Market Extra: Debt on trophy office buildings is starting to buckle as loans come due

by | May 19, 2023 | Stock Market

The financial fallout from half-empty U.S. office buildings has begun to be reflected in prices for bonds backed by luxury office buildings. From New York City’s famed Park Avenue to San Francisco’s California Street, properties long considered fortress investments are reeling as efforts to return more staff to office buildings in big cities stall.

Recent Wall Street “bid lists,” or email blasts from dealers to potential investors, reflect a souring mood for debt on signature office buildings. They peg the value of several Triple-A rated bonds that helped finance top-notch offices at discounts of about 85 cents on the dollar to about 93 cents. “It’s not a rosy picture for some landlords,” said Mike Sheldon, senior portfolio manager at Income Research + Management, a Boston-based fixed-income firm that oversees about $92 billion in assets. “If you’ve got a property that’s Tier 1 and looks strong from an occupancy perspective, with long-term leases in place, those properties are obviously going to hold up a lot better.”Reality check Before the pandemic, investors snapped of slices of $1 billion dollar debt deals for glitzy office buildings at Hudson Yards in Manhattan and other iconic buildings that shape the U.S. skyline. That led to a boom in issuance of single-asset, single-borrower (SASB) bonds, a segment of the commercial mortgage-backed securities market. Often the deals were done at peak property valuations and came with near record low interest rates. Now, w …

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