Markets for retail and office space are under enormous pressure. A foreclosure in the works for a building on NYC's glitzy Fifth Avenue shopping corridor shows just how bad it's getting.

Markets for retail and office space are under enormous pressure. A foreclosure in the works for a building on NYC's glitzy Fifth Avenue shopping corridor shows just how bad it's getting.

August 15, 2020
  • The large New York landlord, SL Green, has moved to foreclose on the 19-story, 100,000 square-foot office building at 590 Fifth Avenue. 
  • The foreclosure shows that the building's landlord, Thor Equities, has fallen into default on a $25 million mezzanine loan held by SL Green against the property.
  • The situation is a sign of the times, as revenues deteriorate in various segments of the real-estate sector, forcing lenders to take action.  
  • Visit Business Insider's homepage for more stories.

The large New York City-focused real estate investment trust, SL Green, has begun a process to foreclose on a Fifth Avenue office and retail property, the $3.5 billion company revealed in a public notice on Friday that was reviewed by Business Insider.

SL Green holds a $25 million mezzanine loan against the building, 590 Fifth Avenue, a 19-story, 100,000-square-foot property along one of Manhattan's most famous shopping corridors and that once boasted the world's highest store rents.

Brick-and-mortar retail locations, including those in High Street areas in major cities across the country, have been hurt by the pandemic, which has caused some retailers to cease paying rent and, in other instances, try to break from their leases.

Read More: SL Green is looking to sell a $1.1 billion Amazon-anchored building to buy back its shares. Here's a look at its strategy to defend its share price as the office market tanks.

The building is owned by Thor Equities, a retail-focused landlord that more recently has said it is turning its attention to other property types, such as industrial, which has thrived during the pandemic. A spokeswoman for Thor declined to comment.

The property's fate is a sign of the times. Thor had tried to reposition the building's store space in recent years into a flagship retail opportunity, but appeared unsuccessful in that effort. That kind of repositioning is even more unlikely now as the city's streetscape remains thinly populated as few workers have returned to the office, tourism has been extinguished, and the pandemic crisis continues to make the public reluctant to venture out into what were once densely packed streets and spaces. 

Flex-office provider Knotel has two floors at the property 

Upstairs, the flexible workspace provider Knotel has two floors at the property, totaling nearly 12,000 square feet. That firm has seen its financial position deteriorate amid the coronavirus crisis and has stopped paying rent at some of its locations, prompting several landlords to sue the firm. 

A person familiar with the property told Business Insider that several tenants at the building had stopped paying rent amid the pandemic, cutting off the revenues that Thor depended on to service the debt on the property.

That source said Knotel was among the occupants at the property that had halted rent payments in recent months. A spokesman for Knotel said the firm had no comment on the status of its rent at the building.

Read more: Leaked Knotel financials reveal that the WeWork rival had huge pre-pandemic losses and now has more unpaid bills than cash. It's a grim sign for the flex-office space.

In the public notice, SL Green announced that it will hold a foreclosure auction on Thor's ownership stake in the property on October 15 in the offices of Fried Frank, a law firm that has a large real-estate practice in the city and that handles transactional work for SL Green. A spokesperson for SL Green did not immediately respond to a request for comment.

To foreclose on mezzanine positions, lenders are legally obligated to alert the public and hold an open auction that allows outside bidders to freely compete for ownership of the real-estate asset.

SL Green is not the only lender to face souring loans on its books. South Korean firms that placed billions of dollars of mezzanine loans in recent years against hotel assets may face a deluge of defaults and write downs. And large banks, such as Wells Fargo, have begun to clear bad loans off of their books recently. 

Read More: A growing group of lenders are looking to unload hundreds of millions of dollars of souring hotel loans. Teams hired to sell the portfolios say it's just the beginning of a surge in activity.

SL Green has raised over $1 billion in cash since the pandemic began to strengthen its financial position and also buy back stock, which was trading at around $48 a share on Friday, almost half of where it was earlier in the year before the pandemic began.

Taking over an asset such as 590 Fifth Avenue is likely to be costly. For one, the company will have to assume payments on the building's $83 million senior mortgage. It may also need to invest millions of dollars to improve the building to lure retail and office tenants.

SL Green, meanwhile, is facing other sizable capital outlays from its expansive book of real-estate loans. The company's chief executive, Marc Holliday, revealed on its recent earnings call to discuss the company's second-quarter results that it is planning to take control of the Lipstick Building, a 34-story office building on Third Avenue, that it has held a mortgage against.

"We will intend to lease and manage and operate that building going forward," Holliday said on the earnings call, stating that the company was "coming up with an appropriate redevelopment plan for that building," which faces a large vacancy with the pending departure of its biggest office tenant, the law firm Latham & Watkins.

SL Green has continued efforts to raise capital, putting the office building 410 Tenth Avenue on the market for over $1 billion recently as well as a $62 million mortgage loan it holds against a Long Island City office tower.

"It's not a big deal if you get one asset back, but if you get several and they require lots of leasing and leasing is slow, that's a bigger challenge and it creates capital needs all at once," said Steve Sakwa, an analyst at Evercore ISI who covers SL Green. "All of a sudden you can have a lot of fingers in the dike."

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