Scott Rechler, chief executive of RXR Realty, speaking on CNBC about potential commercial real estate losses for banks and investors.

What’s new

New York slice
Fortress Investment Group this week acquired a roughly $900 million office loan portfolio from Capital One in a move that gives the manager significant exposure to office debt in its home market. Initial reporting from the Commercial Observer noted New York City office loans accounted for a large portion of the portfolio. The August 17 purchase from the McLean, Virginia-based bank cuts against the grain of current market sentiment, which has steered lenders away from the sector.

The Capital One office loan portfolio sale is smaller in scale than other recent, comparable sales and is focused in a city where valuations have seen widespread valuation declines. New office financing in New York City has primarily favored asset conversions and refinancings in 2023 to date, Real Estate Capital USA data shows.

Centurion refinancing
New York-based bank Morgan Stanley is slated to securitize a $925 million loan used to refinance debt on Paris-based developer and operator Unibail-Rodamco-Westfield’s Century City mall in Los Angeles. The two-year, floating-rate CMBS deal is set to close August 29. In a pre-sale report from KBRA, the New York-based ratings agency valued the mall at $1.35 billion, compared with New York-based advisory Newmark’s May valuation of $1.96 billion. In a similar report, New York-based rating agency Fitch Ratings said the sponsor would use the funds to return $909.5 million in equity to the company and pay closing costs of $18.5 million.

The retail mega-center’s refinancing comes at a time when the wider asset class has gained more relevance and interest as the beleaguered office sector bears negative sentiments and outlooks from the lending landscape. Market analysts tell Real Estate Capital USA they have seen more relative demand and activity beyond grocery-anchored retail centers in recent months in line with this trend.

Shock waves
RXR Realty’s Scott Rechler is not the only real estate executive eyeing potential distress outside of office. For the Market Pulse analysis in affiliate title PERE’s upcoming September issue, Ralph Rosenberg – who wrote a white paper touching on distress in “on-trend sectors” – spoke at greater length on the topic. KKR’s global head of real estate noted how banks will be more discriminating about originating loans, even in favored sectors and markets, due to the negative effects of their exposure to the office sector, which accounts for about 40 percent of real estate exposure across both regional and money-center banks. “The epicenter of the earthquake might be traditional commodity office space, but the tremor will be felt in all other sectors based on availability of capital and the pricing of that capital,” he said.

Trending

The lending paradox
New York-based advisory Berkadia last week released a report analyzing the impact of bank failures on the commercial real estate debt markets, demonstrating there is a more nuanced story behind the disruption in the capital markets. “Expectations in the immediate aftermath included tightening of credit standards and limited access to lending from bank balance sheets drying up. While some of these expectations have come to fruition, the extent to which credit tightening was expected has not fully materialized, especially for multifamily products,” the report stated. The conclusion reached by the report’s authors, Josh Bodin and Steve Bevilacqua, is clear: tighter credit standards do not mean banks are not lending.

Building platforms and pipelines
Fidelity Bancorp Funding, a Santa Ana, California-based alternative lender, this week rolled out a construction lending platform. The platform, headed by John Omori, comes roughly two months after the firm brought on Charlie Woo from San Francisco-based Wells Fargo to oversee its bridge lending program. Access to capital is very market- and sector-specific, Omori noted, adding the firm has had multiple conversations with sponsors seeking to start work or complete projects and have no viable lending options. “We think there is going to be a large opening for alternative lenders, especially for the borrowers with good projects who are experienced and have good track records,” he said.

Office occupancy polarization
Office use remains a polarizing topic among US companies still trying to sort their space needs as hybrid working setups remain in vogue. This week, however, two major office tenant shifts are providing some clarity on what future use could look like. Meta, the parent company of Facebook and Instagram, is catching up to its technology giant counterparts and, as of September, will require employees to be back in the office three days a week. The change is a tonal shift from Meta chief executive officer Mark Zuckerburg’s prior stance that half of his company’s roughly 70,000 employees would work remotely by the decade’s end. Simultaneously this week, Charles Schwab noted in an August 21 filing that the Westlake, Texas-based institution will be reducing its real estate usage and employee headcount to achieve at least $500 million in annual cost savings. Both moves signal that blue chip tenants still have office occupancy issues to resolve, adding further complexity to an already muddled office sector outlook.

Data snapshot

Rising allocations
Real estate allocations increased for all investor types partly due to the denominator effect impacting most institutions’ investment portfolios in H1 2023, according to affiliate title PERE’s latest Investor Report, published this week. The increase was particularly significant for sovereign wealth funds, whose allocation rose for the first time in four years during the first half.

People

KBRA’s co-CMBS head departs
Keith Kockenmeister has left his role as senior managing director and global co-head of commercial mortgage-backed securities at KBRA after working 12 years at the New York-based rating agency. He concluded his tenure in July and in an August 18 LinkedIn post noted he plans to explore fresh opportunities following the departure. Kockenmeister has worked in the commercial real estate industry for 37 years with tenures at Deutsche Bank, Standard & Poor’s and NatWest Bank among others. He most recently helped oversee issuance and surveillance with his KBRA CMBS team. A KBRA spokesperson confirmed senior managing director Nitin Bhasin, previously co-head of global CMBS with Kockenmeister, will now work as global head of CMBS at the firm.

Borrower’s corner

Diversification play
Los Angeles-based BH Properties last week launched an affordable housing platform as part of a strategy to bring cash-flowing assets onto its balance sheet at a time when the real estate investment manager is making significant plays in commercial real estate debt, bankruptcy financings and value-added acquisitions. The firm, which financed New York-based Waterbridge Capital’s distressed acquisition of Union Bank Tower in Los Angeles in March, hopes to build its affordable housing portfolio to $1 billion of assets over the next five years. “We are using this as a yield play to mitigate against our bigger bets in the office and retail space,” said Bill Stoll, a managing director who joined the firm last month from affordable housing specialist Steadfast Communities.

Loan in focus

Veris’s residential revolution
Veris Residential, a real estate investment trust formerly known as Mack-Cali Realty Corp, last week obtained a $340 million Freddie Mac loan via CBRE to refinance debt on Haus25, a newly constructed luxury multifamily property in Jersey City, New Jersey. The five-year fixed-rate loan replaces the property’s construction loan. It also represents the evolution of the REIT’s strategy from being a suburban office to a residential property owner. The REIT, which has a long history in Jersey City, has been slowly offloading its office portfolio in favor of apartment assets, including an April sale of three of its office properties in the city to 601W Companies for $420 million. The Freddie Mac loan was negotiated by CBRE’s debt and structured finance team through its direct lending arm.

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Today’s Term Sheet was prepared by Randy Plavajka, with Anna-Marie Beal and Samantha Rowan contributing