(Bloomberg) -- Lord Abbett & Co. was dealt a more than $60 million blow on a commercial mortgage-backed security tied to an office campus in suburban Kansas City, after the underlying loan was sold at a steep discount.
The money manager owned the vast majority of the $233 million CMBS, which was backed by the mortgage on the Aspiria office campus, formerly the headquarters of telecom giant Sprint Corp. The riskiest portion of the securitization, with a face value of more than $65 million, was wiped out earlier this month after the loan's sale left just $164 million to distribute to creditors, according to the latest monthly remittance report.
Bondholders also did not receive millions of dollars in interest payments, the report shows.
It's the latest in a string of losses to hit buyers of CMBS backed by single mortgages (known as SASBs) tied to older office buildings, a multibillion-dollar corner of the market that's still struggling to recover from the pandemic. In December, holders of a $350 million commercial property bond that financed the Gas Company Tower, a more than three-decade old skyscraper in Los Angeles, saw almost 50% of their investment wiped out, with the pain reaching all the way up to bonds once rated investment grade.
A representative for Lord Abbett declined to comment. Gary Oborny, chief executive officer of Occidental Management, which manages and leases the Aspiria complex, said in a statement that the firm continues "to focus on current and future leasing and development opportunities."
To be clear, the US office market, which saw values plummet post-pandemic amid an increase in remote work and soaring borrowing costs, has been stabilizing over the past few quarters. Leasing and investor appetite have ticked up, with activity concentrated across prime buildings near mass transit, as employers seek to bring workers back to the office.
Demand has grown for bond deals backed by trophy towers in the roughly $675 billion US CMBS market. Owners of office buildings in major cities have sold large commercial mortgage-backed securities this year, including Manhattan's Seagram Building and Boston's One Congress.
Still, older buildings continue to struggle with rising costs and weak demand. Nearly one-fifth of US office supply was still vacant as of the first quarter, according to CBRE Group Inc.
Many SASBs (which stands for single-asset, single-borrower) that now face losses "were done at a different time in the cycle where rents were higher, occupancies were higher and there was long lease terms on those assets," said Riaz Cassum, an executive managing director at Jones Lang LaSalle Inc. "Now, the cash flow from those assets have been impaired due to higher vacancies, lower rents, which ultimately shows up in defaults."
Weak office fundamentals, receding property values and refinancing challenges helped drive the US CMBS total cumulative default rate to 19.3% in 2024, up from 18.5% a year earlier, according to a recent report from Fitch Ratings. Office loan defaults surged almost 70% to $8.1 billion, accounting for more than half of total defaults, the report said.
In fact, about 1 in 10 loans packaged into CMBS is bad enough that troubleshooters called special servicers now oversee them, double the rate from two years ago, according to March figures from real estate data company Trepp.
The EY Plaza at 725 South Figueroa St. in Los Angeles presents a particularly troubled case for holders of a $275 million SASB back by the mortgage on the building. The lenders have reportedly struck a deal to sell the tower for $130 million, a discount so steep that buyers of bonds originally rated AAA are expected to take a hit, according to a recent note from Barclays Plc.
Over at Aspiria, the bond loss comes even as Kansas City's suburban offices saw more leasing momentum last year. Aspiria signed leases with companies including health-care software firm Netsmart, HNTB Corporation and Ottawa University, according to a January report from brokerage firm Colliers. The site is also opening a large entertainment complex.
It wasn't enough.
Lord Abbett's more than $60 million setback was spread across a number of funds, with the largest stake held by its $21 billion Bond-Debenture Fund, according to filing data compiled by Bloomberg.
--With assistance from Sam Hall.
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