Two bankruptcies have sent occupancy tumbling at a 6.5M SF nationwide real estate portfolio owned by New York-based alternative investment manager Blue Owl Capital.

S&P Global downgraded the credit rating of three classes of debt on a $275M CMBS loan backing the 42-property retail, industrial and office portfolio after occupancy fell from 100% to a little more than 36%, the ratings firm said last week.

The drop was caused by the 2024 bankruptcies of Big Lots — which leased two distribution centers from Blue Owl in Pennsylvania and Oklahoma — and Conn's Inc., the parent company of Badcock, which occupied five warehouses and two office properties in Florida tied to the CMBS loan.

Blue Owl took out a $425M, interest-only loan at a 6.1% fixed rate in 2023, when the portfolio was appraised for more than $1B.

While Blue Owl was current on its debt service payments as of March, S&P said in its report that it had concerns “with the borrower’s ability to make timely debt service payments if the portfolio’s occupancy level does not improve.” The loan was transferred to the special servicer, SitusAMC, in March due to imminent default.

When the CMBS loan was issued in 2023, the portfolio was filled by six tenants on triple-net leases: Save Mart with 2M SF, Big Lots with 2.6M SF, Badcock with 1.5M SF, NAICO/Chandler Insurance Co. with 158K SF, Nation Safe Drivers/Nation Motor Club with 140K SF and Big Y Foods Inc. with 55K SF.

While S&P downgraded its rating on three lower classes of the CMBS loan, it reaffirmed the AAA rating on the Class A certificates. Given the vacancies are mainly concentrated in industrial assets, Blue Owl is in a strong position to fill those buildings back up.

“We believe re-leasing to new tenants [is] relatively likely because they are generally in average-to-good conditions, and some are newer builds,” S&P analysts wrote in the report.

Distress is rising among CMBS borrowers who own retail properties. Nearly $9B of CMBS loans are tied to properties leased by retailers who went bankrupt, according to a March Bisnow analysis. Bargain Hunt, Joann, 99 Cents Only, Party City and Rite Aid have all liquidated stores through the bankruptcy process.

Retailers are expected to shutter more than 15,000 stores this year, more than twice the number of locations projected to open, according to a January Coresite Research report.