Lots More on the Two Troubled NYC Office Buildings Everyone's Talking About

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1:01at 4imprint.com. 4imprint for certain.

1:08Bloomberg Audio Studios. Podcasts, radio, news. Joe, do you know that song, Money, Money? I remember it, yeah. Money, money. Yeah, yeah. Okay, I didn't know this. Apparently, it was inspired by a building here in New York. Really? I didn't know that at all. Yeah, I don't know why. I'm going to Wikipedia it. Why we would actually know this. but apparently there used to be a sign that said money, but M-O-N-Y on top of this building at 1740 Broadway. And the M-O-N-Y money was supposed to be mutual of New York, I guess. And then it got like compressed and then it was on top of this building for a really long time.

1:50And then I guess the band, what were they called? I'm looking on Wikipedia. Is this the one Tommy James and the Shondell? Yes. Yeah, there it is. Tommy James and the Shondells. So they were like staying around that area, looking for inspiration for a song, and they saw the sign and they were like, that's it. And they got a hit out of it. Oh yeah, here it is. Atop the Mutual New York building in Manhattan. I did a deadlift. One, two, three. Hegemony. Okay, good. What to do? Hegemony. Barges. This is an afterschool special, except... I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S.

2:30Where's the best squid ink pasta? These are the important questions. Is it robots taking over the world? No, I think that like in a couple of years, the AI will do a really good job of making the Odd Lots podcast. And people will say, I don't really need to listen to Joe and Tracy anymore. We do have the perfect guest. Welcome to Lots More, where we catch up with friends about what's going on right now. Because even when odd lots is over, there's always lots more. And we really do have the perfect guest. You might have heard just then we are speaking with Hiten Simtani, the founder of 1031 Media, which is a newsletter focusing on real estate.

3:13And Hiten has been on the show before, but we had to bring you back on because there's a lot going on in office buildings in New York, it seems, and particularly on one street on Broadway. Yeah, it's been quite the carnage season for a bit. But I think what happened with reference to this building is even more alarming because. Wait, just to be clear, just to be clear, when you say this building, we are talking about the Mutual of New York building. 1740 Broadway, the money building. Keep going. Tell me about 1740 Broadway. So 1740 Broadway was your prototypical class A office building, sort of Tower of Power, Manhattan, credit tenants, that whole jazz.

3:53And what's happened just last week or this month was that the AAA trench holders, so basically the people who hold what is considered the safest part of the CMBS stash, lost a big chunk of money when this building's debt was sold. So that doesn't happen very often. In fact, the last time it happened was the GFC. So now people are looking at this and saying, OK, so if AAA bondholders aren't safe, then God, how bad is this thing? Because we've talked about CRA distress for about a year and a half now. This one is particularly alarming. The money building stopped making money, I guess. Sorry, you knew that was coming eventually.

4:33But OK, the one saving grace in this seems to be that this particular CMBS deal, commercial mortgage-backed security, it was a single property deal, right? So the risk was tranched up. So you had that AAA slice, the AAA bit. But there was only one property. So you didn't necessarily have the diversification benefits that you would see in a normal CMBS conduit type deal. Correct. And this is something that people have been asking is, is there any point where it's justified to give a single asset transaction like this a AAA rating? Because yes, it is a diverse group of what you would call creditworthy tenants.

5:12But as we've seen with this building and another we're going to talk about, things can go wrong pretty quickly. So is it as diversified as it should be? Probably not, because if you're comparing it with like a pool of residential securities, you'd need, you know, six thousand of them to go bad at once for bondholders to suffer a loss. Now, that did happen at one point. But again, theoretically, that is a little safer than what we're talking about here. Can I just say, Tracy, I don't know. I may have talked about this in the office recently, but I've been watching the New York documentary by Rick Burns, which is Ken Burns's brother.

5:46It is so good. And like I've always liked living in New York. It's fine. But now I'm like really like New York filled. It's a 17 and a half hour documentary. I think you'd really like it. And it's all this like has this whole period of like when all these office buildings have gone up. And now particularly Park Avenue. I know we're talking about a Broadway building. Now I've become like I look at the buildings now. I will say. I'm a New York City office buildings appreciator now. Joe, this is actually true because we were in an office building recently. Yes. And you were so excited to be there.

6:15For me it was really. The Seager building, yeah. Yeah, I thought it was really nondescript and not that impressive, but you were genuinely excited and kept wandering around the office building looking at it. That corner, so again, I know a little side diversion. 53rd and Park, I sort of conclude is like my favorite corner of all of New York City. It's like this sort of like mid-century vibes and fountains and green tinted glass and stuff like that. Anyway, we can get back to the Mooney Mountain building. But you know, Jody, your point, that's a pretty well-shared sentiment. There is a famous quote by an architecture critic.

6:49It says, I'm going to quote, it is the ambition of the New Yorker to live upon the fifth, to take his earrings in the park and to sleep with his fathers in Greenwood. So it's it's a sentiment that's been shared for a few generations. It finally after 20 years. So this May is 20 years of me living in New York. It finally like all like clicked. And now I don't think I'm going to leave. OK, but just to go back to let's move away from Park Avenue and go back to 1740 Broadway. But what's the deal with the tenants there? So this is a pretty decent office building, as far as I can tell, in a prime midtown location.

7:23Maybe it's not as shiny and new as some other things, but I would have thought that someone would be renting it out. Well, it's a tricky time, right? So L Brands anchored the building. In fact, this is the problem with exposure to one, even if it's a great tenant like L Brands, which was the former parent of Victoria's Secret. They occupied, I believe it was close to almost 80 % of the space. Oh, wow. And they said they were going to exit the tower. Now that comes in 2021 when your return to office is very much up in the air. It's going to be very hard to find a tenant that would fill that kind of space.

7:58And it's going to be very hard to find a group of tenants that would want to fill that kind of space. So even if Blackstone had been able to fill that massive void left by L Brands, they would probably have to do it at a much lower rent, right? So that's going to make a serious dent on their NOI. It's going to affect their ability to pay their debt service. And so what they did is they decided to walk away. They walked away in 2022. They defaulted on the loan and they just said, go with God. And that's kind of what happened. And what's funny, Tracy, is they're very salty about this one. So if you look at their press statements starting maybe in the summer of 23, maybe a little earlier, they make it a huge point to say that traditional U.S.

8:40office represents less than 2 % of our entire holdings. So now they're using the scale argument. Hey, we're so big. And Brookfield has used this argument as well. Hey, we're so massive. These are little blips on a very successful track record. All right. Let's take our tour a little bit further south, still on Broadway. Let's head over to 1440 Broadway. Now, this is a building that caught my eye recently because it went into delinquency. And I think it was responsible for a big portion of the uptick in the serious delinquency rate that we saw in the most recent month, which is now at its highest level since early 2017.

9:23This is a$400 million loan backing 1440 Broadway. Now seems to be in serious trouble. What's going on there? Well, so there's been a little bit of news since you wrote your piece. In fact, we just received a refi, and this was predicted, I believe. I knew it. Yeah. In your story, they received a refi. Now, it's a very, it's a Faustian bargain type of refi. It's a very problematic refi because the appraised value of the property is just under, it's about 46. They took a 46 % haircut on the value of the building, but they did receive the loan. They did receive an extension until 2025. Yeah, Joe, this to me is why I was so interested in the building because it seems like a little microcosm of what's going on in office real estate at the moment.

10:10So you have higher benchmark interest rates, obviously. You have tenants like WeWork that used to be in there and are not there anymore. You have Macy's, which is another sort of thematic company. It's had better days. Yeah, there we go. I was trying to be polite with thematic, but death of retail and all of that. And yet, and yet it still gets refinanced. Yeah, they find a way. Wait, can I ask one more 1740 question? I know we moved on, but just one last thing. when there's one big tenant. And so this other building, okay, they have a few tenants and they're all maybe shaky or to some extent.

10:47How do you get like a AAA? I mean, it just seems like inherently when you have 80 % of the space rented to one company, that's no matter how strong the company or everything else, that's got to be like a huge source of concern for the lender. I would assume. This is the right question to ask. Unfortunately, a lot of the people at the ratings agencies don't seem to ask themselves that question. There are a lot of concerns about why something like DBRS or Morningstar, or there was one more, I believe, on this building, S &P, why are they providing AAA ratings to something with so much exposure to one tenant?

11:21And the answer is, well, I think it's their business to keep the market going. I think if you speak to anyone who's steeped in this space, it's far from a purely objective, dispassionate game, the ratings game. So that's the answer to that. Got it. So for 1440 Broadway, when a refi like this comes through and it's on onerous terms where the value of the property has been massively downgraded, who actually takes the loss on that? That's a great question. So in general, just stepping back for a minute, a lot of these Manhattan Trophy towers have an owner in name, right? So in this case, it was CIM, which is a massive money manager based out of LA.

12:01But then they have an owner in skin in the game, let's say, to call it. And in this case, the pension fund that was backing CIM on the property is called QSuper. So it's a Queensland based, so Queensland, Australia based pension fund. So they're the ones who had most of their equity in this transaction. CIM essentially serves as the operating partner and has a little piece. So the ones who end up taking a bath on these things tend to be the sorry pension funds. Australian pensioners. Pensioners. Australian pensioners, Canadian pensioners in many cases. So CPP has taken a bath on several properties in Manhattan recently.

12:36In fact, the one that caught a lot of headlines recently was they walked away. I think they took$1 for their stake in a property and released themselves from certain debt obligations and walked away. And that's happening time and time again. So if you notice the chatter on the sovereign wealth side, a lot of people are saying, office may not be where I need to be anymore. And that's been super interesting. So yeah, in this case on 1440, just a slight clarification, WeWork didn't in fact walk away. WeWork has walked away from a ton of leases all over the country. But in fact, it decided to stay put at this building.

13:10Now what changed though, is that it's doing it at a way reduced rent. So I think it was paying something in the seventies back in the day. And then, you know, it's not Adam Newman's company anymore, but it still has his kind of chutzpah. And it decided to work out a much better deal. So I think it's paying now in the 40s a foot. Macy's, however, has walked away. As of January, it kind of exited its lease. So the building is only 58 % occupied. And it's not in a very, you know, I wouldn't call that like the most glamorous part of Manhattan. No, it's close to Penn Station, which is a place I go to a lot.

13:44So yes. Right. You're unlikely to get your hedge funds or blue chip financial tenants to step into the void. So you have a 58 % occupied building. It's no 53rd and Park. Correct. That's right.

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15:28That's public.com slash market. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokered services for U.S.-listed registered securities, options, and bonds in a self-directed account are offered by Public Investing, Inc. Member FINRA and SIPC. Crypto trading provided by XeroHash. Complete disclosures available at public.com slash disclosures. Are you guys cool with me at kind of indulging you in the numbers on this building? Yeah, please, please. Okay, awesome. So the way that Manhattan Trophy Towers used to work is that it was a great way to announce your presence as a serious investor.

16:03So I'm going to run you through the brief 20-year journey of this building. Awesome. In 2002, this Virginia real estate scion that started a company called Monday Properties came in, bought this property for$230 million. Okay. Did very well with it. And in the kind of the CMBS go-go days of 07, was able to bring in a big institutional investor, Prudential. And the tower was valued at$434 million. So pretty much double what Monday had bought in for. Then, obviously, the crash happened. And in 2013, another private equity firm, Rockpoint, came in, paid$350 million. That's what the tower is valued at when they bought in.

16:42Then in 2014, it got super interesting. And this may have bled into your broader financial world. There was a company called American Realty Capital. Are either of you familiar with that? Oh, yeah, this rings a bell. Yeah. Not here. So Nicholas Schorsch went on sort of the acquisition tear of a lifetime and just bought up basically a tenth of Manhattan and had these weird non-traded REIT vehicles that he was using to fund all these purchases. Predictably, there was a major accounting scandal that company imploded in 2014. And that is when CIM bought in. So CIM bought in at about a$520 million valuation.

17:19And today, the valuation is at$320 million. And so this tower is fascinating. I think, Tracy, the reason it caught your attention, as did mine, is it has every character you can think of in New York real estate, from Adam Newman to Jeff Bezos to these mutual funds to these Virginia Scions. They've all played some kind of role in this tower. And it's basically gone sideways now, valuation-wise, for 20 years? uh no so rock point did terrifically well rock point bought in at 350 sold at 5.9 million nine or ten months later so they made the current valuation is what the current valuation is 320 million okay so like yeah that's what i mean if you just sort of looked at the starting valuation the first number that you mentioned and now right that has not been a particularly great run for it correct it's been it's been a rough go but again this thing about these markets is like a year and a half ago, we could point to this and say, wow, this building was appraised at 595 million.

18:20So it's really changed quite dramatically over these last 18 months or so. But to me, like the symbolism here is that even with the much, much lower valuation, it's still getting refinanced and it's still kind of hanging on and therefore is sort of a microcosm of what's going on with a lot of commercial real estate at the moment, which is even though there is all this concern, so far, a lot of this has been able to be, you know, refied or extended and pretended, whatever your preferred term might be. And I guess the big question is, for how long? Right. And I think this is a point that someone you had on earlier, Rich Hill, made very eloquently.

19:01And my way of putting it less eloquently is this whole debate about wall of maturities is kind of a fugazi debate. It's sort of like if you guys remember this whole thing about TAM, total addressable market. Oh, yeah. That's Steve Eisman's favorite term, right? Right. It is such a, I mean, when the VCs were coming and saying, okay, this company has smart locks. There are 2 million locks owned by institutional investors. Hence my TAM is gajillion trillion dollars, right? It's just a complete, I think if the debt clock is maybe another metaphor. It's a number that keeps going up or down based on what the deliverer of the message wants.

19:39So I've heard something from Bloomberg had an article about 1.5 trillion wall of maturities. Recently, ARIES, which is a big debt fund, threw out a 2.5 trillion number. But it's all meaningless because to your point, Tracy, these loans are getting reworked all the time. They're often getting extended, maybe at more painful terms. But this whole looming wall is just nonsense. This might be a random question, but when a building has significant vacancies, okay, I imagine that's a good time for a new tenant to come in because maybe they can get a good deal on rent. But on the other hand, do tenants express concern or have like, you know, if it's too empty, like do they want their employees coming to work in such like an empty sort of ghost building?

20:21I mean, maybe this isn't quite a ghost building, but does it become a sort of self-fulfilling prophecy where as vacancy gets lower, it becomes less appealing to potential tenants. Is that a thing? It's sort of like if you've been single for a very long time. Oh, that's like a big red flag. Right. It's a really tricky thing. So if we're talking about companies making a big push for RTO, return to office, and talking about vibes and collaboration, a phantom tower doesn't really give off the vibes that you need. So yes, vacancy rates of whatever, I think it's 18%. We've seen some rates hit 18%. This building is what, 42%.

20:56That's not a good sign for prospective tenants. So either they come in and extract incredibly generous concessions from the landlord, or they just stay put, or they don't show up. That's what happens. You know what I think we should do? And this is not a well thought out plan, so please take it with a grain of salt. But I was just thinking, these types of office buildings, there's been so much focus on office to residential conversion but there are a lot of office building-esque type things in asia like in tokyo in hong kong that are filled with little independent shops oh yeah you go into one it's it's 20 stories there's like a cat cafe and maybe a board game like a like a really cool like a food court yeah and you just kind of go through this warren of shops and you're never quite sure what's going to be around the next corner, but it's really fun.

21:48They should do something like that in New York. That's my idea. Well, it totally could work for a couple of buildings. We have had some, there are in fact, specialty, Tracy and Joe, you might want to talk to these people, but there are some specialty companies that essentially reimagine these dead buildings as beautiful event spaces or pop-up retail or even little restaurants and stuff like that. But how deep is that market? I mean, And you could do that with five buildings, maybe. Could you do it with all the buildings around the hulking Penn Station? Probably not. And how do you value those buildings?

22:23If you're an investor, if you're sitting in Queensland, Australia, and looking at your massive Manhattan investment, just tanking in value, you know, how do you take solace? Someone says, we're going to turn it into cat cafes. And you're like, hmm. Two things. One thing I'll say about Penn Station is that for the first time in all of the time I've lived in New York, I don't think there's any scaffolding in front of it. And it actually is kind of nice. Like we can't really build anything or do any construction quickly in this country, apparently. But eventually it did get done. Penn Station is not that bad right now.

22:59No, no. It looks nice. It's completely unfunctional. It's ridiculous. But other than that. There's nowhere to sit. Everyone has to line up in the middle of the room to get on their train single file. I don't understand why they don't have more benches. You know, the secret is to go across the road to the old part of the station and be there. And no one's actually there. You can get on your train immediately and avoid the line. Totally. No, I do that. I do that. In fact, yeah, I never go to Moynihan. I always go to the old ones. Yeah. So, all right, 1440 Broadway, it's sort of, is it a microcosm or is it the worst?

23:33How much do the conditions going on, that's sort of the big question right here, especially for that Queensland investor. How much is it reflective of what's going on in lots of other buildings? Well, I think they were caught particularly badly by an aging retailer and a company that went somewhat belly up in Macy's and WeWork. But their ability to get financing is absolutely, what it reflects more than anything else is that lenders don't want to take these assets back. And lenders, even though they will rail against these borrowers and can try all they can, they are not willing to take these assets back.

24:11That's a big part of it. The other part of it, which we haven't discussed yet, but I think is probably the most fascinating part of the story, is the fees. The fees on these things are unbelievable. So Tracy, your colleague at Bloomberg, reported about 1740 Broadway, right? So that building sold for$186 million, which would have, if that whole amount went back to the bondholders, made them whole, at least the top tranche, the AAA tranche. Instead, they were left with$117 million. So you're looking at, what,$70 million-odd in fees and advances, etc. So when we talk about who's making money in this market, it's the special servicers.

24:50It's the middlemen. It's the adults. They're making a killing. It's an amazing time to be in the servicing business. Yeah. Someone's still making money from the money building, even if the money building is not generating that much money. How many times can I say money on this podcast? That's really good.