Navigating Through Changing Tides in Office Real Estate
In a recent turn of events, the landscape of office properties in distress shows signs of improvement. According to the latest CoStar data, the count of office buildings backed by commercial mortgage-backed securities (CMBS) loans in special servicing has seen a marginal increase of 1.1% in November, following a 13% spike the previous month. Currently, 762 buildings are in this category, with a notable 30% vacancy rate. Office properties represent 31% of all types in special servicing.
This trend of distressed loans might see a positive shift soon, as several properties have secured loan modifications.
Special servicing is a key indicator of distress in commercial real estate, marking situations where borrowers either default or seek renegotiations for loan repayment.
Spotlight on Significant Properties in Special Servicing
A standout in the special serviced properties is a nearly 150-property portfolio in Pennsylvania, securing a $1.27 billion loan. Workspace Property Trust, a major player in U.S. suburban commercial office properties, achieved a two-year extension on this loan earlier this summer. This move is set to remove the loan from the special servicing list.
Another key property is the Aon Center in Chicago, where a $536 million loan has been extended for three years until July 2026, thanks to a loan modification agreement by Situs Holdings. This deal includes a capital boost and ongoing cash management.
Philadelphia's Downtown Dilemma: The Wanamaker Building
In downtown Philadelphia, the Wanamaker Building, backed by a $126 million loan, faces significant challenges. The occupancy of this 1.4 million-square-foot office building, located near Philadelphia City Hall, has dwindled to 22%. The loan's servicer has declared it nonrecoverable, with the property's value plunging from $185.7 million in 2018 to $52.4 million – a sharp 71.8% decrease.
S&P Global Ratings has responded by downgrading bond ratings tied to the Natixis 2018-FL1 CMBS deal holding this loan. The primary concern is the declining cash flow from the office space, exacerbated by significant tenant departures, including Digitas.
The loan for The Wanamaker Building was shifted to special servicing in March, with the borrower struggling to refinance by the June maturity date.
Florida's Retail Scene: Westfield Countryside Mall's New Chapter
In Clearwater, Florida, the Westfield Countryside Mall is under a new spotlight. DBRS Morningstar recently downgraded the CMBS deal's credit ratings, largely due to potential losses on the mall's loan. Transferred to special servicing in June 2020, Unibail-Rodamco-Westfield (URW) has been cooperative with the foreclosure process. JLL, appointed as receiver, is now managing the 1.4 million-square-foot mall's leasing and operations.
Recently, a significant sales push for the mall has been initiated. Midland Loan Services, the special servicer, is reviewing final offers and moving towards negotiating a sale agreement. URW remains tight-lipped about the transaction details.
JLL's leasing efforts at the mall have been successful, including a recent 26,000-square-foot lease with an entertainment tenant. Retail activity is also on an upward trajectory, complemented by a successful tax appeal by JLL, leading to a reduced taxable value. The mall's appraisal value saw an uptick to $116 million in October 2023, a rise from $108 million in September 2022, as per DBRS analysis.
Looking Ahead
These developments across Chicago, Philadelphia, and Florida mark a transformative phase in the commercial real estate sector, indicating both challenges and opportunities in the landscape of distressed properties.
Source: Mark Heschmeyer, CoStar, MMCG
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