CMBS temporary housing challenges highlighted

Some landlords grappling with elevated office and lodging property vacancies in New York City are turning to alternative sources of revenue. The special servicer on the US$77m 315 West 36^th Street loan (securitised in the BMARK 2018-B3 and COMM 2018-COR3 CMBS transactions), for instance, last month reported that the borrower is in discussion with city officials to lease the property as a migrant shelter.

According to KBRA, initial discussions included a potential three-year lease term with two one-year extension options. The 143,479 square-foot mixed-use building in the Garment District of midtown Manhattan is almost entirely vacant after WeWork terminated its 133,208 square-foot lease through bankruptcy. The loan fell 30 days delinquent in May 2023 and was transferred to special servicing. The special servicer subsequently installed a receiver and continues to pursue foreclosure.

KBRA notes that this is not the first time the city has used its abundance of underutilised office space as an opportunity to address housing for migrants and homeless individuals. The agency cites the Hall - a 674,000 square-foot 10-building office complex near the Brooklyn Navy Yard – as an example, which was vacant following its completion in 2021 until owner/developer RXR entered into an agreement with the city’s public health care network to utilise two buildings as short-term respite centres for migrants.

The remaining eight buildings underwent conversion for longer-term shelter use. Since then, the shelter has reportedly been plagued with overcrowding and contractor issues, all while generating income far below original expectations that assumed traditional office use.

The city also continues to expand homeless and migrant housing options through contracts with various lodging properties, which are more readily available for immediate use as housing. KBRA highlights the US$275m contract between the Hotel Association of New York City (HANYC) and the New York City Department of Homeless Services (DHS) to house at least 5,000 migrants for six months. The contract was later extended in September 2023 for an additional three years at a price of nearly US$1.4bn.

Beyond the uncertainty surrounding the duration of these contracts, the agency says it maintains concerns regarding above-average wear-and-tear at properties utilised for temporary housing. “Challenges faced in retrofitting lodging/office for non-traditional use (homeless and migrant housing) extend beyond upfront capital investments. If demand for temporary housing inventory dwindles, there is uncertainty in the viability of a conversion back to traditional commercial use as office, residential or lodging. These factors would influence investor demand and weigh on property values,” it adds.

The KBRA Loan of Concern (K-LOC) Index stood at 21.071% in December 2023, remaining virtually unchanged from 21.072% the previous month. The agency identified 64 new loans (representing US$1.45bn) as K-LOCs in its conduit CMBS coverage universe in December, including 28 office loans (US$954.5m).

Corinne Smith