This week's column examines a decision by Morningstar DBRS to reaffirm its ratings of data center CMBS transactions. It also explores questions about a New York office restructuring and a downgrade on a portfolio of flexible office properties. Read the entire piece by clicking "read more" below.
Ratings firm reaffirms data center strength: Morningstar DBRS has reaffirmed the credit ratings on 100% of loan classes across 13 commercial mortgage-backed securities transactions that back data centers, concluding that one of real estate's fastest-growing sectors remains financially steady.
The bond rating firm assigned stable trends to every class, citing strong occupancy rates, reliable cash flows and investment-grade tenants locked into long-term leases. All underlying loans remain current on debt service payments as of January reporting.
The analysis covered 53 data center properties spread across the United States, with heavy concentrations in Northern Virginia, Texas and Georgia.
Older-vintage transactions closed before 2025 posted average occupancy rates above 90%, according to Morningstar.
The ratings action carries weight for investors because it validates data centers as a durable, income-producing asset class even as interest rates remain elevated.
Despite termination options available to some tenants, none have exercised those rights, a sign that occupiers view the facilities as mission-critical infrastructure rather than discretionary real estate, Morningstar said.
Power constraints continue to function as a supply-side brake, limiting new data center development and bolstering the value of existing properties. Morningstar noted most of the 13 transactions are secured by so-called hyperscale facilities, or those requiring more than 5 megawatts of power, designed for large-scale data storage and processing.
Data centers, which have existed in various forms for many years, have become a key component of the modern global technology industry. The advent of cloud computing, streaming media, file storage and artificial intelligence applications has increased the need for these facilities over the past decade.
New York loan deal shakes investors: A move to restructure a $300 million CMBS loan backed by a struggling office building in Long Island City, New York, has rattled CMBS bondholders.
The deal, CSMC 2020-FACT, is secured by The Factory, a 1.1 million-square-foot mixed-use office and retail property developed by Atlas Capital Group from a 1920 Macy's warehouse. The interest-only, floating-rate loan defaulted at its October maturity date and was modified Jan. 30.
Moody's Ratings downgraded six bond classes in the deal on the property's deteriorating business and terms of the modification.
The deal is a flashpoint in a simmering debate: When special servicers restructure distressed loans, do bondholders, particularly investment-grade investors, get a fair shake?
The answer in this case, according to analysts at Bank of America Securities, may be no. The modification introduces a discounted payoff option that caps recoveries at $223 million on a $300 million loan. In other words, the loan restructuring lets the borrower walk away from a $300 million debt by paying only $223 million, leaving bondholders to absorb a guaranteed $77 million loss.
"Injecting uncertainty into senior bond cashflows makes [investment-grade] investors incredibly uneasy," wrote Alan Todd, CMBS strategist for Bank of America Securities, in a weekly column this month. "This, in turn, can limit market participation and hinder liquidity."
The restructuring extended the loan's maturity to October 2027, with an additional one-year option to October 2028. The loan remains interest-only at a floating rate of the Secured Overnight Financing Rate plus 4.12%. The borrower, Atlas Capital, contributed about $18.7 million in new equity at closing.
The most contentious term of the restructuring was the discounted payoff option beginning Feb. 1, 2028. Moody's warned that exercise of this option would result in a full loss to Class F and a roughly 34% loss to Class E investors. These classes of debt investments are subordinate to senior tranches, meaning they are paid interest and principal only after all senior classes have been paid.
The modification documents did not initially disclose an updated appraisal. However, a November appraisal valuing the property at $204 million — down 62% from $530 million at the time the transaction was securitized — later surfaced in CMBS reporting, according to Todd.
The timing of the appraisal's release, he wrote, "could potentially suggest that the special servicer might have had visibility into the updated valuation while structuring the modification."
Morningstar Credit analysts, in a February report about the discounted payoff option, wrote, "We'll leave it to investors to form their own opinions on these terms, but they certainly are not structures that we typically see."
Atlas Capital and servicers for the loan did not respond to CoStar News' request for comment.
National office portfolio's woes draw attention: Morningstar DBRS downgraded a $1.23 billion CMBS deal tied to a sprawling national portfolio of flexible offices, citing mounting losses.
The cascade of distress at the Workspace Property Trust-owned properties has made the loan one of the most-watched distressed deals in today's CMBS market.
The J.P. Morgan Chase 2018-WPT transaction is one of the largest single-borrower CMBS deals backing office and flexible space still trying to recover from the pandemic era. The debt is also spread out among four other CMBS offerings.
Vacancy stands at 26.7%, plummeting from 95% in 2018, according to CoStar data. The pain could continue. Leases representing about 2% of net rentable area are set to expire or roll during 2026.
The loan transferred to special servicing in November 2024 after the borrower reported shortfalls in its cash management account. The trust subsequently failed to repay the loan when it matured last July.
The loan has missed payments since May 2025 and is now classified as a nonperforming debt. The servicer is actively pursuing foreclosure, though Morningstar cautioned that the process will be prolonged given the portfolio's size.
With Workspace Property Trust's consent, a court-appointed receiver now oversees the portfolio. The receiver is actively transitioning management, pursuing new leases and developing a path-forward recommendation. Updated appraisals are also in progress.
"Workspace Property Trust consensually agreed with the special servicer to appoint a receiver to manage a portion of the overall Workspace portfolio in exchange for freeing up significant funds to support an active and robust leasing environment for our high-quality suburban assets," Workspace said in an email to CoStar News. "In fact, we are experiencing an increased level of leasing activity across the portfolio, approaching or in some cases, exceeding, pre-Covid levels."