Blackstone Handing Back Keys to 1740 Broadway

“This asset faces a unique set of challenges, and we are working diligently to find a solution that is in the best interests of all parties involved, including our investors and lender,” a Blackstone spokesperson told CO, confirming the transfer but declining to comment further than the firm’s statement. “The vast majority of our office portfolio comprises differentiated office properties, such as life science office and office properties benefitting from content creation tailwinds, and we are confident those properties will continue to outperform. We continue to be big believers in New York and cities like it that are hubs for innovation and talent.”

The office building at 1740 Broadway sits on the easterly blockfront of Broadway between West 55th and West 56th streets. The 620,928-square-foot asset was built in 1950.

Its CMBS loan was put on a servicing watchlist due to tenant L Brands’ 418,000-square-foot lease expiring, according to servicing data provided by CRED iQ. The lease was due to expire on March 31, but L Brands decided not to renew and instead downsize and relocate its offices downtown to 55 Water Street at the start of the pandemic. Additionally, law firm Davis + Gilbert, another top tenant at 1740 Broadway, relocated to Rudin Management’s 1675 Broadway in September 2019, putting extra stress on the property. 

Echoing the Blackstone spokesperson’s statement, sources familiar with the transfer told CO the exit is by no means representative of Blackstone’s broader view on the New York City office sector, but rather the firm is leaving this particular investment as a one-off strategy out of a fiduciary responsibility to its investors. “It’s the smartest move for their investors,” one source said. 

Given the property’s existing debt, investing the additional capital required to re-lease the property didn’t make any sense, another source said, particularly with the continued uncertain recovery of the submarket. As such, Blackstone is said to be currently exploring loan resolution options. 

One source indicated that Blackstone has no plans to stop paying debt service on any of its other  U.S. office assets.

The investment in 1740 Broadway had already been written down pre-COVID-19 to reflect broader challenges in both the Midtown office submarket and the asset, sources said. COVID-19 only accelerated those pressures, particularly on the leasing front. 

Blackstone acquired 1740 Broadway in late 2014 for $605 million from Vornado Realty Trust. Both L Brands and Davis & Gilbert had leases with below-market rents at the time, and there was no obvious reason in sight for the two tenants not to renew their leases, or for concern if the tenants didn’t renew, sources said. But, in 2019, the west side office submarket of Midtown started stumbling.

While COVID then placed tremendous extra pressure on the New York City office market, 1740 Broadway’s location reduced its fighting chances even before then, sources said. 

“If 1740 were in a primary location such as Park Ave or Midtown South, there would likely have been a different outcome,” one source said.

Office represents less than 20 percent of Blackstone’s  global real estate portfolio. Within that portfolio, only 4 percent is allocated to traditional offices, with the remainder concentrated in life science and media / tech-focused office markets. The firm’s New York City office portfolio represents less than 1 percent of Blackstone’s global portfolio, with its U.S. office portfolio being nearly 90 percent leased, according to data Blackstone previously disclosed. 

It certainly doesn’t seem like Blackstone is backing off from New York office any time soon, in fact quite the opposite. Only last week, Blackstone announced it had acquired a 49 percent stake in 1 Manhattan West from Brookfield and Qatar Investment Authority in a deal that values the 67-story office building at $2.85 billion. 

In terms of next steps for 1740 Broadway, Mike Haas, co-founder of CRED-iQ —speaking generally, and not of the 1740 Broadway loan — said: “The special servicer will typically dual track the foreclosure process while discussing workout alternatives and possible loan modifications with the borrower.  If the sponsor decides to give the keys back, the special servicer will take the title via deed-in-lieu of foreclosure. Then the special will appoint an asset manager who will try to lease up and stabilize the property for a [real estate owned] sale with the goal to maximize proceeds for the CMBS trust.”

 Cathy Cunningham can be reached at ccunningham@commercialobserver.com.