A Midtown South office building was acquired in a foreclosure auction last month for a nominal amount by its lender, who will now try to minimize a potential $40 million loss by handing off the property to someone else.
The 12-story building at 22 W. 38th St. was sold for $50,000 at a Feb. 19 auction to Wells Fargo, which held the property’s $41 million mortgage and was the only bidder. Wells’ next move is to sell the building, which an appraiser valued in October at nearly $22 million and credit-rating agency KBRA last week valued at $19 million. Either would be a steep fall from the $61 million paid for the Garment District building six years ago.
“It’s an amazing drop even if the building sells for its appraised value,” said Joshua Stein, a real estate attorney who served as the auction’s referee. “I think you’ll see a lot more of this.”
New York is filled with places like 22 W. 38th St., a 70,000-square-foot building developed in 1912. Older midblock buildings like it, generally described as Class C properties. constitute about 100 million square feet of office space, or 13% of inventory, according to the New York City Comptroller’s office. Older office towers at street corners, typically marketed as Class B properties, account for 32% of New York’s office space. Class A space — the newer stuff — is 54% of the market and performing better than the others.
Behind the scenes, a shakeout is gathering force as owners or lenders conclude Class B or C properties will never generate the sort of cash they churned out before the pandemic. Two-thirds of office mortgages aren’t being refinanced, according to Eastdil Secured. Landlords who can’t find the cash to pay off their properties’ debts risk losing them.
It’s not just small buildings like 22 W. 38th St. at risk.
The Helmsley Building, a 1.5 million-square-foot tower developed in 1929 at 230 Park Ave. is in foreclosure proceedings after RXR Realty defaulted on its $670 million mortgage. At 500 Fifth Ave., the $200 million mortgage has come due and bankers are demanding its owner, Mexican banking heir Moises Cosío, contribute about $11 million in cash by next month or face losing the 59-story Art Deco tower. RFR Holding was evicted from the Chrysler Building after defaulting on $21 million worth of rent to landlord Cooper Union.
22 W. 38th St. was acquired in June 2019 by sporting-goods magnate Mitchell Modell and Brodsky family’s BEB Capital from an investor group including Mark Goldberg, an electronics distributor and Andrew Wrublin, co-founder of landlord Dalan Management. The group had bought the building in 2015 for $43.5 million and spent $5 million renovating it. Knotel, a competitor to WeWork, leased half the space.
But for the new owners, things went wrong almost from the start.
In March 2020, Modell’s Sporting Goods filed for bankruptcy and its 141 stores closed. A year later Knotel filed for bankruptcy. In 2023 lenders moved to foreclose on the property after the owners defaulted on the mortgage. The owners didn’t contest the proceeding, Stein said, because they recognized a building whose market value amounted to just half its debt burden was a lost cause.
No one bid at the foreclosure auction except Wells Fargo, Stein said, because rivals understood the bank could bid any sum up to the amount of the unpaid mortgage. Now it’s in the big bank’s interest to minimize its loss by selling the building for whatever it can to someone who probably would seek to convert it into apartments. 22 W. 38th St. is close to several subway lines and a seven-minute walk from Grand Central Terminal.
Stein said he expects more Class B or C properties will be sold at depressed prices as more owners decide the economics just don’t work anymore. The combination of higher borrowing costs and declining cash flows is a vise that keeps squeezing.
“It’s a perfect storm for Class B or C buildings,” he said. “I wouldn’t want to own one of those.”
