Office Loan Defaults Spread to Denver, Buyer Snaps Up Another Distressed Retail Center, Single-Borrower Payoff Rate Set To Improve

A Weekly Look at the Commercial Mortgage-Backed Securities Business

Brookfield Office Properties is trying to work out a loan modification on Republic Plaza, Denver's tallest office building. (Linda Jáquez/CoStar)

By Mark Heschmeyer

CoStar News

February 16, 2023 | 11:49 P.M.

Office Loan Defaults Spread to Denver: Credit-rating firms have been lowering bond ratings on downtown office buildings across the country, including in Charlotte, North Carolina, and Philadelphia in the past two weeks. In the latest downgrade, S&P Global Ratings notched down its ratings on five classes of bonds from commercial mortgage-backed securities deal WFRBS 2013-C11. The move reflects S&P’s reevaluation of the largest loan in the offering backed by Republic Plaza, Denver’s largest office building.

Republic Plaza is a 56-story, 1.34 million-square-foot, Class A office property and parking garage hit hard by changing office demand, particularly in the energy sector. The property, opened in 1982, has an outstanding loan balance of $243.1 million spread out over two CMBS deals. The loan matured on Dec. 1 without paying off as scheduled, according to S&P Global.

The sponsor, Brookfield Office Properties, was not able to refinance the outstanding mortgage by the maturity date, S&P Global said. However, the borrower has continued to make monthly debt service payments. Discussions on various resolution strategies, including a potential loan modification and maturity date extension, are ongoing, according to S&P Global. Brookfield declined to comment to CoStar News.

A new appraisal report has been ordered for the property, S&P Global said. The property was last appraised when the loan originated in 2012 at $535.4 million, or $412 per square foot.

The key performance metrics of the property are much different now than they were in 2012. Republic Plaza has a current vacancy rate of 25.3% compared to 4% 10 years ago, CoStar data shows. The current space availability rate of 36.7% is up from 4% in 2012. While vacancy measures empty office space available, availability includes occupied space that is also coming up for lease.

Remote work initiatives continue to have an outsized impact on Denver’s downtown office market, according to a CoStar analysis. The vacancy rate of 25.1% is the highest on record for the market, driven by the delivery of a handful of major projects and large-scale move-outs.

CoStar estimates that nearly 10% of office space in downtown Denver is occupied by energy tenants, which have suffered both the oil price bust in 2014 and more recently a historic drop in demand at the outset of the COVID-19 pandemic. Two years ago, one of the market’s established long-term energy tenants, DCP Midstream, relocated its headquarters from Republic Plaza, where the company had occupied 171,000 square feet for years. The company took 72,000 square feet at the newly completed Belleview Station in the Denver Tech Center.

Town Center at Cobb

Kohan Retail Investment Group acquired Town Center at Cobb in Kennesaw, Georgia. (CoStar)

Buyer Snaps Up Another Distressed Retail Center: Kohan Retail Investment Group, a major buyer of shopping centers during the pandemic, has purchased its first property of 2023. The Great Neck, New York-based firm acquired Town Center at Cobb in Kennesaw, Georgia, for $71 million.

Kohan has feasted on distressed shopping centers going back to the first quarter of 2020. It has acquired some 40 retail centers since then, according to CoStar data. The portfolio it has amassed totals 20.2 million square feet for which it paid about $780 million.

Like most of its previous purchases, Kohan’s purchase of Town Center at Cobb came via a special servicer of CMBS deals, according to CoStar data.

Trustees for two CMBS deals that originated in 2012 had previously taken ownership of Town Center at Cobb through foreclosure in February 2021. A sales marketing effort kicked off in July with a call for offers due in October, according to CoStar loan notes.

As of last month, the property had an outstanding loan balance of $166.7 million, CoStar data shows. The loan is secured by a 560,000-square-foot portion of the 1.3 million-square-foot super-regional mall, according to Moody’s Investors Service.

Property performance had declined in recent years due to lower revenue. The year-end 2021 net-operating income was 30% below the 2012 level. The suburban Atlanta property was already facing declining performance before the pandemic, and the 2019 net-operating income was already 16% lower than in 2012, Moody’s reported last summer.

With a sale price of $71 million, CMBS bondholders are taking more than a $95.6 million loss on the disposition. When the loan originated in 2012, the center had been appraised at $322 million.

Kohan did not respond to a request from CoStar News for additional information.

Single-Borrower Payoff Rate Set To Improve: More than $45 billion of U.S. single-asset, single-borrower CMBS loans are set to reach their final maturity date, after exhausting all extensions, through 2024, according to DBRS Morningstar. The on-time payoff rate for these loans is expected to be higher than in 2022 because of slowing interest rate increases and the so-called flight to quality involving top-tier properties that make up the bulk of single-asset, single-borrower deals, DBRS projected.

The pipeline of single-asset, single-borrower maturities rises dramatically each year, with $8.85 billion in loans reaching their final maturity in 2023, and climbing to more than $3 billion in 2024, according to DBRS.

“Following 2022’s [single-asset, single-borrower] payoff rate of just 62.%, only slightly higher than 58.3% for [multiborrower/multiproperty] loans, we expect the [single-asset, single-borrower] payoff rate to improve significantly to about 75% in 2023 and 94% in 2024,” DBRS said in a report.


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