One loan that’s been tested in the market is backed by 450 5th St. NW in Washington, a building that’s occupied by the Justice Department, which is moving out soon, according to people familiar with the deal. The lender, PGIM, offered below-market rates to subsidize potential buyers of the loan, one of the people said.
American International Group Inc. has also marketed a loan portfolio with imminent maturities that’s secured by several office properties in the Washington area, according to the people.
A spokesman for PGIM declined to comment. An AIG spokesperson didn’t respond to a request for comment.
Deals have been slow to reach the market partly because lenders are still trying to assess values for their collateral. This year’s steep drop in building sales means there are fewer benchmarks for pricing, but brokers say they have seen a flood of new requests for loan valuations.
In another complication, some lenders originated loans early in the year at lower rates that aren’t as attractive to debt buyers seeking yield, according to Josh Zegen, a managing principal at Madison Realty Capital.
“The market is terrible: If you don’t have to sell something, you shouldn’t be selling it,” Zegen said. “Today’s calls from lenders aren’t as urgent yet, but in a slowing market, where they’re not receiving repayments as expected, the calls will become more urgent over time.”
The few deals that are trickling out are reflecting major price declines. A slice of debt on a midtown Manhattan office tower at 150 E. 42nd St. was offered for about 78 cents on the dollar by John Devaney, a trader of distressed commercial mortgage-backed securities. The loan is current and performing, but its price plunged in September.
“This is really the first of some bonds that now have traded down,” Devaney said. “This was trading in the low 90s.”
The situation will become more urgent with a wave of loans — many backed by buildings with growing vacancies — that are set to mature in the coming years, and few lenders willing to take on more office debt.
“Unfortunately for legacy office assets we own that have an impending debt maturity, it’s near impossible to get any kind of refinancing,” said Kaplan of Meadow Partners. “Most existing lenders are not willing to accommodate anything.”
As pressures mount in the coming quarters, he sees opportunities for firms like his.
“It’s going to get worse before it gets better,” Kaplan said. “We’re trying to be patient and wait for those deals.”
--With assistance from Hannah Levitt and William Shaw.
This article was provided by Bloomberg News.