Even Some of the 'Safest' CRE Bonds Are Getting Hammered

If anything has proven itself during 2024 in commercial real estate, it’s that top-rated securities backed by solid real estate assets can blow apart and leave investors whimpering.

What a shame this lesson has to be retaught since the last tutorial during the Great Recession.

The material review started in May when it became clear that 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 completely wiped out.

Bloomberg has since named other investment disasters of properties and deals that were supposed to be beyond reproach. The deals tend to be structured as single-asset, single-borrower (SASB) bonds.

Bloomberg analyzed “almost every” of these SASBs tied to a U.S. office — 150 in all. The research showed that creditors in many of these deals will likely get only a percentage of their original investment returned. “In multiple cases, the losses will likely reach all the way up to buyers of the AAA portions of the debt,” Bloomberg

One was 1407 Broadway, again in Manhattan, a 43-story tower with a roster of solid corporate tenants. In 2019, the owners offered a bond that got a AAA rating. That’s even better than U.S. Treasurys. How could an office building of such quality have a problem? The answer came when the building’s owners failed to pay the full $1 million interest payment. Wells Fargo Bank, as trustee for the bond investors, filed for foreclosure this year.

“As set forth below, Borrowers, among other things, failed to make payments under the Loan Documents including, without limitation, the interest payment due in August 2023 and principal and interest payments due upon maturity of the Loan (as defined herein),” the complaint read. “To date, these Events of Default (as defined in the Loan Agreement (as defined herein)) continue to exist.” The foreclosure notice sought the unpaid principal of $350 million, interest, attorneys fees, costs, expenses, and more.

Another property is River North Point in Chicago with the A tranche 28% underwater. For 555 W. 5th St., Los Angeles, 51% of the A tranche is in trouble. The Aspiria Office Campus in Overland Park, Kansas is doing better, with trouble starting only at the C tranche.

The structure of these loans carries the danger. Conventional CMBS loans can be spread over hundreds of property loans. The single-asset and single-borrower concentrates risk.

This doesn’t mean that all these loans are doomed, however. Demand for them is still up when the collateral is new and in prime locations.