If the office property market is recovering, it still has a way to go.
Money managers who bought a $705 million commercial-mortgage bond tied to Manhattan’s Worldwide Plaza building are at risk of substantial losses after the property’s appraisal was slashed amid the departure of key tenants.
The 49-story skyscraper at 825 8th Ave. was recently reassessed at $345 million, according to loan documents, less than a fifth of its original $1.74 billion value when the debt was issued in 2017. That’s left holders of the once-AAA portion of the bond on track for losses of about $53 million, or 20%, should the property be sold, based on a key industry metric known as an appraisal reduction amount. Holders of $435 million of lower ranking debt are likely to be wiped out.
One of the key tenants has moved southwest to the Hudson Yards area and more modern premises. Another may be on the way out, but 825 Eighth Avenue is hardly a shabby venue. The massive cut in price is a reminder that the market remains spoiled for choice (Midtown Manhattan vacancy rates are around 22 percent, down a percentage point from a year ago) and of the distortion to prices brought about by the ultra-low interest rates of the mid-2010s. The scale of the losses incurred by some bondholders is also a reminder that the further a lender slips down the seniority scale (which determines who gets repaid in which order), the hairier things can get.
Over at Commercial Cafe, Ioana Ginsac looks at the broader picture and finds that “the national office vacancy rate was close to 19.4% in July, following an increase of nearly 130 basis points year-over-year.”
Interestingly (and ominously), loan maturities “are peaking,” meaning that it’s going to be increasingly difficult to, as the phrase goes, “extend and pretend.” In other words, more borrowers and lenders are going to have to deal with the consequences of what the properties they own (or are relying upon as security for the loans they have made) are really worth.
From last month’s Commercial Cafe:
Yardi Research estimates that about 14,000 office properties are encumbered by loans that have recently matured or that will mature by the end of 2027. That equates to 33% of all office loans and adds up to nearly $290 billion. Additionally, at the start of the year, Moody’s reported that the percentage of loans extended in 2024 dropped from the previous year and defaults increased. And, according to Trepp, office commercial mortgage-backed security delinquency rates rose to 11.08% in June, which marked a 3.5% increase from June 2024.
Whether or not the Feds should cut rates remains a matter of debate (spoiler: It should not), but it is not hard to imagine that participants in the office market would like to see that happen even more than they usually do.