The Manhattan office tower Blackstone had bought for $605 million in 2014 and abandoned 2 years ago finally changed hands for $200 million, which paves the way for a complex new beginning.
By Wolf Richter for WOLF STREET.
Two Years Ago, in March 2022, Blackstone indicated that it would no longer make the interest payments on the fixed-rate interest-only $308 million mortgage on a Manhattan office tower it had bought in 2014 for $605 million. The 26-story tower at 1740 Broadway was built in 1950 as the iconic headquarter of Mutual Life Insurance Co., which vacated the building in 2006. The building was then renovated and leased.
In 2015, Blackstone had obtained the $308 million mortgage from Deutsche Bank, which then securitized the mortgage into a single-asset commercial mortgage-backed security (BWAY 2015-1740) and then sold these CMBS to investors.
So after the $308 million in cash it had obtained from the mortgage in 2015, Blackstone had $297 million left in the tower.
By March 2022, the two largest tenants – L Brands, with 77% of the rentable space, and law firm Davis & Gilbert, with 15.8% – had moved out, and Blackstone had written off its investment. It stopped making payments on the loan, essentially returning the tower to the lenders (the special servicer of the CMBS). So this was part one of the saga, and we discussed it at the time.
Now there’s part two.
So now, two years later, after a number of complications, including a change in special servicer, the CMBS, backed by the $308 million mortgage, was purchased for “just under $200 million” by private equity firm Yellowstone Real Estate, according to the Commercial Observer, citing sources familiar with the trade. Yellowstone Real Estate was previously owned by, uhm, Blackstone, the Commercial Observer said.
The buyer of the mortgage gets the building, and so Yellowstone essentially acquired the tower for “just under $200 million,” that Blackstone had purchased for $605 million in 2014. So the price has collapsed by 67%.
Investors in the CMBS got what would be left of the “just under $200 million,” minus fees, on the $308 million investment, so a loss of at least 35%, with lower-rated tranches of the CMBS getting wiped out, and with the top-rated tranches taking a smaller capital loss.
Yellowstone is now considering a residential conversion of the 70-plus-year-old iconic building, according to the sources cited by the Commercial Observer. And that will be part three of the saga.
It takes years to clean up the office CRE mess.
So far, it took two years from Blackstone’s announcement that it would no longer service the loan to the loan getting sold, which is making way for a new beginning with a much lower cost base.
If plans for a residential conversion materialize, it will trigger a long complex process from planning and permitting through construction and completion of the project, after which Manhattan will have another fancy residential building. And that would be a good thing. But in addition to the two years that the tower already sat nearly vacant and in default purgatory, before it finally changed hands, it will take several more years before it returns to life.
When CRE hits investors, fine, they were paid to take those risks. But we’re a little more squeamish when it comes to banks: Banks’ Exposure to CRE Loans by Bank Size
