Office lease expirations weigh on CMBS market; Big loss expected for Houston building; Fannie Mae backs high-price Boston apartment deal A weekly look at the commercial mortgage-backed securities business
This week’s column examines how office tenant nonrenewals are weighing on the CMBS market, a big loss expected for a Houston office building, and Fannie Mae's backing of the largest Boston apartment deal in more than a year. Read the entire piece by clicking “read more” below.
Office lease expirations weigh on CMBS market: Whether or not an office property meets its commercial mortgage-backed securities loan obligations often comes down to whether tenants renew their lease.
That’s the takeaway after reviewing CoStar data for U.S. office properties backing billions of dollars in CMBS loans in a dozen major markets: Atlanta, Boston, Chicago, Dallas, Houston, Los Angeles, Miami, New York, Northern New Jersey, San Francisco, San Jose and Seattle.
For CMBS-financed office properties in those markets that have an occupancy rate of 80% or higher, the renewal rate among tenants has averaged 53.4% over the past 24 months, according to CoStar data. Only 8.2% of the loans on those properties are in special servicing — often a sign of late loan payments.
For the office properties in those markets with an occupancy rate of 80% or less, the 24-month renewal rate has averaged 9.8%. More than 31% of the loans on those properties are in special servicing.
The average vacancy rate in these less-occupied properties is 45% — the highest in 10 years for that property group. The tenants in the group have given back nearly 2.1 million square feet of office space over the past year and 12.7 million square feet since the start of 2019.
“Tenants are increasingly prioritizing a landlord’s financial health,” Jacob Rowden, manager of U.S. office research for the brokerage JLL, told CoStar News in an email. “If they’re facing a near-term expiration, or in the market to expand, tenants don’t want to waste time pursuing a deal that may run into interference from the lender, they don’t want to come out of pocket for buildout expenses, and they don’t want to deal with the complications that could arise from a foreclosure or other ownership transfer event.”
These factors are going to drive tenants to target buildings with a healthier rent roll and debt burden, Rowden said.
“The occupancy rate of a building is going to correlate with that strongly, which makes it a lot more likely that a tenant will renew in a building with healthy occupancy,” he said.
The good news for the office market is that a growing cohort of corporate tenants is recommitting to large blocks of commercial real estate, helping to lay the foundation for a recovery.
That includes Boston drug developer Vertex Pharmaceuticals, which signed a renewal last month to maintain its corporate headquarters at 50 Northern Ave. and 11 Fan Pier Blvd., two CMBS-financed buildings that total more than 1.1 million square feet.
Big loss expected for Houston building: One City Centre, a 607,526-square-foot office property backed by a $100 million specially serviced CMBS loan, is under contract and expected to be sold in November, according to CoStar loan data.
Appraised at $162 million when the loan was originated in 2015, the property was appraised this summer at just $25.9 million — a decrease of 84% from its original value.
The loan was transferred to special servicing in March 2021 following the departure of the largest tenant, Waste Management, which occupied about 41% of the space. Waste Management left when its lease expired in December 2020.
Occupancy currently stands at 21% with a negative cash flow, according to Fitch Ratings, which reviewed the CMBS deal holding the debt last month.
Moises Benzaquen, founding and managing partner of finance at Accesso Partners, which owns the property, did not respond to a request for comment.
Fannie Mae backs high-price Boston apartment deal: Carmel Partners’ $212 million purchase in July of a luxury apartment tower in Boston’s Theater District — the highest price paid for an apartment complex in the market in more than a year — spawned the largest loan securitized by housing finance giant Fannie Mae in August.
AvalonBay Communities sold the 398-unit AVA Theater District for about $532,663 per unit. The property was 94.8% occupied at the time of sale, according to Fannie Mae data.
Walker & Dunlop provided the buyer with a $137.3 million loan for the acquisition. Fannie Mae bought the loan and securitized it in August. The five-year loan bears an interest of 5.39%, according to Fannie Mae data. The loan was underwritten at an annual net cash flow of $10.9 million.
Rebranded as Luka on the Common, the property stands 30 stories tall on a 21,344-square-foot site in the Boston Common multifamily market. It was built in 2015 and features an on-site fitness center and a rooftop sky lounge and is one block from Boston Common, the oldest city park in the United States.
