenities. Rising interest rates and pandemic-forced remote work has led to record-high vacancies and mortgage defaults among high-end office buildings. Few office buildings, which feature modern amenities, have been able to retain tenants and, in some cases, increase rents. This has not been the case for older, cheaper buildings with surging vacancies and plummeting values. Developers of these less viable buildings are gearing up to sell them at deep discounts. More office buildings entering the sales market could pave the way for unlocking sales activity, which plunged 56% YoY in Q1. The decline in demand is not limited to a specific segment of older or less expensive buildings. In the last quarter of 2022, Class-A and Class-BC type properties saw a decline in demand, according to Moody's Analytics. In spite of investments in modern amenities, some Class-A properties have not been able to find tenants. The fall in demand and property valuations has caused many property developers to default on their mortgage payments. Owners who own both types of buildings are offloading their weaker ones to focus on the more profitable ones and optimize their portfolio. J.P. Morgan estimates 21% of CMBS outstanding office loans to default leading to a loss severity assumption of 41% and forward cumulative losses of 8.6%.
Brookfield recently missed the payment on a $275M CMBS loan for an office building in Los Angeles. Brookfield has previously experienced instances of delinquency in loan payments, involving a $161.4M mortgage for a dozen buildings in Washington, D.C. RXR defaulted on a $240M loan associated with a 33-story office tower in lower Manhattan. RXR plans to turn over ownership of the building to whoever buys the defaulted debt. Silverstein Properties, which redeveloped the World Trade Center, is selling a 20-story office building for $66M lower than its refinancing value in 2020. Blackstone sold a 49% stake in an office building for $1B, down from the $1.5B valuation when it bought the stake in 2017. Analysts predict a surge in defaults as pre-pandemic mortgages expire. Also, Moody's expects 84% of CMBS office loans maturing this year to face refinancing challenges. Moody's made this claim in its First Quarter 2023 CRE Quarterly Economy Briefing. Mody's Analytics head of CRE economic analysis, Kenvin Fagan, said "Ultimately, not all of these loans that are in this 84% will default or be liquidated. Some owners will find new equity to save quality assets, and some borrowers will get extensions and workouts as we work through this down cycle." He added that the maturity wave would provide some pricing clarity on how forced-sold offices will be priced by investors. |
