South Korean Investors Lose on Risky Office Bets

Some South Korean investment groups that made heavy bets on underwriting U.S. office tower debt have rolled snake eyes, according to a Bloomberg report. It might be something for others interested in investing in office debt to consider.

IGIS Asset Management had provided subordinated debt for 1551 Broadway in New York City, with its American Eagle store anchor. However, a source told Bloomberg that the company had “decided to cut its losses” and sell its position “at a hefty discount.”

Trepp had reported that the building was one of the largest newly modified loans in May 2024. Originally scheduled to mature in July 2021, it defaulted in November of that year after a 120-day forbearance period. American Eagle had three stories of 25,600 square feet of space but the lease ended early this year. The retail rent was two-thirds of the base rent, with 25 stores of LED signage spread across 12 separate screens and 14,500 square feet made up the rest. Valued at $360 million in 2011, it was revalued in 2022 at $442 million but lowered later that year to $378 million and most recently reappraised at $359 million. The maturity date was reset in May 2024 to December 2025.

Another South Korean firm, Meritz Alternative Asset Management, was a mezzanine lender on the 1.4 million square feet Gas Company Tower in Los Angeles. In 2023, the property was appraised at $270 million, which was down 56.7% from the $623 million valuation in 2021. This year, according to a post by Trepp, the value fell an additional 21% to $214.5 million.

“They bought into these positions not fully prepared structurally to deal with the downside scenario,” Spencer Park, an attorney at Milbank who has advised Korean mezzanine investors, told Bloomberg. “Where the situation did go south or did not perform well, they were a bit paralyzed and they were wiped out, or they were forced in a situation where they were behind the eight ball.”

It would be too easy, though, to consider this a problem for South Korea. Sophisticated investors in the U.S. as well have found themselves having made decisions that proved to be questionable. Investors in the AAA tranche of the $308 million debt backed by 1740 Broadway in midtown Manhattan only got 74% of their investment back after the loan sold at a steep discount. Creditors in the five lower groups were wiped out.

And another part of the CRE-backed bond market is seeing more defaults than was ever supposed to. The single-asset, single-borrower (SASB) bond market, an estimated $260 billion worth, is feeling the tremors. The loans backed the purchase of major office and retail assets. The investors are institutional investors like pension funds, insurers, and banks.

These are major office spaces that are supposed to be above the fray, not B- or C-Class buildings that are supposed to be the leftovers. Perhaps CRE will move ahead on the crest of a soft landing, but there may be a lot of surprises yet to come.