A weekly look at the commercial mortgage-backed securities business
A group of U.S. office properties underwritten with a 91% average occupancy now sit at just 64%, according to CoStar data. (Getty Images)
By Mark Heschmeyer (via CoStar)
CoStar News
October 23, 2025 | 6:09 AM
This week’s column examines recent appraisals showing lower values for U.S. office properties and bondholders taking losses on deals backing a New York mall and a downtown Cleveland tower. Read the entire piece by clicking “read more” below.
Values plummet for distressed office properties: Distressed U.S. office properties have lost more than half their value, threatening billions in losses for commercial mortgage investors, according to a CoStar analysis of 270 specially serviced loans in commercial mortgage-backed securities deals that have been reappraised in the past 12 months.
The scale of distress, $19.2 billion in troubled debt backed by only $16.6 billion in collateral value, leaves lenders facing difficult choices between extending loans or realizing substantial losses through foreclosure and liquidation.
That collateral value represents a loss of $18 billion from the $34.6 billion in value the properties were appraised at when the loans were originated. On average, the properties saw new appraisals come in 52% lower. More than half the properties lost over 50% of their value, and 29 properties declined more than 80% in value.
The value destruction has pushed many loans deeply underwater. Over 70% now carry loan-to-value ratios exceeding 100%, meaning the debt surpasses the property value. The average loan-to-value stands at 167%.
Plummeting occupancy is the main driver of the situation, analysts have said, a result of lower demand for office space since the COVID-19 pandemic. Properties in a group of loans underwritten with a 91% average occupancy now sit at just 64%, a 27-percentage-point decline, according to CMBS data. Nearly a quarter of the properties are less than half occupied.
The analysis showed properties that lost 40 or more occupancy points saw values plummet 62%, nearly double the decline of properties that were able to maintain occupancy. Office properties lost an average value of $655 per square foot of vacated space.
The elevated vacancies serve as a reminder of the pain still present even as office demand turned a corner in the third quarter. About 12 million more square feet of space was occupied than given up, the first positive quarterly figure since late 2021.
Cash flows in the affected properties have deteriorated in lockstep with the vacancy increases, according to CMBS data. Year-over-year net operating income sank by an average of 20%, with 70% of properties posting declines. Half the properties are not generating sufficient cash to cover debt payments. Nearly 80% of the loans are delinquent. Central business districts suffered more than suburban locations, with downtown properties showing a 189% average loan-to-value and 58% occupancy compared to suburban properties at a 157% loan-to-value and 67% occupancy.
The troubled CMBS debt was primarily originated before the pandemic, with the heaviest concentrations from 2014-2015 deals totaling 130 loans valued at $6.9 billion.
Mall loan losses hammer bondholders: Mostinvestors in a $418.5 million CMBS loan on a 2.2 million-square-foot mall in West Nyack, New York, have taken a large loss on the deal.
The specially serviced loan on Palisades Center was resolved this month with losses extending deep into Class A bonds, according to Morningstar Credit. The servicer, Mount Street, applied $231.4 million in losses against the deal. Lower classes of bonds with fewer benefits for investors were written off entirely. Class A bondholders recouped only $157.1 million of their $229.1 million investment, according to Morningstar.
The loan backed a Pyramid Management Group-owned mall that entered special servicing in September 2022 due to imminent maturity and monetary default. The loan defaulted in October 2022.
Mount Street pursued a note sale as the resolution strategy, according to Morningstar. The loan carried an unpaid principal balance of $388.5 million. Mount Street declined to comment.
The mall spans 151.3 acres and includes 1.9 million square feet of gross leasable area in the loan collateral. The property, built in 1997, was last renovated in 2013.
Current anchors include BJ’s Wholesale Club, Burlington, Dick’s Sporting Goods, Home Depot, Macy’s, Target and AMC Theatres. Two anchor spaces sit vacant following the departures of Lord & Taylor and JCPenney. Overall occupancy stands at 83.6% as of June.
The mall was last appraised at $209 million in 2023, down from an $881 million valuation in 2016.
Pyramid did not respond to a request for comment. The firm previously told CoStar News its goal was to maintain ownership of the mall.
Cleveland sale wipes out debt investors: The sale of 1100 Superior Ave. in Cleveland this month resulted in a total loss for CMBS investors on a loan with an outstanding balance of $45.1 million.
The loan, backed by the 21-story office tower, had languished in special servicing since 2021, according to CoStar data. The downtown property was given back to its lenders in January 2023.
CBRE arranged the sale this month of the 576,500-square-foot building. Brady Sullivan Properties purchased the property from CMBS special servicer LNR Partners for $8.1 million, according to CoStar data. The building was appraised at $52.5 million in 2014 and reappraised at $15.1 million 10 months ago. The property was 32% occupied at the time of sale.
The building stands in Cleveland’s central business district. Developers built the Class B tower in 1972 and renovated it in 2006 and 2013. The property includes a seven-story garage with 420 parking spaces.
While a loss in occupancy in the wake of the pandemic has settled, slower hiring and weak job growth in Cleveland continue to weigh on demand, according to a CoStar analysis. Leasing activity remains muted downtown, totaling just under 100,000 square feet last quarter. Tenants vacated 135,000 square feet. Renewals rather than new leases represented many of the largest deals in recent months.
Reposted with permission from CoStar
