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Category ArchiveMoody’s

Värde Jumps Into CLOs With $368M Closing

As the market heats up for an asset class that harks back to the yield-seeking days before the financial crisis, Värde Partners announced it has closed a $368 million commercial real estate collateralized loan obligation (CLO), marking its debut offering in the financing type.

The transaction, known as VMC 2018-FL1, represents a pool of 25 recently originated short-term floating rate mortgages, secured by 28 sector-diverse properties. Although a ruling in the U.S. Court of Appeals for the District of Columbia Circuit last week decreed that CLOs would no longer be required to follow the same risk-retention rules as asset-backed securities, Värde will nonetheless keep about 22 percent of the transaction on its books, offering the remainder—$288 million of bonds that have received ratings of AAA through BBB- from Moody’s and Kroll Bond Rating Agency—on the open market.

“There is significant demand for commercial mortgage capital, and [we] seek to provide flexible solutions to meet the needs of businesses not served by traditional lenders,” Brian Schmidt, the head of Värde’s mortgage business, said in a statement.

The pool’s loans, which were originated between 2016 and 2018, carry terms of 24 to 40 months, according to KBRA’s rating report. The 28 properties that secure them are spread across 12 states, with the biggest concentrations in Florida, California and Illinois.

Despite a nearly decade-long lull following the financial crisis, the asset type has rocketed back to the fore in the last year. After a 2016 that saw just $2 billion dollars in new CLOs, 2017 brought a fourfold increase, topped off by a blockbuster $1 billion deal that Blackstone closed in late December. Panelists at CREFC’s Miami conference last month anticipated that the market could grow to as much as $14 billion in 2018.

Underwriting quality has generally improved from ten years ago, but Värde’s entry is still loaded with transitional assets that inflate the proportions of the underlying properties’ debt. The overall loan-to-appraised value ratio for the 25 mortgages is nearly 87 percent—which would fall to 71 percent once the properties are stabilized.

The transactions’ largest loan, secured by Golden Bear Plaza in Palm Beach Gardens, Fla, is more than 80 percent occupied, with a diverse base of 45 tenants. But other properties, like City Center Square, the Kansas City, Mo. tower that backs the second-largest loan, may inflate the deal’s risk profile. It was built in 1977, and is only 52 percent occupied.

The deal’s KLTV—an loan-to-value-like indicator derived from KBRA’s cash-flow analysis—was 128.3 percent, riskier than any CLO transaction the agency rated last year.

Source: commercial

Brian Grow Named President of Morningstar Credit Ratings

Following the departure of its ratings business’s previous leader, Vickie Tillman, at the end of last year, Morningstar has named Brian Grow the new president of Morningstar Credit Ratings.

Grow, 44, served most recently as the head of the firm’s asset-backed securities and residential mortgage-backed securities ratings practices. He joined the company in 2011 and presided over a period of growth in structured-finance ratings, as the firm’s trio of largest competitors—Standard and Poor’s, Moody’s and Fitch—drew scorn for their role in overrating the creditworthiness of debt securities in the years before the financial crisis.

“Brian has proven to be an extremely effective leader and has helped take Morningstar Credit Ratings from a single asset class to a full-service and diverse rating agency,” Haywood Kelly, the Morningstar Inc. executive to whom Grow will report, said in a statement. “His analytical and technical expertise, high-quality standards and history of strategic decision-making will support Morningstar in its mission to help investors reach their financial goals.”

Despite Morningstar’s recent growth, it remains a small player in a heavily concentrated industry. In March 2017—the date of its latest regulatory filing—the company employed 81 credit analysts, 17 of whom were supervisors. As of late last year, that staff was responsible for ratings on about three dozen banks, just over three hundred corporations, and around 3,600 structured finance transactions.

Standard and Poor’s, by contrast, rates about 60,000 banks, 50,000 corporations and about as many structured securities—not to mention nearly a million public-finance entities, its filings show. At the end of 2016, its workforce numbered just over 1,500 analysts, with more than 150 supervisors.

As of his third day on the job, at least, Grow said he sees advantages to helming a smaller vessel.

“I think of the big three [rating agencies] as big cruise ships,” he said. “Everybody knows them, but they’re not nimble. The smaller agencies are more like speedboats.”

Morningstar, Grow pointed out, is still majority owned by its founder, Joe Mansueto, an arrangement that the new president said helps the company maintain a long-term focus.

After a decade of regulatory challenges for the industry, as the ratings agencies labored to implement strict controls mandated by the Dodd-Frank Act, the focus is shifting back towards the fundamental business of understanding debt markets, Grow said.

“Regulatory [challenges] are kind of old news,” explained Grow, who studied economics at St. Lawrence University and holds a master’s degree in business from Yale University. Instead, his priority will be “staying on top of monitoring and surveillance. We’re very focused on that because there will be a down cycle at some point, and I want to be the first to come out and inform investors.”

Source: commercial

Delivering Amazon: This Is What’s Right and Wrong With the City’s Pitches for HQ2

Earlier this week, The Associated Press reported that Amazon received 238 proposals from cities and regions that want to house its second North American headquarters.

Indeed, Amazon has a lot to offer: a promised 50,000 jobs and $5 billion to spend. Everyone—including Gotham—wants in on the action.

In its attempt to lure Jeff Bezos to our city, New York hasn’t shown this much leg since The Deuce era.

More than 70 elected officials—from Public Advocate Letitia James, to Manhattan Borough President Gale Brewer, to City Council Speaker Melissa Mark-Viverito—signed a statement touting New York City’s accessibility to both Boston and Washington, D.C.; its commitment to sustainability; Citi Bike and the largest subway system in the world (wisely, nobody mentioned MTA’s “summer of hell”) and “affordability”—as in, the fact that the administration has promised 200,000 affordable housing units over the next 10 years. (Friendly advice: The word “affordability” isn’t something that really works to New York’s advantage in real estate matters. But too late now.)

“Companies don’t just come to New York,” Mayor Bill de Blasio wrote in his seduction letter. “They become part of New York.”

In its official presentation, the New York City Economic Development Corporation proposed four different neighborhoods that could conceivably do the job: Lower Manhattan, the Far West Side, Long Island City and Downtown Brooklyn.

And while everybody weighs in (Moody’s pegged New York’s chance of landing Amazon as sixth in the country—after Austin, Texas; Atlanta; Philadelphia; Rochester, N.Y.; and Pittsburg—as per a New York Times story), it’s worth considering the four areas up for consideration, what they all have to offer and what the NYCEDC probably won’t mention.—Max Gross

Lower Manhattan

Over the 16 years since the Sept. 11, 2001, World Trade Center attacks, Lower Manhattan has been transformed from a financial district to a commercial and residential hub.

It is this very evolution—plus its transportation network—that makes the neighborhood ideal for Amazon’s second headquarters in North America, Lower Manhattan boosters say.

Amazon wants 500,000 square feet of office space in 2018 with another 7.5 million square feet over time. And Lower Manhattan has the potential for over 8.5 million square feet of space, according to the city’s recent proposal to Amazon.

Granted, Downtown Manhattan would not be the cheapest option nationwide. But, “cost of space should be least of their concerns,” Marty Burger, the chief executive officer of Silverstein Properties, said in a survey for Commercial Observer’s upcoming Owners Magazine. (The landlord owns the majority of the World Trade Center buildings.)

“Most important is access to new talent,” he continued. “You want a place that has A) the best transportation, B) a great pool of people to draw from. When we look at the lower tip of Manhattan, it has the best access to all this talent—Brooklyn, Queens, Staten Island, Jersey City, even Long Island. There are 10 million people to draw that talent from.”

Lower Manhattan has a high concentration of mass transit with 13 subway lines and the PATH train, and those transit hubs have been upgraded with abundant retail and dining options as well as climate-controlled concourses, said John Wheeler, a managing director who runs JLL’s Lower Manhattan office.

Downtown Manhattan boasts access to the waterfront, more than 83 acres of open space and enticing dining options, from food halls like Hudson Eats in Brookfield Place to restaurants helmed by star chefs, like Jean-Georges Vongerichten, Nobuyuki “Nobu” Matsuhisa and Danny Meyer, to fast-casual chains like Chop’t Creative Salad Company and Dig Inn.

Burger has already figured out how to make it work for what’s being called Amazon HQ2.

“We could put together a campus for them,” Burger said. “They could take the top of 3 World Trade Center. We could work with Durst [Organization] to get them the top of 1 World Trade Center. We have a potential to build 2 World Trade Center and 5 World Trade Center. We could put together 7 million square feet.”

But there are also other options for Amazon.

Wheeler noted that, while the World Trade Center would be “part of the solution,” other candidates include Brookfield Place, 28 Liberty Street and Guardian Life Insurance Company of America’s headquarters building at 7 Hanover Square.
Lauren Elkies Schram

Long Island City

Long Island City’s relatively recent transformation from an industrial outpost to Queens waterfront hotspot has been mostly fueled by residential development, with more than 14,000 new units built since 2006 and another 19,000-plus in the pipeline, according to data from the Long Island City Partnership.

As far as commercial development is concerned, however, the neighborhood by most accounts has some way to go. Most of Long Island City’s new office stock has come in the form of repositioning existing warehouse buildings into loft-like spaces mostly of a scale smaller than what Amazon would demand.

But the city is floating LIC as a legitimate option for Amazon, citing the neighborhood’s “creative” appeal as “home to over 150 restaurants, bars and cafés” and more than 40 “arts and cultural institutions” including galleries, museums and theaters, according to the NYCEDC’s proposal.

While the proposal cites “over 13 million square feet of first-class real estate” available in the neighborhood, how much of that qualifies as office space that would suit Amazon’s needs is murkier. Per the LIC Partnership, the area has roughly 7.5 million square feet of existing, nonretail commercial space—which would already fall short of the 8 million that Amazon will eventually require—and another 4.5 million square feet on the way by 2020.

But projects like The Jacx—Tishman Speyer’s two-towered development that promises to bring 1.2 million square feet of Class A office and retail space to Jackson Avenue—hope to further enhance the neighborhood’s office chops. And perhaps the biggest advantage LIC has is its relative affordability compared to the other areas under consideration with the city citing “price points that compare favorably with commercial centers across the five boroughs.”

For developers like TF Cornerstone, which was an early believer in Long Island City and has helped facilitate its transformation via multiple large-scale residential projects, Amazon’s arrival would be a massive boon to the neighborhood’s economy—one that would fuel demand for the thousands of new residential units due to come online, attract needed retail to the area and heighten its profile as an office destination. In turn, LIC’s relatively central location within the five boroughs and robust public transit offerings would give Amazon what it needs for a viable HQ2.

“The north Long Island City waterfront offers the best location for a large user like Amazon,” Jake Elghanayan, a senior vice president at TF Cornerstone, told Commercial Observer in a forthcoming interview for Commercial Observer’s Owners Magazine. Elghanayan cited the neighborhood’s large “contiguous development area” and robust public transit offerings, as well as its proximity to the new Cornell Tech campus on Roosevelt Island.—Rey Mashayekhi

West Side of Manhattan

Those associated with the Hudson Yards megaproject like to say that “a new city” is being built on Manhattan’s Far West Side, and it’s hard to argue with the assessment. With tens of millions of square feet of new commercial space due to come online in the area over the coming years, Hudson Yards would most likely serve as the centerpiece of the city’s effort to get Amazon to commit HQ2 to Manhattan’s West Side.

Besides the sprawling 28-acre development being undertaken by Related Companies and Oxford Properties, there is also Brookfield Property Partners’ Manhattan West project nearby, where Amazon already has a sizable footprint. Last month, the tech giant committed to taking 360,000 square feet of office space at 5 Manhattan West, where it will house 2,000 employees and serve as the primary location for Amazon’s advertising division. (CO first reported that Amazon was in talks for the space in April.)

The city’s proposal for HQ2 also cites the nearby Penn Plaza district, where Vornado Realty Trust—the largest commercial landlord in the area surrounding Penn Station—has in recent years talked up a large-scale repositioning of its assets in a bid to capitalize on the West Side’s newfound appeal as an office destination.

In total, the city says the West Side offers Amazon more than 26 million feet of available office space to build its campus—more than triple the 8 million Amazon will need long term—as well as ample transit options for the company’s sizable workforce: 15 subway lines, plus access to the PATH, the Long Island Rail Road, the Metro-North Railroad and Amtrak, not to mention the Port Authority Bus Terminal and the Hudson River ferry service.

But the West Side could prove cost prohibitive; it is the most expensive of the four New York City submarkets being floated as options for Amazon. With the cost of living and doing business in New York already the biggest drawback in the city’s bid for HQ2, the likes of Related and Brookfield may have to look elsewhere to fill up all that office space.

Such cost concerns aren’t discouraging neighborhood stakeholders, however. “Manhattan’s always been expensive, but it gives you other things,” said Robert Benfatto, the president of the Hudson Yards/Hell’s Kitchen Alliance Business Improvement District. “It has its upsides and downsides, but it tends to be attractive to businesses.”—R.M.

Downtown Brooklyn

Out of the four neighborhoods New York City proposed for Amazon’s second headquarters, the “Brooklyn Tech Triangle” of Dumbo, Downtown Brooklyn and the Navy Yard might hold the most promise. Although the area doesn’t have much office space right now, several large projects are either under construction or in the pipeline. At the Navy Yard, Rudin Management and Boston Properties’ Dock 72 will bring 675,000 square feet of offices—anchored with a 222,000-square-foot WeWork—to a former dry dock on the East River.

Besides Dock 72, landlord Brooklyn Navy Yard Economic Development Corporation is leasing up a newly renovated 1-million-square-foot industrial and office building called Building 77, and there’s available space at Steiner Studios, the film and television production complex on the eastern edge of the yard. The closest subway stations are about a mile away in Dumbo (certainly its biggest drawback), but the yard has begun running shuttle buses that take commuters into Dumbo and Downtown Brooklyn for easy transit access. It’s also about to open a new ferry stop next to Dock 72.

TerraCRG Founder Ofer Cohen dispelled concerns about the Navy Yard’s lack of transit, pointing out that it hasn’t prevented hip companies from setting up shop there. New Lab, an innovative science and tech coworking space, recently opened in Building 128. And Building 77 hosts tenants like startup incubator 1776, a commissary kitchen for small food manufacturers called Tiny Drumsticks and fashion company Lafayette 148. He noted that Dock 72 would probably be the only project large enough to accommodate Amazon’s requirement of 500,000 square feet of office space in 2019.

“Downtown Brooklyn and the Brooklyn Tech Triangle are poised for significant growth,” said Downtown Brooklyn Partnership President Regina Myer. “There’s a huge demand for Class A space in Downtown Brooklyn. We have 1,400 innovative companies in the broader tech triangle. And we have an amazing pipeline of new talent for companies relocating to the tech triangle because we have 10 different colleges.”

Myer pointed to several sites in Downtown Brooklyn that could host Amazon. Rabsky Group could build an office building as large as 770,000 square feet on its vacant parcel at 625 Fulton Street, and RedSky Capital could develop a huge commercial and residential project on its assemblage bounded by Dekalb Avenue, Flatbush Avenue and Fulton Street. And Tishman Speyer is developing the Wheeler, a 10-story office building, on top of the Art Deco Macy’s department store at 422 Fulton Street.

CPEX Real Estate’s Timothy King, the brokerage’s managing partner, pointed out that Amazon would have convenient access to plenty of retail and amenities in Downtown Brooklyn, including hospitals, hotels, shopping, restaurants and bars. And when you consider Atlantic Terminal, the broader tech triangle offers 13 subway lines. “Short of going out in the desert somewhere and building some kind of utopian village,” he said, “I’d be hard pressed to find some place better for Amazon than beautiful Downtown Brooklyn.”—Rebecca Baird-Remba

Source: commercial

Plight of 400 Atlantic Worsens as Charter Announces New Stamford HQ

When the mortgage refinancing 400 Atlantic Street, in Stamford, Conn., was packaged into the Goldman Sachs-sponsored GSMS 2007-GG10 CMBS deal in March 2007, there were no particular red flags. Representing a modest 3.5 percent of the deal’s initial balance, the loan was secured by what looked at the time to be a thriving office tower. Ninety-seven percent of the building was leased, to tenants like UBS, American Express, and International Paper. Stamford was a bustling financial center. And the leader of the borrowers’ group was Alan Landis, founder of the Landis Group and a co-owner of the New York Yankees.

In the years since, however, fate has not been kind.

Nearly five months into the $265 million loan’s second trip to special servicing, the building’s second-largest tenant, Charter Communications, announced on Tuesday it would vacate its 110,000 square feet in the building, wiping out more than 20 percent of the building’s occupancy. UBS, which has gradually decamped from Stamford over several years, will finish vacating its 50 percent of the building next year. And International Paper and American Express, who together recently took up over 30 percent of the tower’s space, have also moved out.

Those departures have left the building—whose owners had never missed a loan payment before the recent maturity default—in dire straits. At securitization, the building was valued at $335 million, but a 2016 appraisal cut that number by 60 percent, to only $134 million.

By its own account, the Landis Group’s attempts to restructure the building’s debt with the special servicer, C-III, have not gone smoothly. In a statement sent to CO, a Landis representative said that the group has been trying to negotiate an exit plan with its servicers for three years, but that C-III, along with master servicer Wells Fargo, have passed on “multiple opportunities to agree to various proposals initiated by the owner to restructure the loan at amounts that were each higher” than the building’s latest valuations.

Landis believes that the loan’s servicers are suppressing independent appraisals they have obtained, because the assessments reflect amounts lower than Landis’s offer to settle the debt, the representative said.

Landis declined to elaborate on this contention. Wells Fargo referred questions about the loan to C-III, which did not respond to requests for comment.

The Stamford office tower’s struggles have rippled into headaches for the investors in the remaining tranches of GSMS 2007-GG10. The transaction is now more than 90 percent paid down, but the 400 Atlantic loan—the single largest still outstanding—now represents 35 percent of the principal balance and thirteen of the transaction’s other 20 loans are also in special servicing. In early September, Moody’s downgraded its rating on the transaction’s remaining subordinate class to C—and that was before Charter announced it would be moving out.

“We have a very large expected loss, 18.2 percent, on the original pool balance,” Moody’s analyst Wesley Flamer-Binion told CO, “and this loan is contributing to that.” He described the markdown as “huge.”

Analysts had long viewed 2017 as a significant roadblock for legacy CMBS deals, as the so-called maturity wall of 10-year debt originated in 2007 came due.

But if many struggling vintage CMBS loans appear the height of folly in retrospect, 400 Atlantic is not one of them. With strong tenancy, a solvent, high-profile borrower, and a reasonable initial loan-to-value ratio below 80 percent, the loan showed none of the troubling hallmarks at signing that marked other loans of the period even before the ink was dry.

“Only seers might have known,” that the 2010s would bring a “back-to-downtown” migration among financial services companies and other big office tenants, Manus Clancy, a senior managing director at Trepp, told CO. That trend has damned suburban business centers like Stamford over the past decade, complicating their efforts to keep major office tenants like UBS.

Several other commercial loans in the city have run into delinquency trouble, and Royal Bank of Scotland, once a major financial player in the city, has laid off more than 600 workers at its U.S. headquarters in Stamford since the start of 2015.

UBS’ “thought was, ‘we’re not attracting the kind of talent we need.’ And people need to get out of high-cost states” like Connecticut, Clancy said. “You see it to some degree outside of Boston, too. People want to be near Northwestern, MIT, or downtown Manhattan.”

Charter, on the other hand, is only moving across town, to a site called Gateway Harbor, near where the Rippowam River flows into the Long Island Sound. The telecommunications company will reportedly spend $100 million developing its new headquarters—with state of Connecticut kicking in a $20 million incentives package.

Source: commercial