Trauma Bonding, Amazon Cometh & Office-Resi Reach Pricing

Trauma Bonding

Should a single office tower be deemed a less risky investment than US Treasury bonds? For a time, ratings agencies answered with a resounding yes, and blue-chip sponsors were only too happy to oblige, locking in AAA rated CMBS debt for their primo Manhattan and DTLA and SF buildings. These were, after all, temples of American commerce, and their tenants were as sure a thing as exists in CRE.

Then came Patient Zero, in the avatar of Blackstone’s 1740 Broadway: In May, bondholders lost $40M+ on the $158M AAA-rated chunk, and Barclays said at the time that it expected the list of examples to expand. Now, it has.    

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CMBS (Cont.)

A new deep dive by Bloomberg crunches the numbers on 150+ SASB (single-asset, single-borrower) office deals and finds that many are in various states of undress, including for AAA bondholders: “More than a dozen SASBs tied to offices that once held pristine credit grades are now quoted below 80 cents on the dollar, a common market threshold for distress,” the publication reported. As part of its analysis, Bloomberg tracked appraisal reduction amounts, which give you a timelier sense of how much of the debt is underwater, and help guide how much creditors receive in interest payments; a separate analysis by CREFC in July found that the rate of SASB loans in or near default has almost tripled over 2Y, to 8.7% in 2024.

In June, AAA bondholders of the debt on Shorenstein’s 1407 Broadway were informed that they wouldn’t be getting all of the $1M in interest due that month, and they’re in the thick of a foreclosure attempt. It’s a similarly sorry story at the WeWork/Rhone-owned 600 California in SF, and at Blackstone’s River North Point - rest assured, Blackstone once again bust out their “guys US office is only 2% of our gigantesque portfolio can you STFU already” lament.  

“There will be deals that are horrific, where the AAAs may not be paid off in full and there’s basically no bid for the asset,” TPG Angelo Gordon’s TJ Durkin told Bloomberg. “The investment community thought the real estate would never become obsolete. It ended up being wrong.” (Side note: TPG is also in the thick of a short sale of a Chicago office complex.) TPG and some of its peers (Ellington Management, Beach Point Capital, Balbec Capital) are now bargain-hunting on SASB debt deals.

BTW, don’t take this as a sign that SASB deals in other asset classes are suffering – in some cases, like industrial, they are roaring. Big asset managers tend to like SASB deals because they are less pesky to underwrite – who wants to chase down warehouses all over the Midwest? – and because they can get “bigger, chunkier allocations,” as one CMBS investor put it.    

Bonus: Check out our chat on Odd Lots about AAA office losses 

No More RealPage Brotherly Love

Philly has officially banned the practice of algorithmic rent-setting in multifamily, following in SF’s footsteps. Large landlords have routinely used software (most prominently RealPage) to guide what they charge tenants, and once Philly’s ordinance is signed into law landlords would face a fine of $2K/violation, plus open themselves up to being sued by tenants and the city.

“A lot of these [rental algos] are big black boxes,” Cade Underwood, aide to bill sponsor Nicholas O’Rourke, told Bisnow, while a RealPage spox said the bill ignored the “real issue: Philadelphia needs more supply of affordable housing.”

This RealPage mess – the Thoma Bravo-owned firm is the subject of a federal antitrust lawsuit – is among the biggest stories in multi (FBI raids, class-action landlord lawsuits, propaganda wars, fear among landlords that RealPage had quasi-monopolistic pricing power), and The Promote will have more on it in coming weeks.

Vanbarton’s Office-Resi Litmus Test

One of the faces of Manhattan’s office-resi movement is looking to understand just how big the payoff could be: Vanbarton is shopping 160 Water Street, per REA, a 24-story property that it bought a decade ago for $165M ($330-ish/foot) and is converting into 588 units. The article teases the pricing – always watch for the broker finesse of “could fetch bids well north” 😉 – of $900K/unit, or $530M - only 8 Manhattan deals of $500M+ have closed in the last decade, per the publication. Eastdil is marketing the tower, known as Pearl House, w/ emphasis on its 30K sf amenity spread (bowling alley, cold plunge 🥶)

Vanbarton (Gary Tischler, Richard Coles) had initially wanted $200M for the unconverted property in ‘21, before landing a $272M loan from Brookfield for the conversion job in ‘22. The developer, along w/ Nathan Berman’s Metro Loft, is on a spree of such projects: It’s in contract to buy nearby 77 Water for $95M, and is buying the Archdiocese of New York’s HQ for $100M+. Strong pricing on 160 Water could inform its exit strategy on those bets.

Interesting data point here: Manhattan office-resi projects now make up 40% of the 18K rental units coming online through ‘28, per Corcoran.

Amazon Cometh

After basically declaring that work-from-home is for losers, Amazon is showcasing its intent in office: In New York 🗽 , the firm’s in talks to take HSBC’s entire space at 452 Fifth, per Cuozzo, a 350K sf spread the bank is vacating in favor of its new (smaller) digs at Tishman Speyer’s Spiral. The landlord is Eli Elefant’s PBC, which has been through quite a ride at the tower: It struck a deal to sell the property to Andrew Chung’s Innovo for $855M, but Chung couldn’t raise the cash to close, so PBC pocketed his $30M deposit. It then went and raised $340M+ this May on the Israeli bond market through TASE bonds (more on the financing instrument here) to pay off the building’s JPM-issued debt. If Amazon does take the space, it has the tasty prospect of creating a Midtown campus akin to what Google did @ Chelsea Market: Next door to 452 Fifth, Amazon houses 2K employees at the former Lord & Taylor building, which it bought for $1.15B in ‘20 and tricked out.

Meanwhile, in Miami 🥥 , Amazon is finalizing a 60-80K sf spread at L&L & Oak Row’s under-construction Wynwood Plaza, per CO.

Quickies

• Value-added chutzpah: Tides’ Sean Kia, who bought a Brentwood manse for $14.5M last Y, just listed it for $25.5M 🫡 

• People keep giving Bruce Eichner money to build stuff 

• What actually happens in ZIP codes where large SFR landlords play? 

• Minskoff 🐩 sells Playa Vista office for $188M (bought for $413M in ‘16)

• Norges 🇳🇴 pays a handsome $1,600/foot for Menlo Park boutique office

• Audit finds “substantial doubt” that Charles Cohen’s firm can carry on after Fortress mess - catch up more here 

Unquotable Quotes

Happy Diwali 🎇 🪔 🎇: Tomorrow is my favorite holiday of the year, a celebration of prosperity. If you’re able to, spend some time w/ family, play some cards, light some lamps, & buy gold (not financial advice).