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Workspace firm latest to restructure debt in Garden State
WeWork filed for Chapter 11 bankruptcy protection in New Jersey, marking the seventh large bankruptcy case filed in the state in the past year. The co-working firm is one of many struggling companies that have filed for bankruptcy in the state, with the state's share of bankruptcies with at least $100 million in liabilities rising from below 2% to 5% in the last 12 months, according to New Generation Research. Other major companies that have filed for bankruptcy in the past year include David's Bridal, Bed Bath & Beyond, and Rite Aid. WeWork has been working to ditch dozens of leases, including around 40 in New York, and has previously told investors it will "try to renegotiate" nearly all of its expensive leases.
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Charles Cohen, a Midtown office owner, has been struggling with tenants and cash in his eight midtown office towers, most of which are around 40 years old. The occupancy rate has fallen to 54% at 3 Park Ave., and the headquarters building for Cohen's firm at 750 Lexington Ave. is facing higher loss expectations. The largest tenant is WeWork. Fitch Ratings reported a 34% drop in net cash flow at 805 Third Ave., known as the Crystal Pavilion, as vacancies grew to 40% at the 31-story, 600,000 square-foot tower. Fitch expects a 25% loss on the building's mortgage, which is more than 60 days delinquent.
Cohen's family real estate enterprise, Cohen Brothers, is delinquent on more than $600 million worth of loans. Lenders could seize Cohen's holdings if he defaulted, but they generally prefer to restructure a mortgage than take custody of an office building. Cohen's buildings are mostly Class B properties, and he has a net worth of $3 billion. The city has put together a package of tax breaks to encourage office landlords to fix up older buildings. The largest tenant is Meredith Corp., publisher of People and Better Homes & Gardens, which rents 36% of space in a lease that expires at the end of 2026.
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WeWork's bankruptcy filing in November has raised questions about the future of the coworking sector, as many high-profile firms have become synonymous with the industry. Lower-key coworking firms like Industrious and Quest Workspaces are still looking to expand, and several major landlords are launching coworking-style options. The flexible office market may not lead to widespread changes predicted during the heady 2010s, but it is not going anywhere. Landlords looking to survive in the bleak commercial real estate market in the city will need to determine how the option fits into their portfolio sooner rather than later. The Spiral in Hudson Yards, designed by Tishman Speyer, has inked massive leases from tenants including Pfizer, Debevoise & Plimpton, and HSBC. The building is home to two floors of Studio, Tishman Speyer's in-house coworking option, which has seen a resurgence since the pandemic. Most Studio locations now have a waitlist, and the newest option, Camp David, at Industry City's Sunset Park campus, also leased up the fastest.
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New York City's office market is facing a significant decline, with attendance at 50% for over a year and many employers giving up on rehiring workers. Industry experts and political leaders are advocating for more workers to work from home, as many white-collar workers refuse jobs that cannot be done remotely. Mayor Eric Adams has called back city employees to the office five days a week last year, but many white-collar workers refuse jobs that cannot be done remotely. City Comptroller Brad Lander has determined that a 40% drop in office values wouldn't necessarily be dire, as it would translate to a 17% fall in assessed values and trigger a $1.2 billion shortfall in tax collections in 2027. Some believe that the office market has gotten as bad as it will get, with people seeking premium office space for the experience side of things for their employees.
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GDS, Sabal team with lender Aareal Bank to acquire office building’s debt
Bargain hunters have acquired distressed debt on the office portion of the Met Tower building, potentially leading to one of the first big takeovers in the Plaza District. GDS Development Management and Sabal Investment Holdings entered into a joint venture with lender Aareal Bank to buy the defaulted loan backing L&L Holding's office portion of the 68-story, mixed-use tower at 142 West 57th Street. The new owners did not elaborate on their plans for the property, but the purchase by experienced operators is a sign that they will seek to foreclose and take it over. A Newmark team led by Adam Spies and Dustin Stolly marketed the debt. GDS and Sabal received the $92.5 million loan at a slight discount. Aareal Bank had put the loan up for sale earlier this year, but its decision to stay in the joint venture indicates that it was not willing to let it go for a steep discount and had faith that a new operator could stabilize the property.
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Jeff Blau’s firm, nonprofits poised to grab rent-regulated debt
Blackstone is aiming to win $17 billion in commercial property loans from the FDIC's debt sale of Signature Bank's failed assets, secured by retail, office, and industrial assets. Other bidders include Starwood Capital Group and Brookfield Asset Management. Blackstone is in discussions with Rialto Capital to help service the loans. Related Companies affiliate is the leading contender for a 5% stake in $15 billion in Signature loans backed by New York's rent-regulated apartments. The properties' value has declined since the state overhauled rent stabilization in 2019, and New York Community Bank snubbed those loans upon buying the rest of Signature's assets. Related Fund Management, in partnership with nonprofit housing groups Community Preservation Corporation and Neighborhood Restore, is the leading contender for the rent-regulated loan portfolio. The FDIC plans to keep a 95 percent stake in the rent-regulated portfolio as part of its statutory obligation to protect low-income tenants.
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TRD on the problem with pricing and how Signature loan sales could change it
The New York City real estate landscape is currently in turmoil due to a decrease in deals and uncertainty. This has led to fewer comparable sales to gauge value, and the lack of clarity is particularly pronounced for office properties. NYC office sales are half of last year, and some landlords have returned buildings to lenders instead of discounted offloading. However, the impending sale of Signature Bank's $33 billion commercial loan book could potentially change this, with bidders expected to discount loans by 15 to 40 percent, resetting commercial property values in the city. However, office owners may face a conservative approach, as recent valuation drops for RFR and Kushner's Dumbo office complex reflect the broader challenges facing landlords. The industry may be desperate for price discovery, but buyers or sellers are likely to be unhappy with the answer. The most expensive residential closings on Friday were $8.6 million for a condo in Brooklyn Heights and $5.8 million for a building in Queens.
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Owners are scrambling to pay back lenders, throwing in more cash or facing default
The office sector is facing a credit crunch, worse than during the 2008-09 global financial crisis. Only one out of every three securitized office mortgages that expired during the first nine months of 2023 was paid off by the end of September, according to Moody's Analytics. This is the smallest share for the first nine months of any year since at least 2008 and well below the nadir reached in 2009, when 47% of these loans were paid off. The numbers cover only office mortgages packaged into bonds, reflecting a broader freeze in the lending market for office buildings. Remote work and rising vacancies have hit building profits, making it harder to pay interest. Higher interest rates have pushed debt costs up and building values down, fueling a rise in defaults.
The share of office CMBS loans that are delinquent has tripled over the past year to 5.75%. Many banks no longer issue new office loans and many insurance companies and debt funds have become more cautious. The office sector relies on a steady stream of debt, and landlords typically buy buildings with big mortgages and pay them off by taking out new loans or by selling. As interest rates and vacancies rose, that share dropped to 71% in the first nine months of 2022 and to just 31.2% this year. Not all troubled mortgages are headed for foreclosure, and lenders are willing to extend loans for a while at higher interest rates as long as landlords put in cash to pay them down.