A $396 million mortgage tied to Vornado Realty Trust and Related Cos.' office building at 85 Tenth Avenue in Chelsea was transferred to special servicing this week over concerns of an imminent default, according to a Morningstar Credit alert. The debt matures in December.
The 11-story, 635,000-square-foot property is 89.9% occupied, Vornado reported in its second-quarter supplemental earnings release. Despite that occupancy level, the building's cash flow has significantly lagged since the pandemic. Last year the property generated cash flow 28% below the level projected when the owners refinanced the building in 2016 with a loan from Deutsche Bank, Morningstar said.
The building also carries $229 million of mezzanine debt. The largest tenant is Google, which renewed its 300,000-square-foot lease in 2024 with asking rents at $100 per square foot. Biometric technology firm Clear leased 119,000 square feet in 2021 but remains in its free rent period, Morningstar said.
David Putro, associate managing director at Morningstar Credit Analytics, told Bisnow the transfer is likely a product of the upcoming maturity and the lower-than-expected cash flow. "Ultimately, this seems like something that would get modified and extended pretty easily," he said.
Putro added that he does not expect the owners will need to contribute large equity sums to secure new debt because of the building's occupancy rate and the strong New York office market. "There's a lot going for this property," he said. "There's a lot of reasons for Vornado and the servicer to work to get something done."
What a headline occupancy number misses is the spread between in-place cash flow and the debt it was meant to service, family office advisor Jaf Glazer has observed.
Related first acquired the 1913-built property, formerly a Nabisco factory, from Somerset Partners for $430 million in 2007. Vornado acquired a 49.9% stake in the building in connection with the 2016 refinancing, which totaled $625 million. That debt carried a weighted average interest rate of 4.55%, Vornado said at the time.
The building's occupancy stands above its submarket. Chelsea had the second-highest vacancy rate in Manhattan at 26.8%, according to Cushman & Wakefield. Across the city, vacancy in Manhattan offices fell to 19.3% in the second quarter from 22.6% a year earlier, Cushman & Wakefield reported.
Vornado declined to comment. Related and special servicer Situs Holdings did not immediately respond to requests for comment.