Investors In Once-AAA-Rated Bond Tied To Shorenstein Tower Could Face Losses: Fitch

Shorenstein Properties' increasing difficulties with one of its New York City office towers could end up driving losses for bondholders who bought debt on the building that had been considered ultrasafe just a few years ago.

The top-rated class of the CMBS loan backed by the family firm’s 1407 Broadway, a 43-story, 1.1M SF property, was downgraded by Fitch Ratings on Wednesday. The credit ratings agency warned that the property's declining value could drive a big loss on the mortgage.

Shorenstein acquired the Class-A tower in 2015, securing a $350M CMBS loan from Barclays in 2019 after the building was valued at $510M. The securitized debt was split into six classes, and Fitch gave the $187M Class-A certificates a AAA rating — higher than even U.S. Treasury bonds.

The building's performance has deteriorated since the onset of the pandemic, and Fitch downgraded its rating on the Class-A certificates to CCC from B-. Three of the riskier classes of the mortgage were also downgraded to “reflect limited, if any, recovery prospects,” according to Fitch.

The tower is now valued at just $120M following a new appraisal, 11.8% below last year’s appraisal and 76% of its value in 2019, according to Fitch. 

Shorenstein and the loan's special servicer, Torchlight Loan Services, have been in workout discussions even after the previous special servicer, Mount Street, filed a preforeclosure suit against the landlord last spring.

But while the negotiations have been ongoing, they haven't been trending in the right direction, per Fitch, which could hit the holders of the Class-A bonds.

“Full recovery is unlikely,” the ratings agency wrote in its downgrade assessment, which also noted that the decrease in property value “​​reflect the limited progress towards a commercially viable workout including a modification.” 

Shorenstein declined to comment.

Occupancy at the tower has fallen from 94% in 2019 to 75% at the end of 2024. Shorenstein did renew two leases with apparel maker tenants in the building recently — a 32K SF deal with High Life, per Morningstar, and 47K SF with S. Rothschild Co., according to special servicer commentary in the Morningstar Credit database.

But another 35.9% of its currently leased space is set to expire within the next year, according to Morningstar. Its ground lease is also set to expire at the end of 2030, although there is an 18-year renewal option.

The lowest class of investor in the CMBS loan has already incurred more than $2M in losses because cash flow from the property was used by the master servicer to pay down principal to the Class-A shareholders, according to Fitch.

The downgrade reflects the challenges posed by single-asset, single-borrower CMBS loans tied to office buildings. The first losses incurred by holders of a AAA-rated CMBS bond since 2008 were taken last year when a Blackstone-owned building at 1740 Broadway sold for less than half of its prior value. 

Shorenstein in particular has been hit hard by the distress in the U.S. office market, with almost $1B in at-risk or defaulted debt linked to its properties as of last June.

The family firm has given three buildings back to lenders since the start of the pandemic — before this, it had given up four in the previous 75 years, The Wall Street Journal reported in April. Its portfolio has shrunk by 5M SF since Brandon Shorenstein took over as CEO from his father, Douglas, who died of pancreatic cancer in 2015.

“If you would have told me five or six years ago that we would be walking away from multiple properties, I would probably be a lot more stressed about it,” Brandon Shorenstein told the WSJ. “But unfortunately that’s just where the state of the business is today.”