More Owners of Distressed Office Properties Simply Choose to Walk Away

[Scientific Playa]

Looks like the remote workforce is winning the new working from home or wherever paradigm/battle/war.

Screw the old days of having to kiss up to the boss, b.s. meetings, playing office politics, office backstabbers and snitches, commuting, car repair/maintenance and toll expenses.

• NEWS
• ECONOMIC NEWS

More Owners of Distressed Office Properties Simply Choose to Walk Away​

Image courtesy of [RICOWde] / Getty Images.

By LYLE NIEDENS

Published June 27, 2023

KEY TAKEAWAYS​

• Office owners small and large facing loans they can't pay or refinance increasingly have chosen to give the keys back to their lenders.
• The resulting losses eventually impact the $1 trillion U.S. market for commercial mortgage-backed securities (CMBS).
• Real estate investment giant Blackstone, the world's biggest commercial landlord, has bailed on numerous office properties.

The downturn in the market for commercial office space has caused an increasing number of distressed property owners to make the decision to simply walk away—from mortgages they either can't pay now or can't afford after they refinance at starkly higher interest rates.


Owners from small niche property developers to private equity giants such as Blackstone, the world's largest commercial landlord, have all made that decision in recent months.1 The trend adds another troublesome wrinkle to a commercial office market riddled with troubled loans, rising delinquencies and plunging property values.


"There are a lot of owners kneeling down and going to church," said Vince Schwab, executive managing director in the San Francisco office of real estate investment broker Marcus & Millichap. "I'm kidding, but it's kind of true."


"It's going to be a long haul. There's a lot of stuff going back to the bank," said Schwab.


Darin Mellott, vice president of capital markets research with commercial real estate and investment services firm CBRE, concurs.


"There are some market players who have made the determination that, 'We're giving the keys back,'" Mellott said, adding there's a basic problem with that: "Lenders don't want to be asset managers."


That means loan losses will flow substantially to investors in securities backed by expected cash flow from commercial mortgages—a $1 trillion U.S. market.2

Bad Loans Don't Discriminate​

In a disparate office market that fluctuates depending on property type and location, some attractive properties continue to command record-high rents.


However, other swaths of large metropolitan downtown areas face outright collapse. Schwab said office values in downtown San Francisco, on a square-foot basis, have dropped 60-70% from their peak just a few years ago.


Though property age, type and location may discriminate, the size of the deal or loan does not. Schwab, who specializes in deals of less than $30 million, said offices of all types and sizes face loan problems. And when owners bail, the downstream effects take time to work out.

"It's really a case-by-case basis," Schwab said. He noted a lot depends on a lender's recourse agreements, the terms of any commercial mortgage-backed debt security (CMBS) containing a defaulted note, and underwriters and brokers involved in the original deal.

Regardless, he said, it's always a complex process.

More and More Troubled Notes​

It's also a process that's becoming more common. Delinquency rates on U.S. commercial office property reached 4% in May, more than double the 1.7% rate of just six months ago.

Meanwhile, the number of commercial mortgage-backed securities loans transferred to so-called "special servicers" have spiked. Special servicers take over troubled loans or loans in default from master servicers of CMBS loans, who normally handle payments and communicate with borrowers.3

In May, loans on office property made up 41% of all commercial property loans transferred to special servicers, and the number of office loans in special servicing increased to 6.2% of all office property loans. That's up from 3.6% just six months ago and the first time in 13 years the special servicing rate exceeded 6%.4

As they did during the subprime home-lending frenzy that precipitated the 2008-09 global financial crisis, interest-only loans now haunt the market. Such loans accounted for 88% of CMBS issuance in 2021, up from 51% in 2013.5

Blackstone Bails​

Surging interest rates have made refinancing those loans a losing proposition for office property owners. This year alone, the Mortgage Bankers Association estimates that $92 billion in non-bank office debt will mature.6 Borrowers will either need to refinance that debt, default on it or sell the underlying property.

Blackstone, the real estate investment giant that earlier this year raised $30.4 billion for its latest fund, has chosen to walk away more than once.

The firm stopped making payments in March on both a $325 million loan for a Las Vegas office park it owns and a Midtown Manhattan office tower it bought in 2014 for $605 million.78

In addition, the firm reportedly has considered walking away from a $274 million loan it took it in 2017 to buy Club Quarters hotels in Chicago, San Francisco, Boston and Philadelphia. A special servicer took over that loan in June 2020, as travel halted abruptly in during the Covid-19 pandemic. Blackstone hasn't made a payment on the loan since then.9

Correction—June 27, 2023: A previous version of this article misspelled the name of the expert from CBRE. It's Darin Mellott.
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More Owners of Distressed Office Properties Simply Choose to Walk Away

Office property owners who can't pay their mortgages increasingly have decided to give the key back to their lenders, creating downstream losses for investors in commercial mortgage-backed securities.

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[Geek Nasty]

I just watched a YouTube video on this tl;dr

office property loans have exit clauses every few years or so. Businesses arent committed to the paying off the whole principle like residential borrowers are (funny how that works). So all these businesses are just walking away and leaving the banks with the properties; that they can’t sell.

 

[WIA20XX]

This is only going to get worse. We're at the beginning of a long downward slide with commercial property.

Amazon and the delivery apps are killing brick and mortar
Work From Home is killing Office Space.

The other side of this, moving away from concentration, that's not a good look either. Suburban infrastructure without X amount of density is a lot of home owners paying for sewage, water, roads, and salaries which was previously subsidized by a central core.

 

[bnew]

Bank of America's unrealized losses on securities rose to $131.6 bln

Bank of America reported unrealized losses of $131.6 billion on securities in the third quarter, growing from the second quarter, but the bank does not expect the portfolio will generate actual losses in the long-term.

www.reuters.com

Bank of America's unrealized losses on securities rose to $131.6 bln​

By Saeed Azhar and Nupur Anand

October 17, 20235:58 PM EDTUpdated a day ago

[1/2]A signage is seen at the Bank of America Tower in Manhattan, New York City, New York, U.S., November 2, 2022. REUTERS/Andrew Kelly/File photo Acquire Licensing Rights


NEW YORK, Oct 17 (Reuters) - Bank of America (BAC.N) reported unrealized losses of $131.6 billion on securities in the third quarter, growing from the second quarter, but the bank does not expect the portfolio will generate actual losses in the long-term.

Unrealized losses have come under closer scrutiny by investors since March. At the time, Silicon Valley Bank sold a portfolio of its holdings at a sharp loss, precipitating its collapse and fueling the worst industry turmoil since the 2008 financial crisis.


Analysts say it is highly unlikely that Bank of America would sell the securities at a loss because the lender has strong liquidity with consumer deposits and higher capital. Keeping securities until maturity also gives it the flexibility to avert mark-to-market losses.

Banks use the held-to-maturity designation to buy less risky securities that give them downside protection, even though in a rising interest rate environment there is limited upside potential.


"All of these are unrealized losses are on government- guaranteed securities," Bank of America's chief financial officer, Alastair Borthwick, told reporters on conference call discussing third-quarter earnings. "Because we're holding them to maturity, we will anticipate that we'll have zero losses over time."

Bank of America had reported early $106 billion in paper losses in the second quarter.

Bank of America, the second-biggest U.S. lender had about $603 billion in held-to-maturity securities, it said in a filing on Tuesday, shrinking from $614 billion in the second quarter.


And yet the holdings of low-yielding assets have also constrained the second-largest U.S. lender's ability to make higher profit from deploying its cash in money markets or other assets with greater returns, analysts have said.

"The bank has one of the lower overall yields on its securities book, and that securities book is there to stay for a while," said Eric Compton, analyst at Morningstar.

U.S. banks could be grappling with at least $650 billion of unrealized losses in their securities portfolios, according to an estimate from Moody's after prospects of interest rates staying higher for longer led to a bond market rout in the third quarter.

That would be 15% more than the $558 billion of losses they were sitting on at the end of the second quarter.

JPMorgan Chase (JPM.N) had unrealized losses of $40 billion in its HTM portfolio in the third quarter.

Citigroup (C.N) did not disclose paper losses on its portfolio for the third quarter. They stood at $24 billion at the end of the second quarter.

Both banks did not comment beyond the disclosures.

While the securities holdings represent an economic drag, the mounting unrealized losses are a "non-issue" from an accounting perspective, said Allison Nicoletti, a professor at the Wharton School at the University of Pennsylvania.

"If you would have waited, you would have gotten a higher yield on the bonds,” she said. Still, "these are paper losses — this is a problem only if you have to sell them."

When banks take in customer deposits, they can choose to put excess money to work by buying bonds that they keep for sale based on market prices. Or they can lock in rates for securities that are held until they mature.

Reporting by Saeed Azhar and Nupur Anand; Additional reporting by Lan

 

[ORDER_66]

Must be nice to walk away from property you own and not be penalized for it... property taxes be damned huh???