Commercial real estate will never be the same again ...

David Goldsmith

All Powerful Moderator
Staff member
Carl Icahn goes to war against Rialto, CMBS servicers

Bombshell lawsuit: Dying mall was propped up to generate millions in fees​

Activist investor Carl Icahn has a new target — one that has long pestered short sellers and property owners: servicers of commercial mortgage-backed securities debt.
Icahn’s funds are suing Rialto Capital Advisors, a prominent special servicer, for delaying the sale of a Nevada shopping center and allegedly siphoning millions of dollars from investors, according to a complaint.

Icahn also alleges that Rialto manipulated appraisals to steer servicing decisions away from certain bondholders.
The suit echoes real estate investors’ long-standing gripes over CMBS’s special servicers.
When a CMBS loan runs into trouble, a third party is supposed to service the debt, but there are inherent conflicts. Servicers earn fees as long as a loan is in special servicing, leading critics to suspect some intentionally prolong that status.
The deep-pocketed Icahn seeks a systemic change, but he has his own motive: He is shorting CMBS mall debt through an index known as CMBX.6, which has reaped him huge profits in the past (others mistimed their trades). A change in the way appraisals are calculated could allow Icahn to cash in again on retail woes.

In this case, Icahn’s grievances stem from a faltering retail center in Primm, Nevada, near the border of California. Five years after the property borrowed money in 2012, it was half vacant and the loan’s unpaid principal was about $67 million. Rialto, as the servicer of the loan, appointed a receiver to oversee the property.
That’s when things went south, according to the complaint.
The property, Prizm Outlets, was reappraised in April 2018 for $25.5 million— some $50 million less than the loan balance. According to the complaint, the appraisal should have wiped out the most junior bondholders and most of the second-most-junior bonds. Holders of the Class E bonds, including Icahn, were supposed to become the controlling class of the trust.

“Instead, because it was not in Rialto’s interest — or the interest of other influential market participants — to appropriately recognize losses … Rialto schemed to deny control to the Class E Certificates while running Prizm Outlets into the proverbial ground,” the complaint said.
Icahn alleges Rialto used inflated appraisals to deny control of the retail complex to the Class E bondholders, who would have demanded an immediate sale of the property or replaced Rialto as the special servicer.
An April 2019 appraisal of $28.8 million assumed the center was nearly 100 percent occupied when it was half vacant, according to the complaint.
In October 2019, the servicer ordered another appraisal, this one inflated by a 10-year lease with HeadzUp, an experiential entertainment facility, the lawsuit alleges. It claims that Rialto penned the lease to create an illusion of improving conditions at Prizm Outlets.

In reality, Rialto had to induce HeadzUp with a $650,000 upfront payment and the tenant never paid rent, which the complaint alleges Rialto concealed.
Then came the pandemic. By March 2020, the Class E bondholders were in charge. But by then, Prizm Outlets’ value had fallen by millions more and fees totaling millions of dollars had been paid.
A year later, Prizm Outlets was sold to Kohan Retail Investment Group, a noted buyer of distressed malls, for about $400,000. Rialto had incurred about $12.85 million in fees, advances, and expenses at the property, meaning investors lost $12.4 million.
The sale led bondholders to recognize a loss of $62.2 million, the full principal outstanding of the loan. According to one Bank of America analyst, it was the largest loss, both in terms of dollar amount and in percentage terms, for a CMBS conduit loan since the 2008 financial crisis.

The Icahn funds claim that other players are influencing the CMBS market. It points a finger at mutual fund Putnam and other funds that sold billions of dollars of protection to the CMBX.6 index. It claims that sellers of CMBX.6 protection were the primary beneficiaries of Rialto’s actions on Prizm Outlets.
The complaint does not provide a smoking gun showing Putnam influenced the servicer at the Nevada mall. Still, it alleges such behavior is common in the CMBS world.
“The free and fair operation of the CMBS market is routinely eroded when servicers artificially avoid recognizing manifest losses in the short-term and, in doing so, exacerbate losses to CMBS investors in the long-term,” Icahn’s attorneys at Kasowitz Benson Torres argued.

One outside observer, Shlomo Chopp, an adviser on distressed commercial real estate deals, said the lawsuit could have large implications for CMBS borrowers, not just investors.
“Borrowers should thank Icahn, as this case will be quoted in many foreclosure cases and may even bring change to the industry,” said Chopp. “It brings to light issues that judges have dismissed for the past 10-plus years.”
Chopp explained that when a delinquent borrower alleges servicers of their loans are playing games to rack up fees, judges dismiss it, reasoning “you owe the money, so who cares — pay up.”
“At the same time, default interest and fees are piling up, so most borrowers either walk away or settle because the downside is too great,” he said.

Rialto did not return a request for comment.

David Goldsmith

All Powerful Moderator
Staff member
Party’s over: Rising interest rates crash CRE’s Covid recovery

In early December, Andrew Chung’s Innovo Property Group wired a deposit and penned a contract to buy a 30-story, HSBC-anchored office tower overlooking Bryant Park for $855 million.

As Chung worked to close the deal at 452 Fifth Avenue, which would elevate him from a scrappy industrial builder to a Midtown office landlord, the Federal Reserve signaled it would raise interest rates to combat inflation. By May, the SOFR rate — a broad estimate of what it costs a bank to borrow — skyrocketed to 0.78 percent from near zero in mid-March.

Five months later, Chung blew past his deadline to close on the tower and lost his $35 million deposit.

While the deal had various challenges — Chung had trouble from the beginning raising the equity and took a gamble by putting down the initial deposit, sources said — rising rates certainly complicated matters. Chung had to fork over more and more money to secure financing. Innovo did not respond to a request to comment.

The public collapse of Chung’s deal for the HSBC tower riveted the city’s commercial real estate community, intensifying concerns about rising rates.

“We definitely think now is a good time to be the second-best bidder in the deal.”
— David Schwartz, Slate Property Group

And while it’s the largest transaction to fall apart since rates started ballooning earlier this year, it’s far from the only one. Buyers, sellers and holders across the city are trying to come to grips with an interest rate environment that many younger professionals have never seen in their lifetimes.

In June, the Fed raised interest rates by 75 basis points, the largest such increase since 1994. Economists expect similar hikes to follow in July and September.

Higher rates mean that financing becomes more expensive, which in turn means that property owners have to extract more money from their buildings to cover costs. At the least, it’s making sales more complicated, with all sides changing things around on the fly.

“There are certain transactions I’m working on where retrades haven’t been done yet but we’re totally expecting it,” said Andrew Sasson, a broker at Ackman-Ziff. “Lenders are re-trading on pricing to borrowers in the midst of transactions.”
The big chill

As rates rise, dealmaking has slowed.

Across the country, sales of commercial properties fell 16 percent annually to $39.4 billion in April, according to MSCI Real Assets, declining for the first time in more than a year.

A wave of maturing office debt will further test the market, as owners may find that they can’t borrow as much as they did previously to repay their loans.

More than $7 billion of CMBS office loans in New York are due to mature this year, according to Trepp, more than in the previous three years combined.

Trepp’s Manus Clancy said on a recent podcast that more expensive borrowing costs will likely put pressure on owners who already had only a small buffer to cover their debt-service costs. In those cases, it’s likely owners will have to put equity into the deal when they refinance.

“At that point, that probably becomes a cash-in,” he said.

For property owners with maturing debt, refinancing options have not only become more costly, but also more restricted. In addition to rising rates, the CMBS market has receded in recent months amid inflation concerns and instability in Ukraine.

“The CMBS market is not functioning very well,” SL Green Realty president Andrew Mathias said at a Nareit conference in June. “There’s not a lot of cash buyers for Triple A bonds.”

With CMBS on the decline, borrowers instead have to turn to banks or debt funds for refinancing or new acquisitions. But even debt funds, who rely heavily on lines of credit known as warehouse financing, are closely tied to rate fluctuations.

“If you are buying stabilized real estate at a tight cap [rate], it’s tough to finance,” said Ian Ross, founder of the Manhattan-based development firm SomeraRoad.
Rate caps

Borrowers have protections against rising rates, but those, too, are becoming more expensive.

One such protection — interest rate caps — has increased in price tenfold over the past several months.

Lenders require most borrowers to protect against unexpected rate increases by purchasing rate caps, in which a counterparty agrees to make payments to the borrower if interest rates climb above a certain point.

Six months ago, a two-year cap on a $50 million loan would cost a borrower $85,000, according to the risk-management advisory Chatham Financial. That cap now costs $893,000.

“It’s gone from rounding error to significant cost,” said Chris Moore, a member of Chatham’s real estate team.

Moore said that volatility in the commercial debt markets will continue to work its way through to cap prices. And like moving interest rates, uncertainty over how much caps will cost from the time a buyer signs a contract to the time they’re ready to close a deal is just another factor for borrowers to consider.

“It adds an additional layer of uncertainty and potential higher costs to underwriting,” he said.
No safe haven

Sellers may find that the interest rate environment warrants a more conservative approach.

David Ash, founder of Prince Realty Advisors, said owners may look to do more direct deals instead of a formally run marketing process, which gives them and buyers more flexibility to account for changing financing conditions.

“I’m seeing a lot more interest in doing things directly and quietly with people they know they can work with and close,” he said.

In April, Vornado Realty Trust struck a direct deal to sell its Center Building office property in Long Island City to 60 Guilders for $173 million. Vornado’s Jared Toothman and 60 Guilders’ Kevin Chisholm negotiated the deal over dinner.

It’s clear that rising rates are making things difficult for buyers and sellers, but it’s not like they can skirt the issue by holding.

After Chung’s deal to buy the HSBC tower fell apart, its owner, Eli Elefant’s Property and Building Corp., had to refinance the property, since its existing loan was maturing. PBC ended up paying a higher rate at 3.9 percent — effectively a penalty for not selling.

Ackman-Ziff’s Sasson said there’s nowhere for sellers to hide.

“The alternative is borrowing secure financing, and the financing market has shifted as well,” he said. “Either you get dinged on value when you sell or you get dinged on interest rates when you go to finance it.”
Distress play

Some think that rising rates can present new opportunities as more deals fall apart.

In a few of these cases, the highest bidder in a deal might not be able to close on financing, leading to bidders with smaller offers coming away with a property.

“We definitely think now is a good time to be the second-best bidder in the deal,” said David Schwartz, co-founder of New York-based Slate Property Group.

Patrick Carroll, CEO of the development firm Carroll, said his firm picked up two South Florida deals recently after they fell out of contract with the initial buyer.

“When times like this happen, lenders get ultra, ultra choosey,” said Carroll.

When the pandemic struck New York City in March 2020, opportunistic investors were ready to pounce. However, distressed plays largely failed to materialize, thanks to record-low interest rates, government stimulus packages and abundant capital. Now, those dynamics are changing.

SL Green’s Mathias said if the LIBOR or SOFR rate rises to 3 percent, some “capital structures are going to come under pressure.”

“You could see some interesting distressed opportunities,” he said.

David Goldsmith

All Powerful Moderator
Staff member

Only 20% of U.S. workers in office three days or more: IBM CEO​

  • Corporations are learning that without mandates or strong arming, many workers prefer not to come back to the office most of the time.
  • IBM CEO Arvind Krishna told CNBC's Sara Eisen at the Aspen Ideas Festival that about 20% of the tech company's U.S.-based workers are back in the office three days or more, and he never thinks that will return to anything near 60%.

As major American corporations began to welcome workers back in the spring, they were surprised by what they saw: fewer employees than they expected who wanted to return to offices. That was the case at Ford, which told CNBC back in April that the initial numbers were "lower than we expected," and more recent comments from the CEO of IBM show that many workers at the biggest firms prefer to remain working from anywhere but the office, at least most of the time.
Only 20% of IBM's U.S. employees are in the office for three days a week or more, the tech company's CEO Arvind Krishna told CNBC's Sara Eisen at the Aspen Ideas Festival on Monday. Krishna added that he does not see a scenario where the balance ever gets back to over 60% of workers in the office more often than not.
In an earlier tech era, IBM was one of the first major tech firms to embrace remote work before it was common, with at one point in the 2000s as much as 40% of its workers remote, but it ended up reversing course and requiring workers to again be based in offices in 2017. Now, the paradigm has shifted again.
"I don't think it'll ever cross 60," Krishna said. "So I think we've learned a new normal."
IBM had over 280,000 workers globally at the end of last year.
Krishna does expect employers to get some leverage back when it comes to wages, though only a lower level of wage inflation rather than a reversal of it. "We will get an adjustment of wages," Krishna said at the Aspen Ideas Festival. "I expect to see a decrease in the growth rate, a step down."
He also indicated the wage pressures will vary depending on market.
"The 8-9% inflation or the 5% in wages is not uniform. Some pockets are 9 to 20," he said. "Some pockets are close to flat, and that's going to cause some inequity as we go forward."
Krishna added that IBM's own hiring inflation has been 9%-plus. "Ours is on the upper end, ours is well above nine I would say for replacement workers," he said. "It is so hard to get people."
Most of the layoffs taking place in tech, he said, are at the unprofitable firms, and other recent reporting from CNBC and survey data from the tech industry do show that workers remain in the driver's seat when it comes to job offers and many firms plan to continue aggressively hiring.
Krishna does not expect overall inflation to come down quickly, staying well above the Fed's target of 2% next year. IBM is preparing for a "period of more sustained inflation," Krishna said, and a return to the Fed target of 2% not realistic for another three to four years.
This doesn't mean he sees a recession coming, as he described the current period of high inflation combined with a labor market shortage as atypical and making past economic precedents less significant as forecasting tools.
Meanwhile, tech spending remains strong in the business to business segment, Krishna said, with sectors including retail, banking and finance, and pharmaceuticals and biotech all spending more on technology.
"We're not seeing a slowdown in the B2B space," he said.

David Goldsmith

All Powerful Moderator
Staff member
Tomorrow is D-Day (as in "default") for The American Dream Mall.

The American Dream Is Almost in Default​

The second-largest mall in the country is in trouble after Triple Five, the developer and third owner of East Rutherford, New Jersey’s American Dream, failed to make a payment on an $800 million bond for the property this week. As of June 16, the 3 million-square-foot megamall in the parking lot of MetLife Stadium, with its indoor ski slope, water park, and skating rink, will officially be in default, with a hefty bailout needed to save it.

This is the latest in a trail of bad financial decisions as long as the walk from Saks to the Nickelodeon roller coaster. In 2019, the mall made its grand debut over a decade late with a vision similar to Triple Five’s crown jewel, the Mall of America in Minneapolis. The idea was to make it just as gloriously over the top. (“A one‐of‐a‐kind property that will reshape the way people think about entertainment, theme parks, and shopping,” the press release read at the time. Though it wasn’t “tacky enough,” Curbed’s Justin Davidson wrote in 2021.) But the ribbon had barely been cut on the first phase of its opening when the mall was temporarily shuttered by the pandemic a few months later. Boosters touted the mall’s size as ideal for COVID-era shopping — “Because we’re three million square feet, everyone is naturally socially distant,” CEO Mark Ghermezian told CNBC in November 2020 — but that kind of turnout never materialized, as Bloomberg reported in February. Ghermezian said that American Dream would have a 95 percent occupancy rate by the end of 2021, but photos from early 2022 showed entire corridors of papered-over storefronts. It lost $60 million last year, and making payments on its massive construction debt left it with only $820 — yes, $820 — in a reserve account last year.

But American Dream’s demise is more than bad timing. The collapse of the mall as an institution may be part of a bigger post-COVID trend, notes Alexandra Lange, who visits the mall in the opening of her new book Meet Me by the Fountain: An Inside History of the Mall. As she wrote this week in the New York Times, forecasters predict that a quarter of the country’s 1,000 malls will close within five years. But the developer’s choice to remake one mall into another mall — without adding a better connection to the outdoors, carving out a more permeable perimeter, or redeveloping the acres of parking lots — was misguided in 2019 and downright irresponsible in 2022. “Reminding ourselves of the mall’s garden origins offers clues as to how they might be transformed,” Lange writes. Inspiration might be found in the name of the original never-completed mall American Dream replaced: Meadowlands Xanadu.

American Dream mall can’t catch a break​

State grant snagged in red tape as Aug. 1 payment deadline approaches​

American Dream’s bondholders might not be getting their money in a few weeks as the star-crossed mall sputters toward an Aug. 1 payment date.
This time, the retail complex is not entirely to blame: Its owners, the Ghermezian family’s Triple Five Group, are waiting on a grant from New Jersey.

The state’s Economic Development Authority has yet to approve a necessary document from developer Triple Five Group certifying project expenditures, Bloomberg reported. A spokesperson for the mall said the cost statement has been submitted, but the reason it hasn’t been approved is unclear.

New Jersey’s budget allocated $87 million for an economic redevelopment grant program; the mall is eligible because it’s in an economic redevelopment area.
The grants top out at $390 million over a 20-year period. It’s not known how much the mall would receive if its cost statement were approved.
Nervous bondholders have criticized Triple Five for not submitting the statement sooner. An auditor was hired to do it last March, but the paperwork wasn’t submitted before January.

With the August payment looming and the mall’s troubled history, the bondholders could be forgiven for fretting. The mall is scheduled to make a $9.3 million payment on the bonds at the start of August; $290 million in municipal bond obligations are backed by the grants, which are based on sales-tax collections.

Financial problems have been a constant issue for American Dream, which aimed to make East Rutherford a mecca for shoppers and entertainment seekers but ran into problems with construction, financing, the retail apocalypse and the pandemic.
Last month, the Ghermezians’ firm reportedly failed to make a semiannual payment on an $800 million municipal bond on time. Still, it has avoided default.

A recent securities filing revealed the mall lost $60 million last year, as $173 million in revenue was outstripped by $232 million in expenses. The retail complex recorded $305 million in sales last year, about 15 percent of the once-forecasted $2 billion goal for its first year of operations.
The mall wouldn’t technically default if it fails to pay the grant revenue bonds on time. According to the bond servicer, however, that could trigger a special redemption of the bonds.

Triple Five has also been seeking a four-year extension to pay off $1.7 billion in construction financing. In February, the mall was forced to draw on a reserve account to make a $9.3 million debt payment, draining the account of all but $820.

David Goldsmith

All Powerful Moderator
Staff member
The nightmares continue for American Dream.

Towns demand American Dream mall fork over $9M​

Ghermezians’ Triple Five Group say it’s not fully opened; localities disagree​

Think the American Dream has had every problem a megamall could have? Dream on.
The New Jersey retail complex is at the center of a dispute with local municipalities, which allege it owes them at least $9 million, reported. The localities had negotiated payments with the shopping and entertainment venue at a time when visions abounded of consumers flocking to the East Rutherford site.

The crux of the dispute centers on the definition of “fully opened.” Hitting that status would trigger payments in lieu of taxes and other fees to the municipalities to help them deal with the impacts, primarily traffic. The mall welcomed its first customers in 2019.
But the Ghermezian family’s Triple Five Group, who own the mall, don’t think it is fully opened yet. Triple Five’s position, according to the towns in the dispute, is that fully opened means 100 percent occupancy, something that may never happen. Green Street recently put the mall’s occupancy in the low-80 percent range.

A spokesperson for the mall didn’t respond to the publication’s request for comment.

East Rutherford appears to be gearing up to try to collect. The borough claims to be owed $5.5 million, which would represent nearly 14 percent of its budget this year. It has an attorney exploring its options, the most aggressive tactic taken by one of the dozen municipalities that claim to be missing payments.
Triple Five has cut some checks to East Rutherford. It paid $1.5 million when it closed on the property and $2 million in PILOTs. It also paid for sewer costs and a new police station.

Financial problems are a dime a dozen for the mall.
Last month, Triple Five reportedly failed to make a semiannual payment on an $800 million municipal bond on time. A securities filing, meanwhile, recently revealed the mall lost $60 million last year, generating $173 million in revenue against $232 million in expenses.
The developer has been looking for a four-year extension to pay off $1.7 billion in construction financing. In February, the mall needed to draw on a reserve account to make a $9.3 million debt payment, leaving only $820 in the account.
This week, it was reported that bondholders may not be getting a scheduled $9.3 million payment on Aug. 1 because the state’s Economic Development Authority hasn’t approved the necessary paperwork. Bondholders criticized the mall for not submitting the statement sooner.

David Goldsmith

All Powerful Moderator
Staff member

“Wile E. Coyote moment”: Apartment deals at risk as interest rates spike​

Commercial transactions slowing as financing tightens​

The commercial real estate market is singing a sad tune as rising rates drive investors loony.
Commercial transactions are slowing as interest rates spike, Bloomberg reported. The market slowdown is putting apartment and industrial deals at risk, with one economist comparing the period to an iconic cartoon character suddenly realizing the bottom is falling out.

“It almost feels like a Wile E. Coyote moment,” MSCI Real Assets chief economist for real estate Jim Costello told the outlet. “All the other signals tell you that there should be some sort of a change ahead — a drop in prices.”
That change is already showing. Green Street reported commercial property prices dropped 5 percent in the second quarter and may drop another 5 percent by the end of the year. Apartment prices fell 4 percent from May to June, while warehouse prices dropped 6 percent.

Those sectors are still proving to be jewels of the pandemic, when property values soared for the two stable markets — they’re just losing some of their shine. Industrial prices are 42 percent above pre-pandemic levels, according to Green Street, while multifamily prices are up 16 percent.

Commercial property transactions hit $375.8 billion in the first half, suggesting to some that the market hasn’t hit a wall yet. There was $809 billion in deals last year.

But that metric is considered a lagging indicator because it typically takes months for commercial deals to close.
A decline in commercial lending, brought on by the uncertainty of the invasion of Ukraine and the Federal Reserve’s attempts to cut down inflation, is part of the threat to apartment deals. In February, the Mortgage Bankers Association projected more than $1 trillion in commercial real estate lending for the year.
More recently, the MBA projected only $733 billion, expecting the market to contract by 18 percent.
Franklin BSP Realty Trust executive Michael Comparato noted that multifamily assets are being repriced in real time.

“We’re seeing transactional volume fall off the cliffs as buyers and sellers find a new equilibrium given where interest rates are,” Comparato said to Bloomberg.

David Goldsmith

All Powerful Moderator
Staff member

Breaking down the wild CMBS market​

Volatility causes chaos for investor-backed real estate financing​

Freeze, thaw, chill, repeat.
The CMBS market — a key source of financing for commercial real estate — has been on a wild ride in recent weeks as the broader financial markets have skidded and surged.
Commercial mortgage-backed securities largely track the stock market: When investors get nervous, such as about rising interest rates causing a recession, they pull their money out of risky assets like stocks and mortgage bonds and pile into the safety of U.S. Treasuries.
This can grind markets like CMBS to a near standstill, which happened this summer before a stock market rally helped open the spigot back up. CMBS issuance is expected to fall short of last year’s $109 billion, despite a strong first half of 2022, according to Trepp.
All this can make things confusing and difficult for borrowers seeking CMBS loans.
Manus Clancy, Trepp’s head of data and research, spoke with The Real Deal to break down what’s happening with CMBS. This interview has been edited for clarity.

We hear things like “the CMBS market has ground to a halt,” which sounds dramatic — like the 2008 credit crunch. What does it mean when people say the market’s frozen?​

CMBS has really gone through some serious pivots over the last six to 10 weeks. The market was really kind of muddling along really until that shocking [inflation] report came out in June. People freaked out and pulled back. We went a month and a half without seeing any new CMBS conduits priced.
Over the next six weeks, liquidity started to improve and people started putting money to work again. We saw two or three conduit deals price and then it dried up for a short period of time.

Why did it pause?​

Banks get nervous as to whether they can sell the loans at a profit. The business model is to lend and hedge right away against interest rate moves and spreads widening. When times get extremely volatile, the banks worry that they’re going to get stuck holding these loans, so they pull back. That’s what we saw in the middle of June.

Did the banks end up selling loans for a loss?​

That’s a tricky question. Every bank has to report on securitization whether they made or lost money. Recently the banks have been saying they’ve been losing money on securitizations… somewhere in the low single-digits, like 2 to 3 percent. But that’s not really representative of what’s happening because it only reflects what they made the loan at and what they sold it for. When you consider they’re hedging against interest rate moves, they’ve probably all done small profits.

What does this all mean for borrowers? Does volatility make loans more expensive?​

When volatility picks up, you have one of two things happen. The first is the banks say, We’re going to pull out. You’ve seen that happen three times in the last 15 years: during the Financial Crisis, in 2016 when oil went to $26 a barrel and during the first months of Covid.
“It pivots so quickly. Nobody wants to be caught long when everybody’s selling and they don’t want to be sitting on cash when everybody’s buying.”
Manus Clancy, Trepp
The other way it can play out is that to compensate for the greater volatility, the banks are going to lend at significantly higher rates. If the spread had been 200 basis points, maybe they’re now going to quote a 250 basis point spread. We saw that from June until a few days ago when the stock market started to bounce back. There has since been renewed volatility in the equity markets and banks are back to being a little more cautious.

How much of the commercial mortgage market runs through CMBS?​

The number people throw out there is something like 15 percent. I think in 2007, when we saw enormous issuance, it was probably closer to 20 percent.

If borrowers can’t access CMBS, where do they turn?​

It opens the doors for banks and insurance companies to pick up some of the slack. CMBS issuers have to be laser-focused on clearing these loans at a profit. They have to react to market moves immediately and widen their spreads as volatility picks up. Banks don’t have that same immediacy. Their thinking is, if we like this credit yesterday and we like the return we’re getting, we can move at a time when CMBS does not want to move. The same is true for insurance companies.

How are delinquencies trending?​

They dipped again last month and they’re now in the low 3 percent range. The July number is a new post-Covid low. The expectation is that delinquencies will go higher over the next six months. People are expecting that rates are going to be higher and because borrowers will reach their refinancing date, they’ll have to pay more. I don’t think there will be an explosion — more like a modest uptick.

What do you think happens in the near future?​

I think the markets will ebb and flow. Everybody seems to be moving to the same cadence. When the narrative flips to “we don’t have inflation under control and the Fed is going to have to be more aggressive and we’re going to have a recession,” everybody moves to one side of the table. They panic and put money into short-term Treasuries because no one wants to get caught holding assets. But the minute confidence changes and people think we can navigate a soft landing and a recession will be modest, nobody wants to miss out on returns either.
It pivots so quickly. Nobody wants to be caught long when everybody’s selling and they don’t want to be sitting on cash when everybody’s buying. The sentiment is so unanimous in either direction when it happens. Everybody runs to the right and then everybody runs to the left.

Have you ever seen volatility like this?​

We’ve had more volatile periods. 2008 was more volatile. The early days of Covid was more volatile. What we’ve seen in past crises is that there’s a market sell-off and then somebody jumps in and makes a lot of money and everybody else says, Why didn’t I jump in sooner? Now I think the slightest sell-off, the slightest dip, everybody plows in. Each downturn, that period of time it takes people to go from panic to exuberant gets shorter and shorter.

David Goldsmith

All Powerful Moderator
Staff member

Amazon Closes, Abandons Plans for Dozens of US Warehouses​ Inc., determined to reduce the size of its sprawling delivery operation amid slowing sales growth, has abandoned dozens of existing and planned facilities around the US, according to a closely watched consulting firm.​

MWPVL International Inc., which tracks Amazon’s real-estate footprint, estimates the company has either shuttered or killed plans to open 42 facilities totaling almost 25 million square feet of usable space. The company has delayed opening an additional 21 locations, totaling nearly 28 million square feet, according to MWPVL. The e-commerce giant also has canceled a handful of European projects, mostly in Spain, the firm said.
Just this week Amazon warned officials in Maryland that it plans to close two delivery stations next month in Hanover and Essex, near Baltimore, that employ more than 300 people. The moves are a striking contrast with previous years, when the world’s largest e-commerce company typically entered the fall rushing to open new facilities and hire thousands of workers to prepare for the holiday shopping season. Amazon continues to open facilities where it requires more space to meet customer demand.
“There remains some serious cutting to do before year-end -- in North America and the rest of the world,” said Marc Wulfraat, MWPVL’s founder and president. “Having said this, they continue to go live with new facilities this year at an astonishing pace.”
Maria Boschetti, an Amazon spokesperson, said it’s common for the company to explore multiple locations at once and make adjustments “based upon needs across the network.”

“We weigh a variety of factors when deciding where to develop future sites to best serve customers,” she said in an emailed statement. “We have dozens of fulfillment centers, sortation centers and delivery stations under construction and evolving around the world.”
The Maryland closings are part of an initiative to shift work to more modern buildings, Amazon says. “We regularly look at how we can improve the experience for our employees, partners, drivers and customers, and that includes upgrading our facilities,” Boschetti said. “As part of that effort, we’ll be closing our delivery stations in Hanover and Essex and offering all employees the opportunity to transfer to several different delivery stations close by.”
Chief Executive Officer Andy Jassy has pledged to unwind part of a pandemic-era expansion that saddled Amazon with a surfeit of warehouse space and too many employees. The company has typically weaned its ranks of hourly workers by leaving vacant positions open, slowing hiring and tightening disciplinary or productivity standards. But warehouse closings are also part of the mix, and workers are bracing for more. During the second quarter, Amazon’s workforce shrank by roughly 100,000 jobs to 1.52 million, the biggest quarter-to-quarter contraction in the company’s history.
The Seattle company has also been seeking to sub-lease at least 10 million square feet of warehouse space, Bloomberg reported in May.

When homebound shoppers stampeded online during the pandemic, Amazon responded by doubling the size of its logistics network over a two-year period, a rapid buildout that exceeded that of rivals and partners like Walmart Inc., United Parcel Service Inc. and FedEx Corp. For a time, Amazon was opening a new warehouse somewhere in the U.S. roughly every 24 hours. Jassy told Bloomberg in June that the company had decided in early 2021 to build toward the high end of its forecasts for shopper demand, erring on the side of having too much warehouse space rather than too little.
Wulfraat said that most of the closings announced this year are delivery stations, smaller buildings that hand off already packaged items to drivers. Facilities that have been canceled include several planned fulfillment centers, giant warehouses containing millions of items. MWPVL estimates that Amazon operates more than 1,200 logistics facilities, large and small, around the US.
More belt-tightening could complicate Amazon’s already fraught relations with organized labor. Earlier this year, an upstart labor union started by a fired Amazon worker won a historic victory at a company warehouse in Staten Island, New York. A federal labor official on Thursday rejected Amazon’s bid to overturn the result. Last month, workers at an Amazon facility near Albany, New York, filed a petition to hold a union election there.
How much overcapacity Amazon needs to work through is hard to gauge, and some analysts believe the extra space will come in handy during the Christmas holiday season.

David Goldsmith

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Cohen Brothers’ Midtown tower back in special servicing​

Landlord approaching default on CMBS loan at 750 Lexington Avenue​

Default is looming over the Cohen Brothers Realty’s International Plaza tower, where a CMBS loan on the building was transferred to special servicing.
The balance of the loan on the Plaza District office at 750 Lexington Avenue is $126.8 million, according to Trepp data reported by the Commercial Observer. Citigroup issued the loan in 2015, which is facing default three years ahead of its maturity date.

The loan is split between two conduit deals, part of a $130 million package. Cohen Brothers hit 30 days of delinquency in September, triggering the special servicing move. The developer has been delinquent seven times and the loan was previously placed in special servicing last July; the loan matures in October 2025.
The 750 Lexington Avenue property was 71 percent leased in 2021 and has struggled to generate cash flow because of the pandemic, as well as the June 2016 departure of Locke Lord. The law firm abandoned about 119,000 square feet, nearly one third of the building’s rentable space.

The 31-story property was built in 1986 and spans 382,000 square feet.
One of the largest tenants is WeWork, which signed a 15-year lease for 111,000 square feet at the beginning of 2018. The asking rent for the space was $80 per square foot. The building was 95 percent leased after WeWork inked its deal.

Charles Cohen has faced issues with his loan payments in the past. Near the start of the pandemic, the real estate scion fell at least a month behind on payments for four Manhattan properties: the Decoration & Design Center, 465 Park Avenue, 3 Park Avenue South and 805 Third Avenue.

At the time, Cohen owed about $1 billion in commercial mortgage-backed securities across its vast portfolio. The billionaire landlord downplayed the problems at the time, attributing the delays to “timing issues” from tenants who were behind in paying their rent directly to lenders.

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Office REITs Massacred as the Future these Office Markets Were Built for Got Cancelled by Working-from-Home​

by Wolf Richter • Oct 4, 2022 • 56 Comments

“Expect more distress from some owners as loan defaults and relinquishing of assets could increase going forward.”

By Wolf Richter for WOLF STREET.​

The biggest office REITs — publicly traded landlords that specialize in office properties — have gotten massacred in the stock market since March 2020, after having already had a hard time before. Some of them had hit their all-time highs in 1998 or 2000 or 2007, and they’re down 65% and 75% from those highs. And some of them are now back where they’d first been in the 1990s and even the 1980s.
But it’s the problems in the office market since 2020, since the large-scale arrival of working-from-home, and with it the largest office glut ever, with record amounts of office space vacant and on the market for lease, that these REITS have taken the most recent hits.
Interestingly, they plunged during the March 2020 crash, but then they recovered partway up toward their February 2020 level, only to let go again in a very systematic manner this year to either reach new decade lows or get close to them. We’ll get to those big office landlords in a moment.

These landlords face office gluts.

Commercial real estate advisory Savills today released the first batch of its Q3 quarterly office market reports on the major markets in the US, 12 markets in total. Houston tops the list in terms of the largest share of vacant office space on the market, with an availability rate of 30.7%. San Francisco is second with 28.9%, and shooting higher.

A big issue is sublease space. This is space for which companies are still paying rent to the landlord, but they’re not occupying it, and instead they’re trying to find sublease tenants for it to help defray the expenses of that space. These companies will price their sublease space aggressively since they don’t have to make a profit on this office space, but just want to lower their costs of holding it until the lease expires. Sublease space puts downward pressure on effective rents – even as landlords are tying to hold the line.
Houston has long been the hardest-hit of the big office markets due to the oil bust that started wreaking havoc in 2015, followed by the pandemic and the shift to working from home. But things are getting slightly less bad. The construction boom that took off during the oil boom kept throwing the latest and greatest office towers on the market at the worst possible time, with projects that had been planned years earlier. These fancy office towers triggered a flight to quality, with companies leaving their old digs when the lease expired.
Here is the fate of some of those older Class A office towers built in the 1980s, after the tenants moved to one of those new fancy towers: The landlords defaulted on the loans and let the old towers go back to the lenders – the CMBS investors – which then sold those towers in foreclosure sales at gigantic losses of 82% and 88% (which I analyzed here earlier this year).
It’s the old towers that get into existential trouble – not the latest and greatest. But even the owners of the latest and greatest have to deal with the glut, and they can’t get the rents that make those towers work. And in the tech sector, such as San Francisco, it’s even the latest and greatest towers, such as the Salesforce Tower, owned by office REIT Boston Properties – which we’ll look at in a moment – that have huge availability rates. Tech is moving out of the latest and greatest, and no one is moving in behind it.
But in Houston, the worst may be finally over. The availability rate dipped to the still worst in the US of 30.7%, but that’s down from 31.1% a year ago. But available sublease space rose again, after falling, to 7.7 million square feet (MSF)
Leasing activity jumped to 3.8 MSF, roughly in line with pre-pandemic activity. But a number of those deals were downsizing moves by energy companies that moved from larger spaces in older buildings to smaller spaces in new buildings, some of them consolidating offices spread over several buildings into one. And their current (larger) digs in these older buildings will come on the market, adding to the pain — and to availability. This is going on all over the place.
San Francisco, until 2019 the hottest office market in the US, is closing in on Houston. Availability rate rose to yet another all-time record 28.9%, up from 26.2% a year ago. Back in the Good Times, Q3 2019, availability was 7.1%. From red-hot office shortage to the worst office glut ever in three years, as tech companies realized that the vacant office space they were hogging for the future wouldn’t be needed because that future wouldn’t come. It has been cancelled by the shift to working from home.
Sublease space dipped to a still huge 7.7 MSF. Leasing activity fell to 1.0 MSF, the lowest since the lockdowns, and less than half the activity during the last three pre-pandemic Q3s.
Asking rents had peaked in 2019 and have been sliding since then. In Q3, the average overall asking rent dipped to $71.25 per square foot (psf) per year.
“Expect continued downward pressure on average asking rents and effective rental rates as landlords aggressively fight for occupancy amidst sluggish demand,” Savills said in its San Francisco report.
“The pullback in leasing in the technology sector this year has added another headwind to any office market recovery which has struggled as many office workers have continued to work remotely,” Savills said. “As a result, expect record high office availability to continue to increase through the end of the year and into 2023.”

New Office Towers continue to be added.​

The table below shows the 12 office markets for which Savills released its Q3 office reports today, in order of the availability rate.
The right two columns show the total office market size in Q3 2021 and in Q3 2022, in million square feet.
The bold column shows the net amount of office space added since Q3 2021, in million square feet – a total of 19.3 million square feet of net new office space was added in these 12 markets in one year.
The most office space was added in Seattle/Puget Sound (5.2 MSF), Boston (3.3 MSF), and San Francisco (2.2 MSF) over the past year. This will continue for years as office projects are being completed. But Houston, a market over twice the size of San Francisco, added only 500,000 sf, as the building boom has run its course.
Office space, MSF
Availability rateIncrease YOYTotal Q3 2021Total Q3 2022
San Francisco28.9%2.283.385.5
Los Angeles25.4%1.7219.4221.1
Chicago Downtown24.5%1.3148.1149.4
Orange County21.9%0.185.785.8
Washington D.C.21.5%0.0122.6122.6
Silicon Valley20.8%1.485.687.0
Seattle/Puget Sound20.5%5.2114.5119.7
Total office space added in 12 months19.3
In Chicago Downtown, the availability rate jumped to 24.5%, from 22.4% a year ago,
In Los Angeles, the availability rose to a record 25.4%. And sublease space jumped to 9.6 MSF, from 8.2 MSF a year ago as Netflix and PayPal put some of their vacant office space on the sublease market.
In Seattle/Puget Sound, the availability rate rose to 20.3%, the highest in the data. Class A availability jumped to a record 20.5%. Sublease space rose to 5.7 MSF.
In Silicon Valley, the availability rate dipped 10 basis points to 20.8%, based on one large deal: TikTok’s parent Bytedance subleased 658,000 sf from Yahoo. And so available sublease space dipped to 4.5 MSF, as that Bytedance deal removed 658,000 sf. Leasing activity in Q3, driven by the 658,000 sft Bytedance deal rose to 1.7 MSF, from 0.9 MSF a year ago.
In Washington D.C., the availability rate rose to 21.5%, and sublease space jumped to 3.4 MSF. Leasing activity in Q3 fell to just 1.1 MSF, the lowest in many years, lower even than during the lockdowns, and about half the five-year average activity.
“Hefty concession packages are indicative of landlords being forced to do more to chase potential tenants and keep existing ones,” Savills said in its office report for Washington D.C. “Class A new leases average now $150 psf in tenant improvement allowances and 24 months in rent abatement, totaling $282 psf in concessions.
“With office market fundamentals remaining soft, expect more distress from some owners as loan defaults and relinquishing of assets could increase going forward,” Savills said.

Shares of office landlords plunge.

The shares of the five largest office REITS by market cap have all plunged from their recent highs – and some of them much more from their distant all-time highs. Many investors buy REITs for their yields, but taking a 50% or 70% capital loss to get a 5% yield is not a good deal.
Boston Properties [BXP], the biggest of them, reached an all-time high in February 2020, and then plunged in March 2020. During the subsequent mega-QE era, it regained much of what it had lost in March 2020. But in April this year, as the Fed’s rate hikes were beginning to do their magic, the shares began to plunge again.
Today, despite a mild gain over the last few days, shares are down 48.7% from their February 2020 high, barely above their March 2020 low, and just a tad away from carving out a 12-year low. And they’re back where they’d first been in 2005 (data via YCharts):

Kilroy Realty Corp [KRC] today closed at $43.37, down 50.9% from its high in February 2020 (which was about level with its prior high in February 2007). Most of that plunge came since April 2022. Shares are now back where they’d first been in 2005 (data via YCharts):

Vornado Realty Trust [VNO] shot to an all-time high in February 2007, before plunging during the Financial Crisis, and then reached a lower high in February 2015, where this chart starts. Since then, the shares have plunged 74%. And since their most recent lower high in January 2020, shares have plunged 66%.
These misbegotten shares are now back where they’d first been in 1997 (data via YCharts):

Cousins Properties [CUZ] had spiked to their all-time high during the dotcom bubble, then plunged, then reached a lower high in 2004 and then again in 2007, and then collapsed. As of the close today, shares have plunged 81% from their all-time high in August 2000. From their lower high in February 2020, shares have plunged 45.5%.
Shares are now back where they’d first been in 1986, good lordy. But if you bought back then, and collected the yield since then, you’re in pretty good shape because at least you got the dividend yield. If you bought during most of the time since then, your dividend yield was a lot lower, and your capital loss was high, and that’s just a bad deal (data via YCharts):

Highwoods Properties in February 2020 got close to matching their all-time high of 2016. Since February 2020, shares have plunged 48.6%, most of it since April 2022, with a big trough in between, and last week they hit $26.41, the lowest price since 2011. Today they closed at $26.98. These shares are now back where they’d first been in 1995 (data via YCharts):

The somewhat smaller office REIT Equity Commonwealth [EQC] is down 31% from February 2020 and down 65% from its all-time high in February 1998. SL Green Realty Corp [OFC] is down 60% from February 2020 and down 75% from its all-time high in 2007. Turns out, these office REITs, once among the hottest stock trends, weren’t such great deals after all – and they really don’t like working from home and higher interest rates.

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The decline of the American mall has left just 700 still standing. Soon there may be just 150 left.​

There may be just 150 malls left in the US in 10 years, according to one industry watcher.
There are currently around 700 malls in the US, down from 2,500 in the 1980s.
Malls have suffered as online sales boomed.

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Once-bustling American malls are going bust as shoppers flock to online retailers instead of sprawling, brick-and-mortar locations.

Ten years from now, there will be approximately 150 malls left in the US, Nick Egelanian, president of retail consulting firm SiteWorks, told The Wall Street Journal.

That's down from around 2,500 locations in the 1980s and 700 today, Egelanian said.

A longtime fixture of American culture, shopping malls have suffered for decades amid a rise in online shopping, a decline in visitors to department stores, and, more recently, the COVID-19 pandemic, which kept consumers home.

Other industry watchers predict a similarly painful fate for malls and retail stores more generally.

In 2020, Coresight Research projected that 25% of the country's approximately 1,000 malls would close shop in the following 3-5 years. In April, analysts at UBS projected that 40,000-50,000 American retail stores would shut down by 2027. They said traditional shopping malls are at particularly high risk because shoppers now prefer to make quick trips to close-by stores, per CNBC.

According to Egelanian, the malls that will weather the storm will be premium locations with entertainment, dining, and luxury stores.

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What Simon Property Group’s latest move says about the future of malls​

The giant shopping center REIT’s newly acquired 50% stake in mixed-use developer Jamestown suggests the traditional mall’s days are numbered.

The chief executive of Simon Property Group, a mall real estate investment trust widely seen as a survivor in a turbulent sector, has consistently brushed aside any suggestion that the traditional mall business is in trouble.
“We have refuted e-commerce taking the malls down,” David Simon said during his most recent conference call with analysts. “We have withstood Covid. Our business is strong, growing — in the enclosed mall business. In the enclosed mall business it’s strong, yet we have naysayers out there that don’t believe it.”

However, the company’s acquisition of a 50% stake in mixed-use developer Jamestown, announced last week, suggests that Simon may be coming to terms with the limits of having a portfolio dependent on enclosed malls, observers say. Simon Property Group didn’t immediately respond to a request to comment for this story.
The deal, whose terms were not disclosed, gives Simon “an opportunity to capitalize on the growing asset and investment management businesses with an experienced fund manager and mixed-use operator and developer, utilizing the Jamestown platform to accelerate Simon’s future densification projects,” according to the companies’ press release.
Jamestown invests in and redevelops properties for varied uses including office, retail and residential. Its many projects include Ponce City in Atlanta, a redevelopment of a former Sears catalog facility; Ghirardelli Square in San Francisco; and Constitution Wharf in Boston. Jamestown boasts a high level of creativity and an opportunity for Simon to diversify, at a time when the math of running an enclosed retail-dominated mall doesn’t add up, according to Shlomo Chopp, managing partner at real estate advisory firm Case Property Services.
“I think there’s a place for malls, and I also think there’s a challenge with regards to a lot of these boxes and anchors,” Chopp said by video conference. “You could argue whether Macy’s is a great anchor or not, or J.C. Penney remains an anchor worthwhile to draw people, but at the end of the day it’s a numbers game, right? Your whole gig all along was that you got a lot of people coming to the property. Now, you don’t.”

For REIT investors, diversification isn’t usually a plus, because investors want “pure bets,” according to Nick Egelanian, president of retail real estate consultancy SiteWorks. But though Simon Property Group has unloaded some of its enclosed malls, they remain a large part of its portfolio, he said.
“Simon needs diversification,” Egelanian said by phone. “They have to be able to demonstrate competency in something other than enclosed regional malls. It’s about time. They’ve built some open air centers, and they’re okay. It’s not their core competency.”
Simon needs to rethink and revamp the department store-dependent malls that define its business, and that will take immense investment and a different kind of expertise, according to Egelanian. Simon owes much of its success to its size and power in the market, but that level of domination won’t solve the problem of how to reuse the cavernous space left by a departed anchor, which will take creativity and an investment of about $1 billion per mall on average, he said.
“So now Simon is partnering with a company that’s one of the most clever and nimble, which will allow them to actually be clever and nimble,” he said. “Because they’re going to be in a different world — some of their malls will act like malls and some of them will act more like mixed centers. They’ll go different ways, at different times, in different formats, but they’ll happen, and this is the kind of expertise they need to do it.”

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Simon: Malls don’t suck. In fact, they’re doing well

With occupancy and rental income up last quarter, the head of the nation’s largest mall owner wants to put an end to “the so-called negative mall narrative.”

Simon Property Group CEO David Simon said on the REIT’s third-quarter earnings call that “many have tried to kill off physical retail real estate and in particular enclosed malls,” but the company’s ample dividends paid to shareholders during the pandemic is a sign that it has become more “stronger and more profitable.”

Technically, however, last quarter was less profitable for Simon.

Simon acquires 50% of Jamestown
Victory! Simon says it has overcome Covid as earnings bounce back
“We kicked the crap out of ‘21”: Largest U.S. mall owner claims comeback
The company’s third-quarter funds from operations were $1.11 billion, or $2.97 per share, a slight drop from the $1.18 billion figure from Q3 of 2021. Net income was $539 million, down from $679.9 million during the same period last year.

Still, Simon said the company still had a good quarter internationally despite the strength in the dollar, with growth driven by higher rental income. Simon also cited lower contributions from the company’s other platform investments.

Base minimum rent per square foot was $54.80 as of Sept. 30, which was up from $53.91 a year ago. Occupancy was almost 95 percent, up 1.7 percentage points.

Though Simon has been bullish on malls, the firm has also been diversifying, announcing last month that it would buy half of real estate investment firm Jamestown. The deal is expected to close this year. Financial terms were not disclosed.

Heading into the holiday season, the CEO called high inflation and interest rates concerning, though he expressed confidence in physical retail. Many mall owners are adapting or redeveloping their properties to adjust to consumers’ changing habits.

“I still feel like demand and bricks and mortars is where the action is going to be,” he said.

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Companies still have way too much office space, and they can't sell it

The amount of commercial real estate available for sub-lease is roughly equal to eight Amazon HQ2 towers.
Other than high-use leases such as medical offices and laboratories, few lease holders can find buyers or tenants for unused office space.
Companies that own their own campuses will likely wait out the current market, even knowing prices may further deteriorate.
Collin Madden, founding partner of GEM Real Estate Partners, walks through empty office space in a building they own that is up for sale in the South Lake Union neighborhood in Seattle, Washington, May 14, 2021.
Collin Madden, founding partner of GEM Real Estate Partners, walks through empty office space in a building they own that is up for sale in the South Lake Union neighborhood in Seattle, Washington, May 14, 2021.
Karen Ducey | Reuters
A few things we know about corporate real estate: it's a focus of cost-cutting for companies, but it's also probably the last asset you want to sell now in a soft market.

How soft? According to Elizabeth Ptacek, senior director of market analytics at commercial real estate information and analytics company CoStar, there is currently 232 million square feet of surplus commercial real estate up for sub-leasing. To put those numbers into perspective, Amazon's HQ2 is 8 million square feet. Even more telling, the 232 million square feet is twice the level of surplus from before the pandemic.

CFOs have told us that as their companies go to hybrid work and corporate hub models that make less use, if any use, of satellite offices, there is real estate to be sold. And they aren't selling it now. Ptacek says that's the right decision.

The only property owners selling today are either desperate for cash or they are sitting on trophy assets. And those trophy assets are few and far between. Well-leased medical offices and laboratories with high credit score tenants and secure income streams are still attracting plenty of attention from investors, according to CoStar, but that's about it. Any corporation that has abandoned a satellite office that used to be key for its in-office staff, is sitting on a property that Ptacek says, "no one will buy for anything less than a substantial discount."

Between the shock to commercial real estate from the remote work trend, followed by the higher interest rates and the prospect of another recession, now is no time to sell even if Ptacek says commercial real estate owners should expect it will get worse yet. CoStar projects that the sub-leasing surplus will persist as companies worry about needing to lay off workers and make other cuts ahead of a recession, and it goes further: the subleasing square footage will never return to the pre-pandemic level, she said.

The slowdown in investment activity that Ptacek described as a gradual slowdown so far, will become a "dramatic slowdown" after the pipeline of deals signed in Q2 and Q3 before rates started to rise are closed. "The bigger impact is ahead of us, and absolutely the higher borrowing cost will have an impact, and in many cases, eliminate the levered investors," she said.

It's a bad situation, but she said that for owners of corporate real estate, if the cost of real estate debt is cheap and the balance sheet is solid, sit on the real estate.

With companies still in the early days of their hybrid work experiments, it's not just economic uncertainty but uncertainty about how in-office occupancy trends over time which should make companies want to hold off pulling the trigger on asset sales. Leases that were up for renewal were an easy call to make (end it), and firms can always sign new leases (likely at even better rates) if and when they need to make that call.

"It's all still shaking out and you see it, you see the big companies one day fully remote and the next day signing huge leases and telling everyone, 'Back in the office,' and then the minute they do employees express consternation and they say, 'Never mind.' It's all very much in flux," Ptacek said.

Uncertainty is the ultimate deal killer, she said. No one wants to buy assets with the risk of no demand barring rent cuts of 50%. It's difficult right now, she said, for either buyer or seller to reach what would be defined as a "reasonable price."

Companies should expect the situation may be even worse a year from now.

"It's probably a fair assumption that this is not going to be a lot better in a year, in terms of demand," she said. "There could be another leg down in transactions."

The wave of distressed sales that usually occur in downturns have not occurred yet, and that is right on schedule, as they tend to lag the start of downturns by a few years. Ptacek noted that after 2008, the peak in the distressed asset sales wave didn't occur until 2010/2011.

"As loans come due and they have difficulty, it's refinance or sell," she said. And more borrowers won't be able to refinance, and the wave of distressed sales will ensue. "There will likely be some level of distress which will weigh on pricing, so you could as an owner find yourself in a position in a few years where the environment is even less favorable. But it's not like it's a good environment today," she said.

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Majority of Maturing US CMBS Conduit Loans Can Refinance​

Fitch Ratings-New York-03 November 2022: Maturing US CMBS loans have elevated refinancing risk with rising interest rates and a weakening macroeconomic outlook, Fitch Ratings says. Nearly $26.5 billion, or 1,493, of non-defaulted and non-defeased conduit and agency loans within Fitch-rated multiborrower transactions are maturing by YE 2023. These loans’ combined weighted average coupon (WAC) of 4.70% is well below current market rates.

In Fitch’s current report, Rising Rates Stress Refinanceability of Maturing U.S. CMBS Conduit Loans, we conducted three plausible scenarios to determine if the loans are able to meet certain debt service coverage ratio (DSCR) and loan-to-value (LTV) parameters in order to secure refinancing. At a 6.75% market interest rate, our analysis shows 65% to 68% of the maturing loan volume is able to satisfy the two DSCR scenarios, based on a threshold of 1.25x for an amortizing loan and 1.40x for an interest-only loan. In the LTV scenario, which sets a maximum 75% LTV, 72% is able to secure refinancing based on current market capitalization rates.

However, 23%, or $6.2 billion, of maturing volume would not be able to refinance under any of the scenarios. NOI growth averaging at least 1.5x current in-place NOI, or a new equity infusion that deleverages existing debt by at least one-third, on average, would be needed to pass the refinancing thresholds.

Fitch’s surveillance analysis applies higher refinancing constants of 9%–12%, providing at least 200bps of rate cushion. Rating actions will likely be concentrated in Rating Outlook revisions to Negative from Stable, as we already account for these potential maturity defaults in our surveillance methodology.

We expect servicers will grant loan modifications and extensions for stable performing assets and those with committed borrowers. Fitch believes servicers are appropriately staffed to address the $6.2 billion of potential maturity defaults for loans unable to refinance under any of the scenarios, which is below the peak volume of coronavirus-related transfers to special servicing in 2020 and 2021.

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The party is over in commercial real estate. Here’s what to expect in 2023.

The $21 trillion commercial real-estate market faces a deluge of debt coming due, at much higher rates​

An era of cheap debt that helped lift prices on hotels, office buildings and other U.S. commercial properties to dizzying new heights has ended.

Borrowers thirsty for financing have watched mortgage rates roughly double in 2022 from the 3% lows, spillover from the Federal Reserve’s inflation fight that could cost several million people their jobs.

Higher financing costs already were a concern for 2023, with billions of dollars worth of older commercial mortgages coming due. Adding to the woes, top tech titans, including Meta Platforms META , in recent weeks have retreated from splashy office leases.

“You had all these large tech companies signing big new leases, which was getting the market comfortable with the idea that the office sector was going to recover over the longer term,” said Greg Handler, head of mortgage and consumer credit at Western Asset Management.

Now, one of the few brights spots in the near $21 trillion commercial real-estate market has become another headwind, Handler said. “It raises real questions about who is going to pick up that extra square feet, and at what price.”

Property puzzle​

Insurance companies and banks often make commercial property loans to hold on their books, while Wall Street packages up the debt into bond deals.

Issuance of bonds, called commercial mortgage-backed securities, or CMBS, has been a driving force in property finance for decades. But this year, “conduit” bond issuance backed by multiple borrowers and properties collapsed as mortgage rates topped 7% (see chart), according to Deutsche Bank research.


Landlords tend to default when debt comes due and financing dries up, a situation that can be exacerbated when a property’s cash flows or valuation falls.

While public markets this year repriced commercial real estate dramatically lower, private markets have yet to budge much from record levels, despite historic losses in stocks, bonds and other financial assets.

The Dow Jones Equity REIT Index DJDBK was on pace to shed 25% this year, a worse drop than the S&P 500 index’s SPX

roughly 17% slide, according to FactSet.

“The bigger issue, I think, is going to be how do the borrowers refinance,” said Alan Todd, head of CMBS research at BofA Global. “And that’s not just on office. It’s if you’re in a property where now valuations are lower, your rate is significantly higher, how are you going to refinance successfully?”

What if prices tumble 30%​

Commercial property prices cooled slightly in recent months, but still were up 7.3% on the year through October, according to the RCA CPPI index. What’s more, prices were an eye-watering 123.5% higher from 10 years ago.

Todd at BofA Global thinks property prices could drop 20%-30%, then see an uneven recovery. “You’re talking about a secular, not cyclical, change for certain property types, whether those are regional malls or some of the lower quality offices,” he said. “Some of those could be fairly problematic.”

Even so, Todd doesn’t foresee a deluge of foreclosures, distress or the magnitude of losses that followed the 2007-2008 global financial crisis, since many lenders now have more leeway to work with borrowers to wait out the storm.

Borrowers might also tap into equity taken out of properties to fund tenant improvements or to get a new loan. “We’ve had 10 years of cash-out refis, so you gotta believe they have money they can cash in,” Todd said.

Analysts at Morgan Stanley estimate that some $300 billion in “dry powder” also sits on the sidelines, which potentially could be deployed and limit the slide in property prices.

Although, with sales volumes largely stuck in a rut, any buyer trying to estimate where property values might ultimately shake out is taking a stab in the dark. The Fed also expects to keep borrowing costs up, until inflation finds a clear path down.

“There is an estimated $450 billion of loans that comes due in each of the next four years,” said Rich Hill, head of real estate strategy and research at Cohen & Steers, a real assets-focused investment manager. “The market is having to come to the reality that the days of cheap money are gone.”

Still, Hill sees commercial real estate heading into 2023 on relatively solid footing, given prudence from lenders in the past decade and his firm’s forecast for net-income and earnings growth to remain higher if the U.S. economy sinks into a recession.

“It’s likely that property values fall in the next 12 to 24 months,” he said. “But in an environment when cash flows are good, I don’t think lenders will sell distressed properties into a challenging market.”

David Goldsmith

All Powerful Moderator
Staff member

Distressed Asset Specialists See Deals In Reckoning That 'Dwarfs '08 Collapse'​

Castles, gold mines, decommissioned missile silos and entire brands like Polaroid and Tommy Bahama’s. Hilco Real Estate Senior Vice President Steve Madura, whose firm specializes in distressed assets, has sold it all, but soon he expects an onslaught of a much more common type of property: CRE.
“The process is the process, and it works for any asset class,” Madura said. And increasingly, he sees this process put to work for commercial real estate.
The next couple of years, when roughly $500B in commercial mortgage loans will require repayment or refinance, per the Mortgage Bankers Association, will “dwarf the 2008 financial collapse,” Madura said.
Refinancing with rising rates will lead to “a reckoning,” with borrowers in a “world of hurt,” and whereas the financial mess of 2008-2009 was caused by bad decisions around the financing of needed assets like single-family homes, the question about the long-term utilization of certain commercial real estate assets may lead to more trouble.
Experts in distressed assets see this moment as an inflection point, and one likely to lead to high demand for their services throughout 2023. The combination of rising interest rates and a basically frozen capital market, coming after a period of low interest rates, has created what Madura calls a “distress bubble” that will impact CMBS, private lenders, private equity and eventually main street.
“Distress is becoming apparent much sooner in the process,” he said.

Distressed asset specialists see increasing focus on office space in 2023.
Andy Graiser, co-president of A&G Real Estate Partners, a real estate specialist that, among other things helps renegotiate or terminate leases, or find subtenants, has tracked the same market slowdown. Obtaining financing and closing deals has become much harder, he said.
“Lenders are being a lot more aggressive with their borrowers,” Graiser said. “Before they worked with them a little bit more, because it wasn’t en vogue to foreclose. Now, because of all the financial stress that's out there, and Covid is in the rearview mirror, some of these lenders and some of these private institutions are getting a lot more aggressive, sharpening their elbows and forcing sales.”
Madura has been monitoring a spike in CRE-related bankruptcies since October that he expects to continue and make the second quarter of 2023 extremely busy for his firm. Many investors are holding on to dry powder, slowing down acquisitions because “they see distress, which equals opportunity.”
Many distressed asset specialists have seen the demand for their services ramp up, and many are staffing up in anticipation of increased deal volume and opportunities.
And they all think that office space that isn’t Class-A or a trophy building will suffer. Graiser said he “doesn’t see a floor yet,” in terms of where the office market will drop, and broadly speaking, believes this downturn will produce “permanent resets” in the way many sectors operate.
“There are huge rows of office buildings in Chicago with 50% vacancy rates,” Madura said. “You want to convert so many office buildings to residential? That only goes so far.”
Distressed assets can refer to all manner of properties, but often come from two main categories; bankruptcy and distress, when an entire business is having financial trouble, or specific assets a firm wants to shed due to underperformance or other financial issues (perhaps they borrowed too much to acquire the specific asset and aren’t able to refinance). Hilco, which splits its business equally between those extremes, counts among its largest clients firms like Lowe’s and Starbucks that are far from financial distress. A&G finds itself involved with many firms that simply seek portfolio optimization.
There are as many different players in the market as there are reasons a firm may come across challenging times. Firms like Ten-X auction off distressed real estate, while Gordon Brothers liquidates industrial equipment and machinery. Hilco, which covers numerous sectors, hires specialists across different property types. There’s a hospitality practice within the firm, one that works on golf courses and resorts and one for industrial property.
Many owners exist in limbo right now, Madura said, waiting for the other shoe to drop. But he expects as more refinancing becomes necessary, owners will start looking for ways out. The firm predicts sectors hit by the pandemic such as leisure entertainment, as well as healthcare, like hospitals and surgery centers and senior living, will present opportunities next year, and Madura is gearing up for 60-80 hour weeks starting in Q2 of 2023.
A&G’s Graiser said they’ve seen an upswing in business since the second half of 2021, with larger and larger firms finding themselves impacted by market conditions. That includes office space, which he predicts will face turmoil in the short and medium term because there’s just so much inventory that needs to be absorbed.
There’s capital sitting on the sidelines, Graiser said, and some have suggested waiting out the distress to get better deals later in 2023. But it may not pay to wait; if there’s a good asset and the numbers work and you have the money, grab it, the demand is out there.
Virgilio De La Piedra, founder of Oceanica Capital Partners, said there are assets out there trading at half their value from a few years ago. The tricky part to realizing the discount is often raising capital, which has become more challenging with higher interest rates, jittery investors and slower capital markets.
“A lot of people are afraid of office, they believe that office is done,” he said. “Understandably, people are scared, but I think that if you find a good office deal in a good location and attractive terms … there's a bunch of smart managers out there that see the opportunities and would love to invest.”
Special servicers, who handle payments and communication for loans that have slipped into default, are seeing more and more properties fall under their purview. Firms that deal in distressed assets are also focused on staff that can assist with receivership, and holding onto and managing properties as they’re unwound from bankrupt owners and sold to new owners. Hilco may see a 15% growth in headcount in 2023, Madura predicted. Graiser believes their firm won’t expand, but the consultants they work with will see plenty of extra business.
The need for more workers stems in large part from the industry’s tight time frames; Madura’s typical timeline to close a deal is 90 days. That’s one reason the sector has seen increased utilization of tech and software in recent years. Hilco uses different project management software to help organize the three-month sprints that typically unravel assets from old owners.
And there’s also perhaps surprising investment in search engine optimization and social media. Madura said that most people don’t expect bankruptcy, or have the number of a specialist on hand, and a referral from a post, which an owner or lender may come across in a rush during an emergency, can be surprisingly lucrative.
The nature of the industry can seem somewhat dark; in many cases it can be cast as finding a profit or upside in someone’s downfall. But Madura sees it as making the best of a bad situation.
“We understand that this is not just dollars and cents, this is somebody's life and livelihood,” he said. “We take this very seriously and pride ourselves as being sensitive to the humanity of all this.”

David Goldsmith

All Powerful Moderator
Staff member
Looks like LinkedIn might finally be catching up with me!

David Goldsmith

All Powerful Moderator
Staff member

A fifth of M&T’s office loans in danger of default​

Bank discloses short-term refinancing risk as rates continue to rise​

As rising rates bear down on commercial landlords with loans coming due, M&T Bank reported early signs of distress in the fourth quarter, particularly among its office building loans.
About 20 percent of its $5 billion office lending portfolio is criticized, meaning those mortgages are in danger of default, chief financial officer Darren King said on an earnings call Thursday.
Those office mortgages, which comprise about 10 percent of the bank’s commercial real estate lending, are concentrated in the Northeast. About 15 percent cover office buildings in New York, King said.

“If we talk about our expectations for charge-offs as we go into this year, that’s the place where we’d have the most concern,” the CFO said, referring to loans written off as losses when a bank believes it can no longer collect on the debt.
M&T is known for multifamily more than office lending. The bank said the vast majority of its real estate loans, which totaled $45.7 billion in the fourth quarter, are due in 2024 or later, meaning deeper signs of distress are not imminent.

Still, King said the bank was stress-testing vacancy and leasing rates among its office portfolio to “make sure we’ve got adequate coverage.”
In addition to that short-term refinancing risk, King said a long-term concern is the increasing number of baby boomers reaching retirement age, which could deliver another blow to office occupancy.
Across its total lending portfolio, which includes consumer loans and residential mortgages, the bank reported a 3 percent uptick in serious delinquencies — loans 90 days past due — to $491 million from the third quarter to the fourth.

Though modest, the increase is a swift reversal from previous quarters.
For more than a year, the bank had managed to drive down delinquencies from the more than $1 billion in the second quarter of 2021 as borrowers struggled through the pandemic.
More delinquencies are likely the result of higher financing costs as loans come due.

The bank said its commercial real estate lending portfolio decreased by $592 million or 1 percent in the fourth quarter from the third. King blamed fewer construction loans.

“Within the commercial real estate portfolio, the biggest trend that we’ve had going on for probably the last four quarters is just the reduction in the construction portfolio,” King said.
Though many construction projects started in late 2018 into 2019, fewer originated during the pandemic, the executive said.
As construction has wrapped on projects financed before the pandemic, their loans have turned into “permanent mortgage financing, oftentimes, not on our balance sheet,” the executive said.

Meanwhile, the increased cost of building materials and labor has weighed on new project filings and loan originations.
Despite those headwinds, the bank reported diluted earnings per common share of $4.29, a 27 percent jump from the same quarter in 2021 and 21 percent above the third quarter.
That earnings power was ushered in by rising rates. The bank saw net-interest income — the difference between interest paid and interest earned —jump $150 million or 9 percent in the fourth quarter compared with the same period in 2021.

David Goldsmith

All Powerful Moderator
Staff member

$16B in CMBS loans nearing cliff in NYC​

Challenged borrowers may be unable to kick can down road​

Commercial mortgage maturities are piling up in New York City as higher interest rates and recession anxiety make refinancing a major challenge.
More than $16 billion in loans secured by New York City commercial properties are set to mature this year, according to data from Trepp. That’s almost 30 percent more than the $12.7 billion that came due last year.
This swell of maturities is in part because borrowers kicked the can down the road over the past three years by exercising extension options on their loans. But that life preserver may no longer be available.

Trepp’s Manus Clancy said that while a significant portion of those maturing loans have extension options, borrowers can no longer take for granted that lenders will agree to their requests.
“It’s not a slam dunk,” he said, explaining that lenders may be hesitant to extend loans on struggling properties.

Major loans coming due this year include a $783 million mortgage on Aby Rosen’s Seagram Building and a $485 million loan on Tishman Speyer’s 300 Park Avenue.

With the Fed hiking interest rates to fight inflation, property owners face a harsh reality. Any new debt they take on will cost much more than the loans they’re replacing. At the same time, the specter of a recession has many end users — such as office tenants and hotel guests — pulling back, which leads to falling property values.
Many owners at their refinancing date are seeing two unappetizing choices: walking away or throwing good money after bad.

And while offices have gotten a lot of the attention, it’s not the only struggling property type. Several New York City hotel properties went into foreclosure in 2022, and some national apartment portfolios have recently come under stress.
“We’re starting to see some news in multifamily distress,” said Xander Snyder, an economist at the title insurance firm First American Financial Corporation.

Snyder said that with the CMBS market slowing, alternative lenders including mortgage REITs and debt funds are stepping in to refinance properties, though at a higher cost.
“That’s always going to impact returns, there’s just no way around that,” he said.
For many struggling borrowers, 2023 may be the end of the line.
Michael Cohen, founder of the CMBS workouts shop Brighton Capital Advisors, said many office properties with maturities this year have relatively short leases in place, a result of tenants refusing to commit to their offices long-term.

Hotels that got through the early days of the pandemic did so by extending their loans and dipping into reserves that by now have run empty. Cohen said the days of putting Band-Aids on busted deals are over.
“There’s no more extend and pretend,” he said. “I can tell you that with 1,000 percent certainty.”