Commercial Investment Real Estate Spring 2020 | Page 17
Table 2: Loans with Single Tenant Exposure in CMBS 2.0 Deals
#
Loan
Name
Curr.
Loan
Bal (mm) Bal ($psf )
Loan
Maturity
Date
MSA
Largest
Tenant Lease
Expiry
% of
Tenant
Gross
Vacated/
Leased
Planning
Area
to Vacate
(GLA)
1 Two Westlake Park $89.23 $198 Houston Oct. 21, 2020 Conoco Philips Nov. 19, 2020 Yes 46%
2 Three Westlake Park $78.89 $188 Houston Feb. 24, 2020 Conoco Philips Feb. 19, 2020 Yes 58%
3 Palazzo Verdi $73.5 $243 Denver July 25, 2020 Newmont Mining Corp Oct. 20, 2020 Yes 72%
4 Scripps Research Building $31.53 $281 San Diego Jan. 23, 2020 The Scripps Research Institute June 19, 2020 Yes 100%
5 Broadcom Building $35.7 $178 Broadcom Corporation May 18, 2020 Yes 0%
San Jose, Calif. Jan. 25, 2020
Source: Remittance reports through various trustees and servicers websites
loan origination, but they consolidated operations
during the economic downturn.
• Tenants decided to move to a nearby location
with better amenities and lower lease rates.
• Most loans had insufficient cash reserves, repre-
senting less than 5 percent of loan balance.
IMPACT ON BOND VALUATION
As shown in Table 1, the One AT&T Center loan locat-
ed in St. Louis has a cut-off balance of roughly $107
million and is currently 100 percent vacant after the
tenant vacated the property upon lease expiration in
September 2017. The borrower has struggled to re-
tenant this property despite its downtown location
due to its large size (1 million sf ), higher amount of
similar available space, and heavy capital expenditure
requirements. Using appraisal reduction estimates
($92.4 million) as a proxy for implied losses on this
loan as of January 2020, we expect three tranches to
realize full principal loss and another to lose almost 8
percent of its principal upon liquidation. If losses stay
below $79.8 million, that tranche will not realize any
principal loss. On the other hand, losses can be as high
as $107 million, implying that this tranche can lose up
to 20 percent of its principal balance.
The impact of losses stemming from such large
loans in the deal could have a meaningful impact on
bond valuations depending on the magnitude of loss-
es, available credit support, and tranche sizes (i.e., the
percent of the deal).
CMBS 2.0/3.0: SINGLE-TENANT TAIL RISK
CMBS 2.0 and 3.0, CMBS transactions issued after the
financial crisis of 2007, have shrunk from $4 or 5 bil-
lion to roughly $1 billion, meaning pools have become
more concentrated. Exposure to single tenants has
grown and requires in-depth analysis for any potential
unforeseen issues.
Table 2 shows similar trends from sample
loans in CMBS 2.0/3.0 deals. In the first three cases,
tenants related to the energy sector (Newport Mining
Corp and Conoco Philips) continue to struggle as oil
prices remain low and tenants vacated at lease expi-
ration dates. In the Broadcom example, the tenant
departed because of ongoing consolidation in the
telecom/technology sector. The early termination
CIREMAGAZINE.COM
A downturn or
consolidation
in a particular
sector will lead
to widespread
downsizing
in space. In
addition, with
the growth
of coworking
tenants,
assessing
single-tenant
risk is not a
straightforward
exercise.
option gave the company the flexibility to vacate be-
fore the lease expiration. While none of these loans
has been resolved or recorded losses yet, exposure to
a large tenant either announcing a departure or al-
ready vacating the property is notable. That doesn’t
mean all loans will default or will experience higher
losses, as strong geographic asset characteristics, in-
creased reserves, and other trigger mechanisms such
as cash sweep events can mitigate losses. However,
office properties located in heavily oversupplied mar-
kets or highly dependent on certain industry sectors
may be of concern.
Anecdotal evidence suggests that a downturn
or consolidation in a particular sector will lead to
widespread downsizing in space. In addition, with the
growth of coworking tenants, assessing single-tenant
risk is not a straightforward exercise. Office proper-
ties located in major markets — namely New York,
Washington, D.C., and San Francisco — tend to re-
tenant space at stable or premium rents over time.
However, in lower-tier locations where submarket
demographics are not favorable, office properties with
significant space may not re-tenant at the same speed
or frequency.
CMBS 2.0 underwriting is relatively
conservative when compared to legacy CMBS
underwriting from both debt service coverage ratio
and loan-to-value perspectives. However, CMBS 2.0
office loans with large tenants haven’t experienced an
economic downturn yet, and the macro environment
remains supportive for the office market in the U.S.
Furthermore, in-depth analysis has become more
complex due to ongoing trends, such as shared space/
smaller space per employee along with the volatile
nature of predicted cashflows. These features were
rather uncommon in CMBS 1.0 deals, but they present
unique challenges and valuation opportunities in
today’s market.
Manish Agarwal
Vice president for PricingDirect by JPMorgan Chase
Contact him at [email protected].
Pramod Bharadwaj
Associate for PricingDirect by JPMorgan Chase
Contact him at [email protected].
COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE
15