- Centre Square was appraised at $471M in 2019, but a judge approved a $70M sale after occupancy fell to 28%.
- Strategists expect about 44 cents on the dollar of recovery, with seven lower-ranking CMBS tranches set to be wiped out.
- Pimco holds about $58M of face value in the $368M deal and could lose more than $35M at the expected recovery.
Bloomberg reports that the $368M CMBS backed by Philadelphia’s Centre Square office complex is set to produce losses deep into the capital stack. Its report on the Centre Square CMBS workout says a judge approved a $70M sale of the two-tower property. Centre Square was appraised at $471M in 2019. The 85% value decline means even securities once rated AAA are expected to take losses.
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A Downtown Office Loan Unwinds
Centre Square includes 43- and 36-story towers at 1500 Market St. The complex occupies a full block across from Philadelphia City Hall. A Nightingale Properties and InterVest Capital Partners joint venture acquired it for $328M in 2017. The mortgage was refinanced and packaged into CMBS in 2020. The financing closed just before the pandemic disrupted office demand. At the time, the property was about 93% leased to 56 tenants, according to KBRA.
The Details
Occupancy later collapsed. Centre Square was only 28% leased by the end of June, according to the latest servicer commentary cited by Bloomberg. The mortgage transferred to a workout specialist by mid-2022. The borrower had said it could not refinance or pay off the loan at maturity. A modification or extension did not materialize. The property was ultimately foreclosed and put up for sale. A judge approved the $70M transaction with PMC Property Group and developer Dean Adler.
Conversion Plans Follow the Sale
The buyers plan to change the use of part of the complex. Adler has said the project could include a 300-room luxury hotel and as many as 500 apartments. That plan would reduce the amount of office space at a property where demand never recovered after the pandemic. Centre Square is one of downtown Philadelphia’s most recognizable office complexes. It opened in 1974 and is known for the large stainless-steel clothespin sculpture in its plaza.
Why It Matters
Wall Street strategists expect recovery around 44 cents on the dollar after advances, fees, and other claims. Holders of seven lower-ranking tranches are expected to be wiped out. Pimco owns roughly $58M of face value across the deal. About half is in the top-rated portion. Bloomberg estimates losses above $35M at the expected recovery. The outcome adds to the mounting CMBS losses tied to troubled office assets. A loss at the AAA level would be only the third such hit since the financial crisis.
SASB Structure Magnifies the Damage
Centre Square is a single-asset, single-borrower deal. Unlike conventional CMBS pools, SASB transactions depend heavily on one property or complex. That concentration leaves less diversification when the collateral fails. Bloomberg notes that the structure expanded rapidly over the past decade. It has also shown greater vulnerability as older office assets lost tenants and value. More than 30 top-rated SASB CMBS tranches now trade below 85 cents on the dollar, according to Bloomberg data. Lower-ranking tranches in those deals are quoted at steeper discounts.
AAA Losses Remain Rare but Are Growing
Top-rated CMBS losses are still unusual, but Centre Square would add to a short recent list. Last year, holders of the safest tranche tied to New York’s Palisades Center mall lost more than $70M. Investors in a CMBS tied to 1740 Broadway in Manhattan previously lost about $40M at the AAA level. Bloomberg notes that all three transactions are SASB deals. That common structure highlights how concentrated collateral can push losses much farther up the bond stack.
What’s Next
The Centre Square sale is expected to close in the coming weeks. Proceeds can then be distributed to creditors. The workout also shows the pressure facing older offices with large near-term refinancing needs. Bank of America strategist Alan Todd expects more loans to reach similar decision points as maturities arrive. Bloomberg cites Chicago, downtown Los Angeles, Portland, and Denver among markets where office values have not fully recovered. That leaves investors exposed to further losses when buildings cannot refinance and sale values fall far below prior appraisals.
