By:  Hadassa Kalatizadeh

As property values for commercial real estate in New York continue in their downward descent, Capital One Financial Corp. is trying to offload more of its NY commercial real estate debt.

The bank is accepting bids for loans totaling close to $200 million, which includes debt backed by offices and apartments, as per marketing materials obtained by Bloomberg News.  The bank, founded in 1994 and based in McLean, Virginia, has tapped brokerage Jones Lang Lasalle (JLL) to try to sell a $120 million non-performing loan backed by five office buildings in Manhattan’s historic NoMad neighborhood.  This loan was first taken out in 2019, before the pandemic when office towers were valued significantly higher.  The loan is now in default for failure to pay the principal balance, which was due in May.

As reported by Crain’s NY, Capital One is also looking to sell a roughly $71 million portfolio, which includes nine performing loans backed by mixed-use pre-war buildings in Manhattan, with ground-floor retail space and apartments. As of July, those apartments were 92% occupied, while the retail space was 67% occupied.  This loan is maturing next year. The deal is being priced at a modest discount, per a Crain’s source familiar with the issue, but who asked to remain anonymous as the information is private.   In August, Capital One had already closed a deal to sell a $1 billion office-loan portfolio to Fortress Investment Group.

A spokesperson for JLL did not immediately comment. A representative for Capital One did not return Crain’s request for comment.

Capital One is not alone in its quest to offload NY commercial property debt.  Many banks have been actively trying to sell portfolios of commercial debt, as the risk in the sector has increased and they are wanted to limit their exposure.  As of September, overall prices for commercial real estate in NY fell 16 percent, compared to their peak in March 2022, per real estate analytics firm Green Street.  Not only declined property values, but rising interest rates are also playing a big part here.  The banks know that when the maturity date comes, they will need to refinance with a new loan and the borrowing costs are now significantly higher, making the assets less profitable.

Many of the loans that had gotten short-term extensions shortly after the pandemic, are now starting to mature and borrowers will be on the hook to pay higher prices for the loans.  The industry is already bracing itself for potential defaults. Even the biggest landlords, including Blackstone, JDS and Brookfield Asset Management, are not immune to the effects of the rising interest rates, as the difference in loan prices will cut directly and bitterly into their cash flows.  We have already seen these developers start to dispose of such properties.  Per Crain’s, some lenders have agreed to accept discounts and provide incentives, so as to offload buildings and decrease their exposure before values slide further.

In the meantime, bargain hunters are waiting for commercial prices to drop deeper before pouncing in to buy them as distressed properties.  “Our expectation has been that prices need to decline 25% to 30% and to generalize we believe we’re about halfway there,” said Joe Harvey, CEO of Park Avenue-based commercial real estate investment firm Cohen & Steers. “We continue to raise capital while waiting for private real estate prices to correct.”