Commercial Investment Real Estate Spring 2020 | Page 16

INVESTMENT ANALYSIS
By Manish Agarwal and Pramod Bharadwaj
THE IMPACT
OF TENANT
DEPARTURES
While the office sector remains relatively steady after the Great Recession,
single-tenant exposure in CMBS 2.0/3.0 can present challenges.
A
unique feature of a commercial
mortgage-backed security (CMBS)
is its ability to provide borrowers
with long-term capital at attractive financ-
ing rates while simultaneously offering
securities to investors with different risk
appetites and investment horizon profiles.
A staple subset of lending within the CMBS
origination market involves single or large
tenant-leased office assets. Such loans with
long-term leases are often considered low
risk at origination due to the high credit
quality of the tenant. While the economy will
go through different cycles during a typical
10-year loan term, the tenant is assumed to
honor its lease obligations, implying stable
property cashflows.
As seen in CMBS 1.0 deals, those
before the Great Recession, large or sin-
gle-tenant departures prior to loan maturity
pose added risks.  It’s difficult to predict fu-
ture performance of such loans because the
outcome of an asset is binary in nature (term/
maturity default risk) and has a significant
impact on the property valuation.
Table 1 features a few examples
of distressed assets from CMBS 1.0 in
which a single or large tenant either
vacated or announced a departure on or
before the lease expiration. The capital expen-
diture required to re-tenant these properties
was significant because the properties be-
came obsolete over time, which led to high-
er loss severities. These loans share a few
common characteristics:
• Tenants honored their leases, but
vacated or subleased space on or before
the lease expiration date.
• Lease expiration dates coincided within
one or two years of loan maturity date.
• Tenants were credit tenants with
operations spread across the nation at
Table 1: Single Tenant Exposure in Legacy CMBS Deals
#
Loan
Name
1 400 Atlantic Street
Balance
Most Recent
Prior to
Appraisal (mm)
Resolution (mm)
Largest
Tenant Lease Exp.
Date Loan
Maturity
Date
Most
Loan
Loss
Tenant
Recent Balance Severity
Vacated
Occ.
($/psf ) (ARA %)
$265 $83.4 UBS Sept. 18, 2020 June 17, 2020 Yes 23% $502 63%
2 UBS Center-Stamford $145.56 $44.4 UBS Dec. 17, 2020 Oct. 16, 2020 Yes 0% $213 69%
3 One AT&T Center $107.15 $17.6 AT&T Sept. 17, 2020 Jan. 15, 2020 Yes 0% $87 86.2%
4 One Campus Drive $80 $14.7 Realogy Corp Oct. 13, 2020 May 16, 2020 Yes 0% $212 78.6%
$55.72 $21 AT&T Aug. 16, 2020 Dec. 15, 2020 Yes 0% $674 100%
5 SBC-Howffman Estates
Source: Remittance reports through various trustees and servicers websites
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COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE
SPRING 2020