CMBS Investors Clamor for a Piece of a New Manhattan Skyscraper

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So you think demand for Manhattan offices is dying? Investors think those fears are overblown, at least for high-quality properties.

This week money managers said demand was strong for pieces of a massive $3 billion bond backed by a single mortgage tied to a brand new trophy office tower, One Vanderbilt, next to Grand Central Terminal. The bond offering, due to be sold next week, is the largest private-label commercial mortgage security since the Covid pandemic started, and the loan is one of the largest office mortgages to be bundled into a bond in the last decade.

As of Friday morning price guidance on the AAA slice of the transaction, with an average life of around 10 years, was 80 to 82 basis points over a swaps benchmark, according to data compiled by Bloomberg. That’s tighter than the pricing on a separate commercial mortgage bond backed by two properties in midtown, with a similar average life and top ratings, that sold at 98 basis points over swaps in April.

The property is enormous -- at 1,401 feet, it is now the tallest commercial skyscraper in Midtown Manhattan. But it’s well located for attracting commuters, and companies are evidently eager to lease space there, with 89% of the building accounted for, and few contracts due to expire during the term of the mortgage. Tenants include companies such as Toronto-Dominion Bank and Carlyle Group.

There are plenty of question marks about the future of Manhattan office space. Around 17.1% of office space is available, a record proportion, according to a report earlier this month from Colliers, a commercial real estate research and services firm. Around the country, some workers have learned that they prefer to work from home at least part of the week. Many employees are returning to work in New York, though it’s unclear how many will come back.

But investors are still willing to put money into properties they see as high quality, known as Class A properties. In addition to One Vanderbilt’s location, it has high sustainability ratings, allowing investors purchasing the CMBS to get credit for buying environmental, sustainable and governance debt.

“While there are still some unknowns regarding the return of office, most concerns have been exaggerated,” said Jen Ripper, a CMBS investment specialist at Penn Mutual Asset Management in Horsham, Pennsylvania who looked at the deal.

Both DBRS Morningstar and Fitch Ratings gave the most senior portion of the transaction AAA grades, with DBRS saying the asset quality is “relatively unmatched, even among New York’s existing supply of trophy office properties.”

CMBS Investors Clamor for a Piece of a New Manhattan Skyscraper

A group of eight investment banks arranged the deal: Wells Fargo Securities, Goldman Sachs & Co., BofA Securities, BMO Capital Markets, Deutsche Bank Securities, JPMorgan, Barclays, and Citigroup.

Some investors had qualms about the offering but thought the high quality of the collateral outweighed them.

“It represents a particular aspect of the New York City office market and so should not be affected by underlying uncertainties of the broader commercial real estate market,”said Chris Sullivan, chief investment officer of the United Nations Federal Credit Union. He said he was willing to overlook the relatively high leverage on the property, and the fact that the sponsors are collecting money from the deal in the form of a dividend.

Cash-Out

The loan is sponsored by a joint venture controlled by SL Green, with minority interests in the borrower held by National Pension Service of Korea and Hines Interests Limited Partnership, according to Fitch Ratings. The loan will return $1 billion in equity to the sponsor as part of the refinance, which represents 30% of the $3 billion loan amount.

All three sponsors together will have a total of $543 million in cash equity remaining following the refinance, Fitch said.

“I think One Vanderbilt was a great test for the CMBS market,” said Dan McNamara, a principal at hedge fund MP Securitized Credit Partners, which has bet against the retail-oriented CMBX 6 derivatives index as part of its broader strategy. “It’s the largest CMBS post-Covid and it’s going very well.”

Relative Value: CMBS

  • Deutsche Bank analysts advised readers to add long-duration single-A CMBS to their portfolios, according to a Wednesday research note
  • Longer duration is the best way to play the long-term hotel recovery, the analysts said
  • “While tail losses will be smaller, we prefer single-A to BBB- due to the incremental subordination and tranche thickness,” analyst Ed Reardon said
  • DB does not recommend BBB- bonds because they don’t have enough cushion versus potential losses

Quotable

“We don’t see problems in the housing market that the Fed should be worried about -- in fact it’s the opposite, with it roaring in certain parts of the country,” Jake Remley, a senior portfolio manager at Income Research + Management, said in an interview. The firm oversees $90 billion and is reducing exposure to parts of the mortgage market that would be most affected by a Fed slowdown. “If the Fed is getting worried about inflation and wants to do something, they should pull from mortgages and go more into Treasuries.”

What’s Next

ABS deals in the queue include Solar Mosaic (solar loan ABS), Hewlett-Packard (equipment), American Car Center (subprime auto), Nissan (prime auto lease), Wendy’s (whole business securitization), and Santander Consumer (prime auto lease).

©2021 Bloomberg L.P.

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