Even Mixed Use Is Turning Up in Special Servicing

As the hailstones of higher interest rates, banking weakness and unease, and uncertainty about work-from-home and hybrid models rapidly fall, many in CRE thought they had found an answer to the office conundrum. Go mixed use.

Cities that combined residential, office, and leisure as soon as possible into mixed-use will have more compelling offerings for people and companies that are looking for a new location, Moody’s Analytics CRE recently noted.

Perhaps, but a recent Trepp analysis may undermine presumption because recent data show mixed-use increasingly hitting the special servicing skids. If these combinations of office, residential, and retail aren’t showing greater debt service resilience, maybe they aren’t quite the fix as perception has suggested.

“Mixed-use and office were responsible for about 55.3% and 41.2% of new special servicing transfers respectively in this period,” Trepp wrote. “In total, $2.46 billion was transferred to the special servicer in May, and mixed-use and office made up $2.38 billion of that.”

The report and data present some difficulties in seeing this. Beyond the mentions of mixed-use in the second and third paragraphs, the data tables sorted by industrial, lodging, multifamily, office, and retail. Mixed-use will spill across three to four of these categories, so it’s impossible to see exactly what is happening.

If mixed-use offered a clear path around danger, you might suspect a significant difference in loan deterioration, although this data is from one month and it could be an anomaly.

Trepp offered an example that, given the description, likely includes mixed-use.

“The largest loan to transfer in April 2023 was the $1.1 billion Workspace Property Trust Portfolio (JPMCC 2018-WPT) loan,” they wrote. “The loan is backed by 147 properties, primarily flex office space. The debt was split into fixed and floating rate portions. The fixed-rate debt has a hard maturity date of July 2023, and that debt is split across four 2018 CMBS conduit deals. The floating rate portions also mature in July and there are no more extension options for the note. The original maturity date for the floating rate portion was July 2020 and that was structured with three 12-month extension options. Special servicer comments were sparse as to why the loan was transferred.”

The Seagram Building, 375 Park Avenue — mostly office but with two restaurants, a conference center, and recreation area — may not have apartments but falls into the mixed-use category. The loan it backs has moved into an extension to 2024 with an option for an additional year, including a need to make $40 million in additional principal payments over the next two years.

Maybe the success of mixed-use goes beyond the category itself and requires more other and less office. Better insights will likely come along in the near future with more data.