Another commercial real estate workout gone bad is detailed here by Trepp. This 2 Rector Street deal is especially telling and it gives us a good idea of the CRE problem and how it has been papered over to avoid loan losses. Even after a loan modification in 2010, things went from bad to worst in this deal as tenants bailed out in search of better deals. Lenders were loathe to report loan losses and borrowers would do anything to forestall the hit, so they just extended the loan and reduced the interest rate in the hope that the market would recover. They did not understand the nature of this boom-bust cycle. This deal is more typical of the CRE market as a B class building and reveals that this market is still weak. This is being played out all over the country as these loans are coming due. The CMBS delinquency rate has increased each month for five straight months.
$100 Million NYC Office Loan Shipped to Special Servicing
According to a story in Commercial Real Estate Direct, the $100 million 2 Rector Street loan was transferred to the special servicer for imminent default. The loan makes up 5.3% of the collateral pool behind CWCI 2007-C3 and should send the deal’s delinquency rate up from 8% to 13%.
The 2 Rector Street property is a 400,000 square foot “Class B” office building in downtown Manhattan. It serves as collateral to a $100 million A-note held in the trust, and a $10 million B-note held outside the trust. The loan was securitized in 2007 with an in-place DSCR of 0.99x. The assumption at the time was that expiring leases would soon be marked to market rates, thus increasing revenue to a level that would be able to sustain debt service. Occupancy was 99%, and as with most commercial real estate deals in 2007, the outlook was optimistic.
In 2009, 2 Rector Street‘s largest tenant, New York Department of Transportation, vacated the building, and by January 2010 the loan was in special servicing. The loan was modified through an equity infusion and interest reserve for no loss to the trust. It has been current ever since, but according to the CRE Direct story, the interest reserve is tapped out and the loan will be in default shortly. The note is not set to mature until 2017 and the top three tenants’ leases all expire in the next three years. The current appraisal value is $51 million, with occupancy at 81% and a DSCR of 0.70x.
Real estate market in Manhattan is much stronger than it was in 2009/2010. I doubt there will end up being that big of a loss on this deal.
The problem with CRE is that all tenants know that they can negotiate rent reductions. There is no way you can lower the interest rate and extend enough times to offset the declining DSCR ratios.