1440 Broadway is a 25-story building at the corner of Broadway and 40th Street in Midtown Manhattan, not far from the bright lights of Times Square and the grubby dishevelment of the Port Authority Bus Terminal. Designed by Starrett & Van Vleck and completed in 1925, its brick and limestone facade is a prime example of classic New York architecture.
Today, 1440 Broadway is also emblematic of tensions in the $20 trillion market for US commercial real estate too.
The serious delinquency rate for office loans reached 7% in April, its highest level since early 2017, according to data from JPMorgan Chase & Co. That jump was driven in part by the $400 million loan backing 1440 Broadway, and which was bundled into a commercial mortgage-backed security (CMBS) known as JPMCC 2021-1440.
“One of the loans responsible for this meaningful month-over-month increase was the $399 million 1440 Broadway loan securitized in JPMCC 2021-1440,” JPMorgan analysts led by Chong Sin, Terrell Bobb and John Sim write in a note to clients. Sponsors of the deal “failed to pay the loan’s balloon payment last month and now the loan is considered non-performing matured.”
Multiple trends have combined to cause trouble for 1440 Broadway. A drop in demand for office buildings in the post-pandemic period has pressured rents. But there’s also been an increase in interest rates which has both pushed up the cost of financing and contributed to troubles at one of the building’s biggest tenants — WeWork Inc. — which declared bankruptcy late last year.
Meanwhile, Macy’s Inc., another of 1440 Broadway’s key tenants (at least up until recently) has been struggling with the decline of brick-and-mortar shopping while also trying to push its people back into the office.
Here’s JPMorgan:
“…
The property’s two largest tenants at securitization, WeWork and Macy’s, have presented significant challenges to the continued performance of this loan. At securitization, these two tenants accounted for 70% of the property’s rental income. However, Macy’s vacated the property at the end of its lease term in January 2024. WeWork declared bankruptcy earlier this year but has worked with the property’s sponsors to amend the terms of its lease. WeWork negotiated a 40% decrease in rent as it is now expected to pay just $44 psf for its space in the building as opposed to the $73.26 it was originally paying.
WeWork will gradually pay more for its space as the amended lease terms do include steps up in rent. Additionally, WeWork was able to shorten the length of its lease. WeWork’s lease was originally intended to end in 2035 but is now expected to end in 2028.
We estimate that the property’s occupancy rate is now at 58% and a 52% decline in gross rental income from the prior year.”
So 1440 Broadway, facing a triple whammy of lower rents, troubled tenants and higher interest rates, is a prime example of the challenges facing office real estate at the moment. But it’s emblematic of current trends in the space in another way too.
Even as delinquencies climb, defaults in office loans have not been nearly as bad as many have predicted, in part because of both enormous pressure and willingness to modify loans. Many of the players in the vast ecosystem of commercial real estate — the lenders, borrowers and investors who come together to make these deals — are currently incentivized to work troubled loans out.
Earlier this year, Rich Hill, head of real estate strategy and research at Cohen & Steers and a longtime veteran of the commercial real estate space, described this dynamic, as well as the extent of the refinancings and modifications that have helped keep CRE afloat.
As he told the Odd Lots podcast back in March:
“… There’s almost a trillion of loans coming due in 2024. That is factually true. But this time last year, there was only a little bit more than $600 billion of loans coming due in 2024. You don’t just make up $400 billion of loans. Why did that increase? Well, lo and behold, a lot of loans that were maturing in 2023 were amended and extended into 2024 and beyond.
Now, we actually think that same strategy is going to play out in 2024 as well. But what you’re starting to see is this prisoner’s dilemma being solved. Borrowers are not in a good position, lenders are not in a good position. They’re sort of forced to work with each other right now … Modifications and extensions, what it’s doing is it’s providing a little bit of a safety net for commercial real estate valuations.”
And that’s true of 1440 Broadway too. Despite despite huge question marks over the future of WeWork and office rents in general, and despite the gravity of higher benchmark interest rates, there’s still a real chance that the the loan backing 1440 Broadway will be extended too.
That might not always be the case, of course. Appetite for refis and modifications could wane (Some 42% of office conduit loans that were scheduled to mature during the first four months of 2024 have successfully refinanced, down from 53% in 2023, according to JPMorgan). Or, benchmark rates could stay stubbornly high. But for now, even with an estimated 52% drop in rental income in the space of a year, a property like 1440 Broadway is expected to muddle through.
“Despite these challenges, this loan is still likely to be extended in our view,” the JPMorgan Chase analysts conclude.
Related links:
Lots More on the Big Can Kick in Commercial Real Estate — Odd Lots podcast
The Great Rate Reset Hasn’t Happened Yet — Odd Lots newsletter
It’s the Return of Extend and Pretend — Odd Lots newsletter