This week’s column examines the state of office loan delinquencies, a downgrade for deal backed by San Francisco hotels and buyers found for two shopping centers. Read the entire piece by clicking “read more” below.
Office loan delinquencies reach high: Commercial mortgage-backed securities loan delinquencies have surged to their highest level since the pandemic, driven by record-high office defaults and tightening refinance conditions, according to a new report.
Office loan defaults hit a record high in the first quarter, climbing nearly 1 percentage point to 12.73% of the total outstanding balance, Moody's Investors Service said. That translates to $939.8 million added to a total balance of $12.6 billion.
Borrowers are increasingly unwilling or unable to refinance office loans, compounded by ongoing market volatility, the bond-rating firm said. In the first quarter, 61% of maturing office loans paid off. That rate was down from 70% in the fourth quarter.
A look at CoStar CMBS data revealed office loans either delinquent or in default back 689 buildings totaling 127.2 million square feet, or 14.9% of U.S. office square footage.
Office properties in central business districts accounted for 177 of the buildings, totaling 61.5 million square feet with a 32.6% vacancy rate. Meanwhile, urban markets outside downtowns accounted for 152 buildings, totaling 25.8 million square feet with a 35.9% vacancy rate. And suburban markets accounted for 329 buildings, totaling 38.4 million square feet with a 35.1% vacancy rate.
Loans on 26 buildings, totaling 3.5 million square feet, were 30 to 60 days delinquent; 34 buildings, totaling 3.3 million square feet, were 60 to 90 days delinquent; and 129 buildings, totaling 24.2 million square feet, were 90 or more days delinquent.
The bulk of the loan defaults come from borrowers not paying off their debt by the maturity date — 301 buildings totaling 64 million square feet, according to CoStar data.
Of the buildings in default, 77 totaling 13.9 million square feet are in the process of being foreclosed upon; and another 122 totaling 18.3 million square feet are already real estate owned by the lender.
San Francisco hotel deal downgraded: Morningstar DBRS has downgraded its credit ratings on CMBS deal Hilton USA Trust 2016-SFP even as the two San Francisco hotels backing the $725 million deal are under contract to be sold.
The collateral for the underlying loan consists of the 1,024-room Parc 55 San Francisco and the 1,921-room Hilton San Francisco Union Square, both of which have been delinquent for nearly two years.
The two properties were placed under contract in late March, according to CMBS loan servicer commentary. The purchase is contingent upon the loan being modified, extended and assumed by the unidentified buyer. Additionally, the terms of the loan assumption will require the buyer to contribute new equity to the deal and undertake renovations, which are projected to significantly increase value while the market in San Francisco recovers.
San Francisco hotels are still struggling to bring revenue back to pre-pandemic levels, according to a CoStar analysis. Performance has been improving at Parc 55 and the Hilton San Francisco Union Square, according to Morningstar. Year-end 2024 financials showed a net cash flow of $34.2 million versus $941,066 a year earlier.
Morningstar’s downgrades were based partly on the hotels taking an expected loss against a loan of $240 million upon the sale’s closing.
Shopping centers find buyers: Court-appointed receivers of properties backing CMBS loans notched a couple of wins recently in disposing of two separate shopping centers.
Receivers are typically brought in to manage properties when a borrower defaults on a loan.
Lamar Cos., in conjunction with Real Capital Solutions, acquired Alamance Crossing, a 671,201-square-foot, 26-building regional open-air lifestyle center in Burlington, North Carolina. And First National Realty Partners closed on the purchase of Florissant Marketplace, a grocery-anchored shopping center in Florissant, Missouri.
Lamar did not disclose the purchase price, but the property was last appraised in January 2024 at $34.2 million. The appraisal amount was not enough to cover an outstanding loan balance of $50.8 million, according to CoStar data.
“This strategic purchase builds on the nearly 1 million square feet of retail assets we've secured over the past 12 months, underscoring our commitment to identifying and capitalizing on value-add opportunities in the retail sector,” Lamar's chief acquisition officer, Frank Maresca, said in a statement. “Our team is actively pursuing deals to enhance our portfolio and capitalize on the evolving retail landscape.”
Outside of St. Louis, First National acquired the 147,349-square-foot Florissant Marketplace. A $12.4 million loan on the property transferred to special servicing in July 2020 with a receiver appointed in January 2021. The receiver signed a new 40,154-square-foot lease with Crunch Fitness last summer before marketing the property for sale, according to CoStar data.
First National did not disclose its purchase price. The property was last appraised at $8.5 million in October 2023.
