Odd Lots - Lots More on the Two Troubled NYC Office Buildings Everyone's Talking About

Episode Date: May 31, 2024

Over the past two weeks, two New York City office buildings have become major talking points in the market for commercial real estate. Troubles at 1740 Broadway led to the first loss in the AAA-rated tranche of a commercial mortgage bond since the financial crisis. Meanwhile, issues at 1440 Broadway recently propelled the serious delinquency rate for office loans to its highest level since early 2007. So what do these two properties tell us about the outlook for commercial real estate, and how these deals work? On this episode of Lots More, we bring back Hiten Samtani, founder of ten31 Media, to talk about the future of these buildings, as well as their storied history.See omnystudio.com/listener for privacy information.

Bloomberg Audio Studios Podcasts Radio News Joe, do you know that song Money Money? I remember it, yeah. Money, money. Yeah, yeah. Okay, I didn't know this. Apparently, it was inspired by a building here in New York.

Really? I didn't know that at all. Yeah, I don't know why. I'm going to Wikipedia. Why we would actually know this. But apparently there used to be a sign that said money, but M-O-N-Y on top of this building at 1740 Broadway. And the M-O-N-Y money was supposed to be mutual of New York, I guess. And then it got, like, compressed.

And then it was on top of this building for a really long time. And then I guess the band, what were they called? I'm looking on Wikipedia. Is this the one, Tony James, Tommy James and the Chondell? Yes. Yeah, there it is. Tommy James and the Chondell. So they were, like, staying around that area,

looking for inspiration for song, and they saw the sign. And they were like, that's it. And they got a hit out of it. Oh, yeah, here it is, atop the mutual New York building in Manhattan. I did a deadlift. One, two, three. Hedgemi. Okay, go.

What's the other? GEMony. Barges. This is an after-school special, except... I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S. Where's the best squid ink pasta? These are the important questions. Is it robots taking over the world?

No, I think that, like, in a couple of years, the AI will do a really good job of making the outlots podcast. and people say, I don't really need to listen to Joe and Tracy anymore. We do have... Cha-ching. The perfect guest. Welcome to lots more where we catch up with friends about what's going on right now. Because even when odd lots is over, there's always lots more. And we really do have the perfect guest.

You might have heard just then. We are speaking with Hittendemtani, the founder of 1031 Media, which is a newsletter focusing on real estate. and Hiten has been on the show before, but we had to bring you back on because there's a lot going on in office buildings in New York, it seems, and particularly on one street, on Broadway.

Yeah, it's been quite the carnage season for a bit, but I think what happened with reference to this building is even more alarming because... Wait, just to be clear, just to be clear, when you say this building, we are talking about the mutual of New York building. 1740 Broadway, the money building. Keep going.

Tell me about 1740. Broadway. So 1740 Broadway was your prototypical Class A office building, sort of Tower of Power, Manhattan, credit tenants, that whole jazz. And what's happened just last week for this month was that the AAA tranche holder, so basically the people who hold what is considered the safest part of the CMBS stash lost a big chunk of money when this building's debt was sold. So that doesn't happen very often. In fact, the last time it happened was the GFC. So now people are looking at this and saying, okay, so if AAA bondholders aren't safe, then God, how bad is this thing? Because we've talked about Sierra distress for about a year and a half now. This one is particularly alarming.

The money building stopped making money, I guess. Sorry, you knew that was coming eventually. But, okay, the one saving grace in this seems to be that this particular CMBS deal, commercial mortgage-backed security. It was a single property deal, right? So the risk was trenched up. So you had that AAA slice, the AAA bit, but there was only one property. So you didn't necessarily have the diversification benefits that you would see in a normal CMBS conduit type deal. Correct. And this is something that people have been asking is, is there any point where it's justified to give a single asset transaction like this a AAA rating? Because yes, it is a diverse group of what you would call credit worthy tenants. But as we've seen with this building and another

we're going to talk about, things can go wrong pretty quickly. So is it as diversified as it should be? Probably not, because if you're comparing it with like a pool of residential securities, you'd need, you know, 6,000 of them to go bad at once for bondholders to suffer a loss. Now, that did happen at one point. But again, theoretically, that is a little safer than what we're talking about here. Can I just say, Tracy, I don't know, I may have talked about this in the office recently, but I've been watching the New York documentary by Rick Burns, which is Ken Burns's brother. It is so good. And like, I've always liked living in New York. It's fine. But now I'm, like, really, like, New York-pilled. It's a 17-a-half-hour documentary. I think you'd really like it.

And it's all this, like, has this whole period of, like, when all these office buildings have gone up. And now, particularly Park Avenue, I know we're talking about a Broadway building. Now I've become, like, I look at the buildings now. I will say. I'm in New York City office buildings appreciate her now. Joe, this is actually true because we were in an office building recently and you were so excited to be there. For me, it was really, yeah. Yeah, I thought it was really nondescript and not that impressive, but you were genuinely

excited and kept wandering around the office building looking at it. That corner, so again, I know a little side diversion. 53rd at Park, I sort of concluded is like my favorite corner of all of New York City. It's like this sort of like mid-century vibes and fountains and grunties and gruel. and green tinted glass and stuff like that. Anyway, we can get back to the mony model. You know, Joe, to your point, that's a pretty well-shared sentiment.

There is a famous quote by an architecture critic that says, I'm going to quote, it is the ambition of the New Yorker to live upon the fifth, to take his earrings in the park, and asleep with his father's in Greenwood. So it's a sentiment that's been shared for a few generations. It finally, after 20 years, so this May is 20 years of me living in New York,

it finally like all I clicked. and now I don't think I'm going to leave. Okay, but just to go back to, let's move away from Park Avenue and go back to 1740 Broadway. But what's the deal with the tenants there? So this is a pretty decent office building as far as I can tell in a prime midtown location. Maybe it's not as shiny and new as some other things. But I would have thought that someone would be renting it out. Well, it's a tricky time, right?

So L Brands anchored the building. In fact, this is the problem with exposure to, one, even if it's a great tenant like Al Brans, which was the former parent of Victoria's Secret, they occupied, I believe it was close to almost 80% of the space. Oh, wow. And they said they were going to exit the tower. Now, that comes in 2021 when your return to office is very much up in the air. It's going to be very hard to find a tenant that would fill that kind of space.

And it's going to be very hard to find a group of tenants that would want to fill that kind of space. So even if Blackstone had been able to fill that. that massive void left by L Brands, they would probably have to do it at a much lower rent, right? So that's going to make a serious dent on their NOI. It's going to affect their ability to pay their debt service. And so what they did is they decided to walk away. They walked away in 2022. They defaulted on the loan. And they just said, go with God. And that's kind of what happened. And what's funny, Tracy, is they're very salty about this one. So if you look at their press statements starting maybe in the summer of 23, maybe a little earlier,

they make it a huge point to say that traditional U.S. office represents less than 2% of our entire holdings. So now they're using the scale argument. Hey, we're so big. And Brookfield has used this argument as well. Hey, we're so massive. These are little blips on a very successful track record. All right. Let's take our tour a little bit further south, still on Broadway. Let's head over to 1440 Broadway. Now, this is a building that caught my eye recently, because, because it went into delinquency, and I think it was responsible for a big portion of the uptick in the serious delinquency rate that we saw in the most recent month, which is now at its highest level since early 2017. This is a $400 million loan backing 1440 Broadway.

Now seems to be in serious trouble. What's going on there? Well, so there's been a little bit of news since you wrote your piece. In fact, we just received a refi, and this was predicted, I believe. I knew it. Yeah. Your story, they received a refi. Now, it's a Faustian bargain type of refi. It's a very problematic refi because the appraised value of the property is just under, it's about 46.

They took a 46% haircut on the value of the building. But they did receive the loan. They did receive an extension until 2025. Yeah, Joe, this to me is why I was so interested in the building, because it seems like little microcosm of what's going on in office real estate at the moment. So you have higher benchmark interest rates, obviously. You have tenants like we work that used to be in there and are not there anymore. You have Macy's, which is another sort of thematic company. Yeah, there we go. I was trying to be polite with thematic, but death of retail and all of that. And yet, and yet, it still gets

refinanced. Yeah, they find a way. Wait, can I ask one more 1740? question? I know we moved down, but just one last thing. When there's one big tenant, and so this other building, okay, they have a few tenants and they're all maybe shaky or, you know, to some extent, how do you get like a AAA? I mean, it just seems like inherently when you have 80% of the space rented to one company, that's no matter how strong the company or everything else, that's got to be like a huge source of concern for the lender. I would assume. This is the right question to ask, Unfortunately, a lot of the people at the ratings agencies don't seem to ask themselves that question. There are a lot of concerns about why something like DBRS or Morning Star or there was one more, I believe, on this building, S&P, why are they providing AAA ratings to something with so much exposure to one tenant?

And the answer is, well, I think it's their business to keep the market going. I think if you speak to anyone who's steeped in this space, it's far from a purely objective, dispassionate game, the ratings game. So that's the answer to that. Got it. So for 1440 Broadway, when a refi like this comes through and it's on onerous terms where the value of the property has been massively downgraded, who actually takes the loss on that? That's a great question.

So in general, just stepping back for a minute, a lot of these Manhattan Trophy Towers have an owner in name, right? So in this case, it was CIM, which is a massive money manager based out of L.A. But then they have an owner in skin in the game, let's say, to call it. And in this case, the pension fund that was backing CIM on the property is called CUSB. So it's a Queensland-based pension fund. So they're the ones who had most of their equity in this transaction. CIM essentially serves as the operating partner and has a little piece.

So the ones who end up taking a bath on these things tend to be the sorry pension funds and the sovereign funds. Australian pensioners. Australian pensioners, Canadian pensioners in many people. cases. So CPP has taken a bath on several properties in Manhattan recently. In fact, the one that caught a lot of headlines recently was they walked away. I think they took one dollar for their stake in a property and released themselves from certain debt obligations and walked away. And that's happening time and time again. So if you notice the chatter on the sovereign wealth side, a lot of people are saying, office may not be where I need to be anymore. And that's been super

interesting. So yeah, in this case, on 1440, just to slight clarification, we worked in fact walk away. We work has walked away from a ton of leases all over the country, but in fact, it decided to stay put at this building. Now, what changed, though, is that it's doing it at a way reduced rent. So I think it was paying something in the 70s back in the day, and then, you know, it's not Adam Newman's company anymore, but it still has his kind of chutzpah, and it decided to work out a much better deal. So I think it's paying now in the 40s afoot. Macy's, however, has walked away. As of January, it kind of exited its lease.

So the building is only 58% occupied. And it's not in a very, you know, I wouldn't call that like the most glamorous part of Manhattan. No, it's close to Penn Station, which is a place I go to a lot. So, yes. Right. You're unlikely to get your hedge funds or blue chip financial tenants to step it to avoid. So you have a 58% occupied building. It's no 53rd in Park.

Correct. That's right. Are you guys cool with me kind of indulging you in the numbers on this building? Yeah, please, please. Okay, awesome. So the way that Manhattan Trophy Towers used to work is that it was a great way to announce your presence

as a serious investor. So I'm going to run you through the brief 20-year journey of this building. Awesome. In 2002, this Virginia real estate Sion that started a company called Monday Properties came in, bought this property for $230 million. Okay? Did very well with this.

and in the kind of the CNBS-Go days of 07 was able to bring in a big institutional investor, prudential, and the tower was valued at $434 million. So pretty much double what Monday had bought in for. Then obviously the crash happened. And in 2013, another private equity firm, Rockpoint came in, paid $350 million. That's what the tower is valued at when they bought in. Then in 2014, it got super interesting. And this may have bled into your broader financial world. There was a company called American Realty Capital, or either of you familiar with that? Oh, yeah, this rings a bell. Yeah. Not here, but you do on.

So, Nicholas Shorch went on sort of the acquisition tear of a lifetime and just bought up basically a tenth of Manhattan and had these weird non-traded reed vehicles that he was using to fund all these purchases. Predictably, there was a major accounting scandal that company imploded in 2014. And that is when CIM bought in. So CIM bought in at about a 520 million valuation. And today, the valuation is at 320 million. And so this tower is fascinating. I think Tracy, the reason it caught your attention, as did mine, is it has every character you can think of in New York real estate from Adam Newman to Jeff Bezos to these mutual funds,

to these Virginia Sions. They've all played some kind of role in this tower. And it's basically gone sideways now valuation-wise for 20 years. No. So Rockpoint did terrifically well. Rockpoint bought it at 350, sold at $549 million, nine or ten months later. So they made out like that. But the current valuation is what? The current valuation is $320 million. Okay. So like, yeah, that's what I mean. If you just sort of looked at the starting valuation, the first number that you mentioned and now that has not been a particularly great run for it. Correct. It's been, it's been a rough go. But again, this thing about these markets is like, A year and a half ago, we could point to this and say, wow, this building was appraised at $595 million. So it's really changed quite dramatically over these last 18 months or so. But to me, like the symbolism here is that even with the much, much lower valuation, it's still getting refinanced and it's still kind of hanging on and therefore is sort of a microcosm of

what's going on with a lot of commercial real estate at the moment, which is even though there is all this concern. So far, a lot of this has been able to be, you know, refied or extended and pretended, whatever your preferred term might be. And I guess the big question is for how long? Right. And I think this is a point that someone you had on earlier, Rich Hill made very eloquently and my way of putting it less eloquently is this whole debate about Wall of Maturities is kind of a Fugazi debate. It's sort of like if you if you guys remember this whole thing about TAM, total addressable market. Oh, yeah. That's Steve Eisman's favorite term, right?

Right. It is such a, I mean, when the VCs were coming and they're saying, okay, this company has smart locks. There are two million locks owned by institutional investors. Hence my TAM is a gazillion trillion dollars, right? It's just a complete, I think if the debt clock is maybe another metaphor, it's a number that keeps going up or down based on what the deliver of the message wants. So I've heard a thing from Bloomberg had an article about 1.5 trillion wall of maturities. Recently, Ares, which is a big debt fund, throughout a 2.5 trillion number,

but it's all meaningless, because to your point, Tracy, these loans are getting reworked all the time. They're often getting extended, maybe at more painful terms, but this whole looming wall is just nonsense. This might be a random question, but when a building has significant vacancies,

okay, I imagine that's a good time for a new tenant to come in because maybe they can get a good deal on rent. But on the other hand, do tenants express concern or have like, you know, if it's too empty, like, do they want their employees coming to work in such like an empty sort of ghost building? I mean, maybe this isn't quite a ghost building, but does it become a sort of self-fulfilling prophecy where as vacancy gets lower, it becomes less appealing to potential tenants?

Is that a thing? It's sort of like if you've been single for a very long time. Oh, that's like a big red flag. Right? It's a really tricky thing. So if we're talking about companies making a big push for RTO, return to office, and about vibes and collaboration, a phantom tower doesn't really give off the vibes that you need. So yes, vacancy rates of whatever. I think it's 18%.

We've seen some rates hit 18%. This building is, what, 42%. That's not a good sign for prospective tenants. So either they come in and extract incredibly generous concessions from the landlord or they just stay put or they, they don't show up. That's what happens. You know what I think we should do? And this is not a well thought out plan. So please take it with a grain of salt. But I was just thinking these types of office buildings, there's been so much focus on office to residential conversion. But there are a lot of office building-esque type things in Asia, like in Tokyo, in Hong Kong, that are filled with

little independent shops. Oh, yeah. You go into one. It's 20 stories. There's like a cat cafe and maybe a board game cafe. I love this idea. Like a really cool, like a food court somewhere on one of the floor. And you just kind of go through this war in of shops and you're never quite sure what's going to be around the next corner. But it's really fun. They should do something like that in New York. That's my idea. Well, it totally could work for a couple of buildings. We have had some. There are in fact specialty. Tracy and Joe, you might want to talk to these people. But there are some specialty companies that essentially reimagine these dead buildings as beautiful event spaces or pop up. retail or even little restaurants and stuff like that. But how deep is that market? I mean, you could do that with five buildings maybe? Could you do it with all the buildings around the hulking Penn Station? Probably not. And how do you value those buildings? If you're an investor,

if you're sitting in Queensland, Australia, and looking at your massive Manhattan investment, just tanking and value, you know, how do you take solace? Someone says, we're going to turn it into cat cafes and you're like, hmm. Two things. One thing I'll say about Penn Station is that for the first time and all of the time I've lived in New York, I don't think there's any scaffolding in front of it. And it actually is kind of nice. Like we can't really build anything or do any construction quickly in this country, apparently. But eventually it did get done. Penn Station is not bad right now. No, no. It looks nice. It's completely unfunctional. It's ridiculous. But other than that. But there's nowhere to sit.

Everyone has to line up in the middle of the room to get on their train single file. I don't understand why they don't have more benches. You know, the secret is to go across the road to the old part of the station and be there. And no one's actually there. And you can get on your train immediately and avoid the line. Totally. No, I do that. I do that.

In fact, yeah, I never go to. Moyni. I always go to the one. Yeah. So, all right, 1440 Broadway, it's sort of, is it a microcosm or is it a, the worst? Like how much do the conditions going on? Like that's sort of the big question right here, especially for that Queensland investor. How much is it reflective of what's going on in lots of other buildings?

Well, I think they were caught particularly badly by an aging retailer and a company that went somewhat belly up in May C's and WeWork. But their ability to get financing is absolutely what it reflects more than anything else is that lenders don't want to take these assets back. And lenders, even though they will rail against these borrowers and can trial they can, they are not willing to take these assets back. That's a big part of it. The other part of it, which we haven't discussed yet, but I think it's probably the most fascinating part of the story is the fees. The fees on these things are unbelievable.

So Tracy, your colleague at Bloomberg, reported about 1740 Broadway, right? So that building sold for $186 million, which would have, if that whole amount, went back to the bondholders, made them whole, at least the top tranche, the AAA tranche, right? Instead, they were left with 117 million. So you're looking at what, 70 million odd in fees and advances, et cetera. So when we talk about who's making money in this market, it's the special servicers. It's the middlemen. They're making it killing. It's an amazing time to be in the servicing business. Yeah. Someone's still making money from the money building, even if the money building is not generating that much money.

How many times can I say money on this podcast? That's really good. Lots more is produced by Carmen Rodriguez and Dashel Bennett with help from Moses Ondom and Kail Brooks. Our sound engineer is Blake Maples. Sage Bauman is the head of Bloomberg podcasts. Please rate, review, and subscribe to Odd Lots and Lots more on your favorite podcast platforms. And remember that Bloomberg subscribers can listen to all our podcasts add free by connecting

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