CMBS Third-Quarter Workouts Incur Big Losses
CRED iQ took a deeper dive into a selected group of commercial mortgage-backed securities (CMBS) loans that incurred the largest realized losses in the third quarter of 2023. Our research team identified 18 notable workouts classified as dispositions, liquidations or discounted payoffs during the third quarter. All 18 workouts had realized loss severities that varied from 30 percent to 100 percent (as determined by the outstanding balances at the time of disposition).
Our featured loans were concentrated in the office, lodging and retail categories. Across those 18 featured loans, there were five distressed resolutions in the office category, three in lodging, and nine in retail. Additionally, one mixed-use loan, which combined retail and office properties, was part of the featured distressed workouts.
The Crossgates Mall is our most substantial distressed workout, drawing significant news attention as a super regional mall based in Albany, N.Y. This property, which was featured in a recent CRED iQ case study, incurred losses of $98 million through three transactions (COMM 2012-CR1, COMM 2012-CR2 and COMM 2012-CR3). The aggregate debt resulted in a loss severity of 40 percent against the $245 million loan balance.
In May, when the debt extension for Crossgates Mall expired, Pyramid was unable to secure mortgage refinancing. According to Securities and Exchange Commission filings linked to the three CMBS deals holding Crossgates Mall’s debt, the company submitted a notice of default to its creditors. In the tax year 2023, the seven parcels constituting the mall’s footprint collectively paid $6.1 million in taxes to the Town of Guilderland, its special districts, school system and Albany County.
There were three distressed loans with loss severities of 100 percent, involving two office properties and one hotel.
The Campus at Greenhill, an office property in Wallingford, Conn., incurred a $22 million loss for the COMM 2014-UBS5 trust.
Landmark Towers in St. Paul, Minn., incurred a $16 million loss for the MLMT 2008-C1 trust.
With the ongoing elevated interest rate environment, commercial real estate properties may continue to experience negative impacts on their valuations. This can result in significant challenges for borrowers, both in terms of existing debt and when seeking to refinance. As office occupancy continues to see downward pressure as brokers work to backfill dark space, net operating income will continue to be impacted, putting negative pressure on debt financial metrics.
Mike Haas is the founder and CEO of CRED iQ.