The commercial real estate crisis is now creating painful losses as bonds plunge under water in the mortgage-backed securities market.
1407 Broadway, a highly regarded asset in Manhattan’s Garment District, was once considered an incredibly secure investment.
The 43-story tower, adorned with elegant marble and a bronze terrazzo entrance, attracted numerous affluent corporate tenants.
In 2019, its owners issued a $350 million bond backed by rental income, earning a AAA credit rating—indicating a level of safety even higher than U.S. Treasury bonds.
Investors believed the risk of default was virtually nonexistent.
However, on June 17, over four years after the bond’s issuance, investors learned they would not receive their full $1 million interest payment.
As a result, foreclosure proceedings have begun to recover what they can from the property, according to Bloomberg.
Similar situations are unfolding in other cities, including Chicago, San Francisco, and Los Angeles, where properties such as River North Point and 600 California St. are facing defaults.
In Manhattan, the old MONY building was sold at a fraction of its pre-pandemic value, leading to significant losses for some creditors, including a 26% loss for holders of AAA-rated bonds—an occurrence not seen since the financial crisis.
The commercial mortgage-backed securities (CMBS) market, particularly for a new type of bond known as single-asset single-borrower (SASB) bonds, is experiencing severe stress.
A Bloomberg analysis of over 150 SASBs tied to U.S. office properties revealed that many creditors will only recoup a fraction of their initial investments, with losses affecting even those holding AAA-rated portions of the debt.
Unlike traditional CMBS that bundle multiple loans, SASBs are tied to single properties, which heightened risks during the pandemic.
Prior to the pandemic, investors underestimated these risks, believing the AAA ratings were reliable.
The SASB market exploded to a $300 billion valuation in just over a decade, but the pandemic has revealed the vulnerabilities in this approach.
Experts predict that while some deals may incur significant losses, there is a growing demand for SASBs backed by newer, prime-location buildings.
So far this year, sales of new SASBs have reached $56 billion, nearing pre-pandemic levels.
Despite ongoing losses in the hardest-hit deals, there are signs of stabilization among certain distressed assets.
Investors are starting to buy these undervalued bonds, seeing potential opportunities amid the risks.
For example, the Gas Company Tower in Los Angeles, once valued at over $630 million, was recently appraised at just $215 million, leading its owner to surrender it to creditors.
Key metrics, such as the appraisal reduction amount (ARA), indicate significant discrepancies between outstanding loan balances and current property values.
At properties like 1407 Broadway and River North Point, ARAs suggest that AAA bondholders could face considerable losses while lower-tier investors may lose everything if the buildings are sold.
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