Foreclosures Pick Up, Starting With The Largest Landlords

With its $670M mortgage tied to the landmarked office building at 230 Park Ave. rapidly approaching maturity last year, RXR Realty negotiated a forbearance agreement with the loan's special servicer to give it time to come up with a plan to rescue the Helmsley Building.

The 1.4M SF Midtown office tower is historic and is currently more than 80% leased, and with some tenants vacating next year, Scott Rechler’s firm is looking into alternatives for the property, like a partial conversion to residential use. Another loan modification shouldn’t be an issue.

After all, RXR is among the largest, best-capitalized landlords in New York City. But these days, that's no longer enough.

SL Green’s Green Loan Services stepped in as the new special servicer last month and now plans to initiate a foreclosure action even as it continues to negotiate a loan workout, according to commentary on Morningstar Credit’s database. The forbearance agreement expired this month and wasn't extended.

Green Loan Services isn’t alone in deciding to pursue foreclosure against landlords with portfolios worth billions. 

As more loans approach maturity and liquidity returns to the market, foreclosure actions are on the rise. Lenders are increasingly reaching for the keys — starting with high-profile properties.

“If they see a good value, they may say, ‘I'm here to protect the lender, and you're supposed to pay off the loan,’” KBRA Senior Managing Director Roy Chun told Bisnow.

SL Green and RXR declined to comment on the Helmsley Building.

Starting in June 2023, foreclosures have been rising sharply. Last month, foreclosures were filed or executed on 695 properties nationally, according to Attom Data Solutions. Ninety-two of those were in New York, a 59% rise from August and a 48% increase year-over-year.

Meanwhile, more than $1T, or nearly 20%, of U.S. commercial mortgages will need to be refinanced by the end of 2025, according to a report by Moody’s Ratings, indicating that more foreclosure filings could be on the way.

“Foreclosures remain the last resort and generally signal hopelessness that the market or property dynamics will change,” Trepp Vice President Sumit Grover said in an email. “Foreclosure rates have ticked up, but the universe of properties underperforming with negative cashflow is still much higher.”

A growing plethora of real estate moguls are facing efforts by lenders to claw away their properties. That list already includes RFR Holding’s Aby Rosen, billionaire Charles Cohen, JDS Development, Shorenstein Properties and companies run by different members of the Chetrit family.

Loan servicers have less patience with well-funded property owners claiming to be unable to pay off their debt than with smaller companies scrambling to save their buildings, experts said. And with more liquidity in the market, lenders are starting to see more potential to recover debt, incentivizing such takeovers. 

Several multibillion-dollar funds have been raised to buy distressed assets, including those by companies like Lone Star Funds, Madison Realty Capital and Ares. Some, including RXR’s $1B NYC office distress fund, have begun deployment.

Plus, as of the first half of this year, global private equity and venture capital funds have stockpiled a record $2.6T in uncommitted capital. In New York City, CRE sales are already on the rise, up 63% so far in 2024 over last year's pace.

It’s resulted in a shift in tone — from easy extensions to something more serious — shocking some borrowers, Rosenberg & Estis Litigation Department Member Chris Gorman said. 

And in an attempt to dissuade foreclosures, they are downplaying the worth of their assets.

Alongside delinquencies, appraisal reduction amounts have climbed. After a 60% dip between 2021 and 2022, value reductions have surged 84% in the past two years, according to a report by KBRA. A total of $1B in value was lost across 98 loans last year via appraisals.

But approximately one-third of seriously delinquent loans, from 90 or more days delinquent to real estate owned, have still not reported any reduction in value. 

“There are still some wide disparities about what folks on different sides think an asset is worth, with the lenders coming in at higher numbers, borrowers coming in at lower numbers,” Gorman said. “I'm not seeing, at least as of yet, a lot of people willing to bridge that gap.” 

At the same time, property owners are becoming more willing to consider offers from buyers as foreclosures have “unmasked” a greater decline in the market that could impact them, according to Case Property Services Managing Partner Shlomo Chopp.

“Deals could get done easier because the threat of foreclosure has a real risk attached to it, meaning ‘I can actually get hurt if I go to foreclosure because I could lose money on the deal,’” Chopp said. 

Still, despite increased threats, larger, well-capitalized owners have options that smaller firms may not. To allow for modifications, lenders may want to see an injection of capital or provide refinancing with higher costs.

When Tishman Speyer closed on its $3.5B refinancing of Rockefeller Center this month, it agreed to a higher interest rate that would bring its annual interest costs to $225M from the $95M it had been paying, Crain's New York Business reported. Hartz Mountain Industries agreed to contribute $24M of equity to refinance the $250M loan tied to the Soho Grand and Roxy Hotels, Crain's reported last month. 

“When you get around to if it's a second extension, the servicers are a little more careful around seeing that the property looks like it has a viable financial future that it could carry even the rate that it is being extended at, and looking for the borrower to contribute further equity,” Moody’s Head of CMBS Research Darrell Wheeler said. “So from that standpoint, you move from the science down to the art of making a judgment call on whether an extension should be granted.”

That art could include whether or not there are buyers out there who would be ready to scoop up the distressed property. If no market develops, servicers may simply be delaying plans to pounce, KBRA’s Chun said.

“Market activity, that's a piece of information for them,” Chun said. “If they see it trading and they don't like those prices, they might say, ‘This doesn't make sense for me to try to liquidate this now.’”