During 2024, the office asset class — the property type facing the most widespread perception of being troubled — struggled. For a long time, lenders have been patient, largely because they didn’t want to be hit with big losses. However, some properties have faced such financial difficulties that waiting is no longer an option.
Gaps between initial appraisals and realistic valuations have spread in many, though not all, cases. This has shown up in multiple ways. Jim Costello, executive director of MSCI Research, found that private equity fund clients were regularly asking if the degree of asset value cuts they had made were similar in size to those of other companies. This shouldn’t have been the case if appraisal methods were objective, especially when the timing of changes could be selectively chosen.
Top-rated securities backed by solid real estate assets showed they could blow apart and leave investors whimpering. For example, 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 utterly wiped out.
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