– Michael Cohen, Brighton Capital Advisors
In December 2024, Morningstar Credit issued an alert that the $265 million commercial mortgage-backed securities (CMBS) loan secured by the office-to-residential conversion at Metro Loft Management’s 180 Water Street was likely to transfer to special servicing as it had failed to pay off at its November 2024 maturity.
What makes this unusual is that, just five months prior to the alert, the building had been at 98 percent occupancy.
But reviewing the status of various New York office and office-to-residential projects in recent years shows that 180 Water Street was not the outlier it might seem.
The Cunard Building at 25 Broadway was sent to special servicing in April 2024 after defaulting on the maturity of a $250 million CMBS loan despite 92 percent occupancy throughout 2022 and 2023. Metro Loft’s 20 Broad Street, also an office-to-residential conversion project, was sent to special servicing last August ahead of a September maturity date despite a 98 percent occupancy rate there too as of the fall of 2023. And 1407 Broadway’s $350 million CMBS loan was sent to special servicing in September 2023. As of June 2024, the building was 81 percent occupied.
The notion that loans behind office buildings and office-to-residential conversion projects are being sent to special servicing may not seem that surprising given the past few years of economic uncertainty. That is, until you learn that in more cases than expected, the buildings in question seem as strong and healthy as possible on paper, with low vacancies and reliable rent collections.
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Michael Cohen, founder and managing partner at Brighton Capital Advisors, worked with a building where the owner had to invest equity equal to 10 to 15 percent of the loan amount for tenant improvements to prove the owner could run the building at its best-use case. This investment earned the owner a two-year extension on its loan.
“They’ll have the ability to use that money for the property, and it bridges them to the next part of the market,” said Cohen, who emphasizes the importance for owners of proving to lenders they can not only run a building, but also evolve its status in the marketplace through upgrades to appeal to modern office tenants.
“You have to go in there with a plan,” said Cohen. “If there’s equity in the building remaining and the servicer thinks it can lease up the building themselves and you don’t want to put any money into it, they’re going to take the property back from you.”…
