Here Come the Long Office Loan Mods

Two large CMBS loans backed by venerable Park Avenue trophies that had landed on Trepp’s “watch list” recently negotiated extensions.

Tishman Speyer got a one-year extension with additional a one-year extension option for a $485M CMBS loan that had gone into special servicing. Backing the loan was 300 Park Avenue, a 26-story building dating to 1955.

Last month, New York-based RFR Realty negotiated a one-year extension, also with a one-year extension option, of a $1B debt package, including a $783M CMBS loan, on the Seagram Building, 375 Park Ave., in a modified package that includes an infusion of equity from RFR.

Expect more of the same, says Moody’s Analytics CRE, which recently pointed to class A bonds (CGCMT 2013-375P A) on the Seagram Building “to evaluate the current market expectations,” wrote Matt Reidy, director of CRE economics on the CRE thought leadership team at Moody’s. He says broker dealers are offering the bonds at $92.25. “The current offering price indicates a market expectation that the loan will not payoff until year four, the term at which the AAA CMBS yield and the yield on 375P A are both 5.45%.”

“This example shows, the market currently expects office maturities to be extended for a significant length of time,” he wrote, adding. “This example shows, the market currently expects office maturities to be extended for a significant length of time.”

Those are the whats. What about the whys? Two major reasons for the development come to mind. First, lenders don’t want properties on their hands. In this market, where would they unload? If a lot of loans hit the skids and the lenders took the keys, there would be so much inventory on the market that instead of fire sales, the likely result would be a massive blazing conflagration extinction event. lenders would write off huge amounts, individually and collectively.

That leads to reason two, an unplanned but necessary collective one. If you want to know what happens when reality comes knocking at your balance sheet’s asset valuation door, look at banks like Signature, Silicon Valley, and First Republic that couldn’t withstand the gales of mark to market when it came to their long-term bond holdings, including Treasurys, which have to be one of the safest investments you can make. If you can hold them to maturity. If not, a run up of interest rates can leave their values in tatters.

If suddenly many office loans are on the markets and prices go plunging, it’s not only a write-off on the buildings for sale but could argue for wholesale value reassessments on what lenders are carrying and what the value of all office property might be. That’s something no one in the industry wants to confront.