A venture started by WeWork Inc. and Rhone Group defaulted on a loan for a San Francisco office tower, Bloomberg News reported. The $240 million loan was for a building at 600 California St. that is owned by funds managed by a venture formed by WeWork and Rhone in 2019 to buy and oversee real estate. The property, which includes a WeWork coworking space as an anchor tenant, is located in San Francisco’s Financial District. Office property defaults are starting to pile up as landlords including Pacific Investment Management Co.’s Columbia Property Trust grapple with the pressure from rising rates and seek to kickstart negotations with lenders. Markets such as San Francisco have been under particular strain as technology companies slash jobs and pull back on their office space.
An apartment-building investor lost four Houston complexes to foreclosure last week, the latest sign that surging interest rates are beginning to upend the multitrillion-dollar rental-housing market, the Wall Street Journal reported. Applesway Investment Group borrowed nearly $230 million to buy the buildings with more than 3,200 units as part of a Texas buying spree during the pandemic. Arbor Realty Trust, a publicly traded mortgage company, foreclosed on the properties after Applesway defaulted on the loans, according to public documents filed in Harris County, Texas. New York-based investment firm Fundamental Partners bought the Houston properties, public records show, for an undisclosed amount. Turmoil in commercial property markets is starting to spread beyond urban offices and aging shopping malls to rental apartments. The multifamily sector has long been considered a relatively safe investment, especially when home prices rose so much during the pandemic and forced many home shoppers to keep renting. Landlords have benefited from surging apartment rents and cheap debt in recent years, which pushed property values to record highs. Investors paid high prices for the buildings in part because they were betting on a continued rise in rents. They also considered apartments a safer bet during a recession because people always need a place to live. Now, the recent increase in interest rates has cooled off the apartment sector. Investors who bought properties at the peak of the market in 2021 often financed those deals with floating-rate mortgages. Many of those loans have reset at higher rates.
Almost $1.5 trillion of US commercial real estate debt comes due for repayment before the end of 2025, Bloomberg News reported. “Refinancing risks are front and center” for owners of properties from office buildings to stores and warehouses, Morgan Stanley analysts including James Egan wrote in a note this past week. “The maturity wall here is front-loaded. So are the associated risks.” The investment bank estimates office and retail property valuations could fall as much as 40% from peak to trough, increasing the risk of defaults. Adding to the headache, small and regional banks — the biggest source of credit to the industry last year — have been rocked by deposit outflows following the demise of Silicon Valley Bank, raising concerns that will crimp their ability to provide finance to borrowers. The wall of debt is set to get worse before it gets better. Maturities climb for the coming four years, peaking at $550 billion in 2027, according to the MS note. Banks also own more than half of the agency commercial mortgage-backed securities — bonds supported by property loans and issued by US government-sponsored entities such as Fannie Mae — increasing their exposure to the sector.
A bankruptcy judge yesterday dismissed the chapter 11 case of Legacy Lofts on St. Mary’s LLC after the townhouse developer failed to comply with court requirements, the San Antonio Express-News reported. It had filed for bankruptcy protection in December to stop a foreclosure on a portion the property along North St. Mary’s and East Euclid avenues where it built 19 townhouse units. Since entering bankruptcy, Legacy Lofts had not filed monthly operating reports or paid quarterly fees as required, according to James Rose Jr., an attorney for the U.S. Trustee’s office. Legacy Lofts also failed to file a reorganization plan, Rose told Chief U.S. Bankruptcy Judge Craig Gargotta during a Monday hearing. On March 20, Rose filed a motion to have the case dismissed or converted to a chapter 7 liquidation. Allen DeBard, Legacy Lofts' bankruptcy lawyer, did not oppose the motion to dismiss the case.
The turmoil that drove Silicon Valley Bank and Signature Bank out of business last month, rocking the wider banking sector, has analysts bracing for the next possible crisis: the $20 trillion commercial real estate market, The New York Times reported. The bank failures brought new scrutiny to other regional banks, which provide the bulk of commercial real estate loans. Those loans are then repackaged into complex financial products for investors in wider markets. And the outlook for the industry appears stark. Commercial real estate, the lifeblood of the lending business for regional banks, now “faces a huge hurdle,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, warned investors, adding to a growing chorus that has been expressing concerns about the industry’s looming challenges. Critics say that the sector is precarious thanks to a potentially toxic cocktail of post-pandemic office vacancies, rising interest rates and a mass refinancing of mortgages that lies ahead. Cities across the U.S. had been experiencing a plunge in demand for office space that accelerated during the height of the pandemic, and many were still struggling to bounce back, according to the National Association of Realtors. The bigger the city, the larger the decline, which has added up to a 12 percent office vacancy rate in the U.S., from 9.5 percent in 2019, the industry group reported in February. “Remote and hybrid work, layoffs and higher interest rates further increased office space availability in the market,” the group wrote. The debt on those office buildings will soon come due, whether or not the spaces are full. More than half of the $2.9 trillion in commercial mortgages will need to be renegotiated by the end of 2025. Local and regional banks are on the hook for most of those loans — nearly 70 percent, according to estimates from Bank of America and Goldman Sachs. (Subscription required to view article.)
Prices of bonds backed by commercial mortgages have recently dropped to levels not seen since the early days of the pandemic, pointing to a growing economic threat stemming from office vacancies and rising interest rates, The Wall Street Journal reported. A small corner of the U.S. bond market, commercial-mortgage-backed securities (CMBS), have taken a beating for over a year owing to fears that owners of business parks, high-rises and other office properties could default on loans extended at a time of different work habits and lower financing costs. That stress only deepened after Silicon Valley Bank’s collapse, which raised concerns that regional banks might scale back their risk-taking and become more reluctant to make commercial real-estate loans — making it harder for property owners to refinance existing debt.The average extra yield, or spread, above U.S. Treasurys that investors were demanding to hold CMBS with a triple-B rating (the lowest broad investment-grade tier) — was 9.52 percentage points, according to an ICE BofA index. That was up from 7.6 percentage points at the end of February and approaching the 10.8 percentage point level reached in March 2020. The average price of the bonds has dropped to around 75 cents on the dollar from roughly 89 cents a year ago.
A listing for a newly built Southampton home boasts of “dramatic floor-to-ceiling windows” and “park-like grounds” with lush landscaping just a block from the ocean, The Real Deal reported. What the $13.4 million listing doesn’t mention: The owner’s equity interest was wiped away in a foreclosure in February, and now his lender wants permission to kick him out and sell the home in a bankruptcy auction. The lender, an entity apparently tied to Miami-based distressed investor Lakeport Capital, claims that one of the home’s former owners, Mark Gallagher, is trespassing by continuing to live there after the foreclosure. The 10,000-square-foot Cape Cod-style home, which is actively listed, has been thrust into the convoluted world of bankruptcy, adding to Gallagher’s growing legal battles surrounding the shiny new mansion. In February 2020, hard-money lender 5 Arch Funding Corp. provided Gallagher with $5.8 million in financing for the project, consisting of a $3.3 million senior loan and a $2.5 million building loan. The consolidated loan was personally guaranteed by Gallagher and his wife, Nicole. The next year, creditors and lenders began coming after the couple. Blue Sky Ltd., an anonymous company based in the Cayman Islands that acquired the debt, alleged that the Gallaghers had defaulted in October 2021 and initiated a Uniform Commercial Code foreclosure. On Feb. 17, Blue Sky won the auction with a credit bid using its existing debt. As a result, it took over the equity interests in the LLC that owned the home. Late last month, the new owner filed for bankruptcy, allowing the LLC to restructure, and hired David Goldwasser as the restructuring officer. The bankruptcy petition lists Jean-Marc Orlando, founder of Lakeport, as the sole owner of the debtor entity. The petition claims the property has $12.3 million in liens, which is close to its value. In a separate lawsuit in federal court, Mark Gallagher is seeking a temporary restraining order to stop the new owner from removing him from the property. His attorney alleges the interest rate used for the secured loan is higher than 25 percent and criminally usurious.
Defaults and vacancies are on the rise at high-end office buildings, in the latest sign that remote work and rising interest rates are spreading pain to more corners of the commercial real-estate market, the Wall Street Journal reported. For much of the pandemic, buildings in central locations that feature modern amenities fared better than their less-pricey peers. Some even were able to increase rents while older, cheaper buildings saw surging vacancy rates and plummeting values. Now, these so-called class-A properties, whose rents generally fall into a city’s top quartile, are increasingly coming under pressure. The amount of U.S. class-A office space in central business districts that is leased fell in the fourth quarter of last year for the first time since 2021, according to Moody’s Analytics. The owners of a number of high-end properties recently defaulted on their mortgages, highlighting the financial strain from rising interest rates and vacancies. “Any property owner that says ‘Oh we’re fine’ is a little bit fooling themselves,” said Thomas LaSalvia, director of economic research at Moody’s Analytics. Some office landlords invested heavily in their buildings in recent years, adding spas, gyms, restaurants and modern elevators. The hope was that by modernizing their properties, these owners could benefit from a flight to quality as more tenants seek out environmentally friendly buildings with plenty of amenities and natural light.
Defaults and vacancies are on the rise at high-end office buildings, in the latest sign that remote work and rising interest rates are spreading pain to more corners of the commercial real-estate market, the Wall Street Journal reported. For much of the pandemic, buildings in central locations that feature modern amenities fared better than their less-pricey peers. Some even were able to increase rents while older, cheaper buildings saw surging vacancy rates and plummeting values. Now, these so-called class-A properties, whose rents generally fall into a city’s top quartile, are increasingly coming under pressure. The amount of U.S. class-A office space in central business districts that is leased fell in the fourth quarter of last year for the first time since 2021, according to Moody’s Analytics. The owners of a number of high-end properties recently defaulted on their mortgages, highlighting the financial strain from rising interest rates and vacancies. “Any property owner that says ‘Oh we’re fine’ is a little bit fooling themselves,” said Thomas LaSalvia, director of economic research at Moody’s Analytics. Some office landlords invested heavily in their buildings in recent years, adding spas, gyms, restaurants and modern elevators. The hope was that by modernizing their properties, these owners could benefit from a flight to quality as more tenants seek out environmentally friendly buildings with plenty of amenities and natural light.
Strains in the banking sector are roiling a roughly $8 trillion bond market considered almost as safe as U.S. government bonds, the Wall Street Journal reported. So-called agency mortgage bonds are widely held by banks, insurers and bond funds because they are backed by the mortgage loans from government-owned lenders Fannie Mae and Freddie Mac. The bonds are far less likely to default than most debt and are easy to buy and sell quickly, a crucial reason they were Silicon Valley Bank’s biggest investment before it foundered. But agency mortgage-backed securities, like all long-term bonds, are vulnerable to rising interest rates, which pushed their prices down last year and saddled banks such as SVB SIVB -60.41%decrease; red down pointing triangle with unrealized losses. Now that the Federal Deposit Insurance Corp. has taken over SVB, investors expect the bonds to be sold off in coming months, adding supply to the weakened market and pushing prices lower. Last week, the risk premium on a widely followed Bloomberg index of agency MBS hit its highest level since October, when climbing interest rates turned global markets topsy-turvy. The move reflected fears that other regional banks might have to sell their holdings, bond-fund managers said.
