The Credit Consequences of WFH
Exit Wall Street subway station and head south along Broadway and within a minute or so you’ll find yourself at the Adams Express Building. Built in 1916 as the headquarters for the Adams Express Company, an early competitor to American Express, it rises 33 storeys into the sky and houses 780,000 square feet of office space. At the time of its completion, it was the seventh tallest structure in Manhattan. “Below the fifth story the building will be in the Florentine style,” wrote The New York Times, “from the fifth floor upward it will be severely simple, with no embellishments, and no projections except the cornice at the top.”
From its earliest days, the building, at 61 Broadway, found little trouble attracting tenants. Chase National Bank leased the entire ground floor and basement, signing a 20-year lease at $65,000 per year and, by 1917, all floors were occupied. The building was eventually sold in 1973 but in 1988 its owner was unable to meet mortgage obligations and handed the keys back to mortgage lender MetLife. Assuming full ownership, MetLife refashioned the building for itself. It invested $20 million on renovations and put some of its own staff in there, leasing other floors to prestigious tenants such as Merrill Lynch.
In 1998, as part of a downsizing of its property portfolio, MetLife sold the building to Crown Properties for $58 million. “With recent major capital improvements, state-of-the-art mechanical and electrical systems and a convenient, coveted location in the heart of the Financial District, 61 Broadway is one of the premiere addresses in Downtown Manhattan,” boasted Crown Properties president, Devar Rad. Occupancy in the building stood at 92%.
But Crown Properties didn’t own it for long. “Prices are too high, and I have made enough money,” Rad told the New York Post in 2004. Notwithstanding a drop in occupancy to 85%, he was able to sell it for $130 million to a pair of real estate firms, Broad Street Development and Heyman Properties. Ten years later, they, too, took a profit, selling the building to RXR Realty for $330 million.
For a while, it looked like a good deal for RXR. The firm renovated the historic building for modern office uses, upgrading the elevators, sprinkler systems, HVAC systems, bathrooms, hallways and lobby, and installing art by Frank Stella. Within two years of buying it, RXR sold a 49% stake to China Orient Asset Management at a valuation of $440 million, allowing it to recoup its initial equity investment. In 2019, it refinanced the property at an appraisal value of $495 million, securing $325 million of loans, including $275 million from Aareal Bank of Germany. Law firms, architecture firms and tech companies all crowded in as tenants; WeWork rival, Knotel, had just signed a ten year lease for space over four floors.
And then Covid happened.
By the end of 2021, Knotel was bust, other tenants didn’t want to come back, and occupancy at 61 Broadway was on its way down to 58%. RXR offered prospective tenants a 10% discount on market rents, but none were interested. Management thought about repurposing the building for residential use, but that would have impaired its value: Buildings slated for conversion typically sell for around $300 a square foot, much lower than the $630 a square foot 61 Broadway was worth at its last appraisal. So in December 2022, the firm simply stopped making payments on its loan to Aareal Bank and on May 1 it went into maturity default. For the second time in its history, 61 Broadway had its keys returned to a lender.
Aareal Bank celebrates its 100th anniversary this year, so it’s seen this kind of thing before. “Real estate is a very cyclical business,” managing board member Christof Winkelmann reminded investors on his most recent earnings call.
To absorb the hit from 61 Broadway, the bank added to its loan loss provisions, raising them by 50% in the first six months of the year compared with the same period last year. It hired real estate services company Jones Lang LaSalle to sell the loan, which is being marketed as a cheap way into the property. “The last-dollar exposure of the Loan…sits at a 51.5% discount to the origination appraisal,” reads the particulars. “This provides investors with the opportunity to step in well below replacement cost and comparable transactions, providing an excellent opportunity for potential capital appreciation.”