Another Office Tower Goes Bust: Blackstone Walks from Manhattan Tower it Bought for $605 Million. CMBS Holders to Eat Remaining Losses

by Wolf Richter, Wolf Street:

Older office towers are besieged. Working-from-home and hybrid-work aren’t helping. The losses are huge.

Another older office tower is going to cost lenders an arm and a leg, after it already cost PE firm Blackstone an arm and a leg. Blackstone is walking away from the 26-story 621,000-square-foot office tower at 1740 Broadway in Midtown Manhattan that it had bought in 2014 for $605 million. The two biggest tenants moved out well before their leases expired: L Brands, occupying 77% of the rentable area (lease expires March 31); and law firm Davis & Gilbert, which had 15.8% of the space. Now the building is mostly vacant.

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The property, built in 1950, is the collateral for a $308 million loan that was originated by Deutsche Bank and securitized into a single-asset single-borrower CMBS in 2015. This CMBS is backed by only the loan on this building, and there is no diversification within it. Now Blackstone is letting the holders of the CMBS have the building and eat the losses.

“This asset faces a unique set of challenges, and we are working diligently to find a solution that is in the best interests of all parties involved, including our investors and lender,” a Blackstone spokesperson told the Commercial Observer.

“It’s the smartest move for their investors,” one source told the Commercial Observer.

Investing more money to upgrade the building, on top of the $308 million in existing debt, didn’t make any sense, particularly with the continued uncertain recovery of the Midtown submarket, another source told the Commercial Observer.

Blackstone’s investment – it purchased the tower for $605 million – had been written down before the pandemic due to the broader challenges in both the Midtown office submarket and the asset, and the pandemic only accelerated those pressures, particularly on the leasing front, sources told the Commercial Observer.

In Manhattan, 18.6% of the total office space was on the market for lease at the end of Q4, according to Savills. And new buildings are being completed and add to the total availability, and when their lease expires, companies can upgrade to the latest and greatest, and they can downsize and upgrade, and what’s left behind are these vacant older office towers.

These reports of vacant older office towers going back to lenders are piling up, as the shift to working-from-home and to hybrid arrangements has reduced the need for corporate office space. Companies are moving out of older buildings and are upgrading to newer and often smaller spaces. And as new office towers are still being built, the older office towers end up vacant.

Lenders get to eat the often huge losses while the future of these older office towers remains uncertain.

We got some ideas of how big the losses can be when the older office towers were sold in foreclosure sales. All this can take years.

For example, in Houston’s Energy Corridor, the 450,000-square-foot Two Westlake Park defaulted on a $87.5 million loan in 2018 and was sold in mid-2020 in a foreclosure sale for $18 million. After fees and expenses, the CMBS holders booked a loss of 82%. The vacant Three Westlake Park in the same complex, once “valued” at $121 million, was sold last month at a foreclosure sale for $20.6 million. After fees and expenses, the CMBS holders booked a loss of 88%.

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