🦔A two-tower office complex in downtown Philadelphia was appraised at $471 million in 2019. A judge just approved its sale for $70 million. The 85% decline means even the AAA-rated bonds backed by the property will take losses, only the third time that's happened since the 2008 financial crisis.
Pimco, one of the largest bond managers in the world, holds roughly $58 million across the deal and faces over $35 million in losses. The building was 93% leased in 2020. It's 28% leased today. Over 30 other top-rated single-asset CMBS deals are now below 85 cents on the dollar, per Bloomberg.
My Take
AAA is supposed to mean you always get paid. Pimco bought that rating and is about to recover 44 cents on the dollar. The building lost 65 points of occupancy in six years and the agencies didn't downgrade the bonds fast enough for it to matter. The ratings were wrong in 2008 on housing and they were wrong here on offices.
These single-asset deals were Wall Street's favorite product for a decade. One building, one loan, slap a AAA on the top tranche. A KBRA analyst called it "binary." Either everything pays or everything defaults. That structure hides risk behind a credit rating until it's too late to get out. And the BofA head of CMBS strategy said this is just the start. Chicago, Denver, Portland, downtown LA, none of those office markets have recovered and the loans are coming due over the next two years. At a 5.13% 10-year yield, no one is going to refinance a half-empty office tower. The owners walk away, the bondholders eat it, and the AAA stamp was worth exactly what it was in 2008.
Hedgie🤗