Centre Square is a pair of 43 and 36 story towers dating to 1974 that fill a full block across from Philadelphia's City Hall. Out front is a 45 foot stainless steel clothespin sculpture that makes the property hard to miss.
This deal is a single-asset, single-borrower CMBS, or SASB, secured by one mortgage on this complex. SASBs took off over the past decade, but with all the risk riding on a single property, a downturn can ripple through every layer of the bond.
A joint venture of Nightingale Properties and InterVest Capital Partners bought the complex for $328 million in 2017, one of Philadelphia's largest commercial real estate deals. In 2020, the mortgage was refinanced and securitized into a CMBS that closed just weeks before Covid-19 scrambled the office market.
KBRA reported that, at the time, occupancy was roughly 93% across 56 tenants. The pandemic and remote work then undercut demand. By the end of June, servicer commentary put occupancy at 28%, with the University of Pennsylvania Health System and mortgage insurer Radian Guaranty among tenants still in place.
By mid 2022, servicing moved the loan to a special workout team when the borrower disclosed it couldn't refinance or pay off the debt at its maturity later that year. A modification or extension did not materialize, the property ultimately went through foreclosure, and it was subsequently offered for sale. In the prior month, a court signed off on a $70 million sale of the complex to PMC Property Group and developer Dean Adler; he has said the vision includes turning part of the property into a 300-room luxury hotel and up to 500 apartments. The approval clears a closing in the coming weeks, with proceeds to be paid out to creditors.
The drop from a 2019 appraisal of $471 million to a $70 million sale price is roughly an 85% decline in value, which means even the formerly AAA class is now expected to absorb losses. Once advances, fees and other claims are netted out, Wall Street strategists estimate recoveries close to 44 cents on the dollar.
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Pacific Investment Management Co. holds the biggest position in this CMBS, with roughly $58 million in face value spread across the deal, of which about half sits in the top-rated tranche. Given the projected recovery, its losses would exceed $35 million, calculated from purchase prices inferred from reported shifts in its holdings and contemporaneous bond levels. Holders of seven lower ranking tranches are expected to be wiped out. A Pimco spokesperson declined to comment.
If the AAA slice takes a hit, it would be only the third instance since the financial crisis of losses reaching the top tier of a CMBS. Last year, the most senior class of a bond linked to New York's Palisades Center mall suffered losses of more than $70 million, after an earlier roughly $40 million hit to senior holders in a CMBS backed by Manhattan's 1740 Broadway.
All three problem deals are SASBs. Unlike traditional CMBS that bundle many loans, SASBs typically hinge on one mortgage and have proved more vulnerable to losses despite AAA labels. SASBs are "a different shape of risk," said Nitin Bhasin, a CMBS analyst at KBRA. Some default, some don't. It's binary."
Analysts say the pressure is not over as older offices face weak demand, lower values and looming maturities.
While New York and San Francisco have seen some leasing tailwinds tied to AI, plenty of markets may take years to claw back. Bloomberg data show more than 30 top rated SASB slices now trade below 85 cents on the dollar, with lower tranches marked at even deeper discounts. That list includes bonds linked to properties in Atlanta, Chicago and Denver.
The takeaway for regular investors: concentration cuts both ways. When a single property stumbles, even previously pristine bonds can take real damage, and Centre Square's roughly 44 cent recovery shows how fast that can filter into returns.
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