Even AAA-Rated CMBS Bonds Aren't Safe From Office Distress

For the first time in 16 years, the holders of the highest-rated class of bonds in a CMBS loan have taken a loss.

Investors who bought the AAA-rated portion of the $308M loan given to Blackstone for 1740 Broadway were paid back 74 cents on the dollar after the building sold for half of its prior value, Bloomberg reports. Investors in the five lower-rated tranches of the CMBS loan were completely wiped out.

Blackstone paid $605M in 2014 to acquire the 621K SF office tower, but defaulted on the loan in 2022 after the building lost its anchor tenant that occupied 70% of the building.

A spokesperson for the private equity giant said at the time it would stop covering the operating shortfalls and work with the CMBS trust to exit the property.

The CMBS trust's special servicer marketed the loan for sale earlier this year, which was acquired by Yellowstone Real Estate last month for $186M. Yellowstone plans to convert the building into apartments.

But at that price, bondholders of the original $308M only got back $117M, a move that tallied a 26% loss for the investors in the $158M of AAA-rated tranche and a total wipeout for bondholders holding $151M in the four lower-rated debt tranches.

“This deal was a perfect storm of an office building that relies on one tenant for the majority of the rent. We will see more bonds get hit related to the office space,” Janus Henderson Head of U.S. Securitized Products John Kerschner told Bloomberg in an interview.

Blackstone told Bloomberg in an emailed statement that the property was already written off three years ago and was a “rare instance in our nearly $600B portfolio.”

According to Barclays, the loss of the safest class of the CMBS bond was the first since the end of the Great Financial Crisis, but it may not be the last.

More than 6% of office loans packaged in CMBS were delinquent as of April, the highest amount since June 2018, Moody’s reported. KBRA Analytics also reported earlier this year that a third of the $52B in office loans inside commercial mortgage bonds were in trouble in March.

“Now that we’ve seen the first commercial mortgage-backed securities get hit, other AAA bonds are bound to see losses,” Barclays CMBS strategist Lea Overby told Bloomberg. “These losses may be a sign that the commercial real estate market is starting to hit rock bottom.”