Midtown Center Confronts Uncertainty with Fannie Mae’s Anticipated Departure
In a significant development for the commercial real estate sector in Washington D.C., the Midtown Center is facing a period of uncertainty as Fannie Mae, the anchor tenant, has indicated plans for an early exit from its lease. The 14-story edifice, which is the global headquarters of the government-sponsored enterprise, is a key component of a substantial commercial mortgage-backed securities (CMBS) arrangement. The entity has opted to utilize an early termination option in its 15-year lease agreement, originally intended to extend until May 2029.
Constructed in 2018, the Midtown Center is an 868,000-square-foot complex situated at 1100 15th Street NW. It is currently underpinned by $525 million in CMBS debt. This financial structure comprises a $382 million senior CMBS loan, initiated in 2019 and distributed across three separate transactions, in addition to $143 million in subordinate debt. The debt was arranged by a consortium of lenders, including Wells Fargo, Bank of America, and Goldman Sachs, with a fixed interest rate and a balloon mortgage that is due in 2029, culminating on September 30, 2033.
The impending departure of the enterprise, which occupies a substantial 82 percent of the building’s gross leasable area, presents a considerable challenge in terms of vacancy for the property management to address. Adding to the complexity is the building’s second-largest occupant, WeWork, which holds 13 percent of the space and is currently grappling with its own financial difficulties following a bankruptcy filing. Although WeWork’s lease is valid through 2036, there is growing concern over the possibility of this space becoming vacant if the coworking firm is compelled to liquidate its assets.
According to the loan agreements, the enterprise is obligated to remit a $66.2 million termination fee should it choose to vacate the premises in 2029. This fee is intended to help mitigate the impact on rent and debt service obligations. The headwinds facing the office market, including the increasing adoption of hybrid work models, the Midtown Center benefits from being a relatively new Class A property. This distinction affords a grace period to attract a new tenant or tenants prior to the termination of the current lease. Nevertheless, attracting new occupants may require capital investments to retrofit the space to suit diverse tenant needs.
Morningstar Credit Analytics has placed the Midtown Center loan on its watchlist in light of the WeWork bankruptcy, signaling awareness of the potential challenges in refinancing should the property fail to achieve full occupancy. Jonathan Ramel, a vice president at Morningstar, has voiced concern regarding the balloon risk tied to the loan’s expected repayment date in 2029.
The Midtown Center stands at a pivotal juncture with the anticipated exit of Fannie Mae. The property is confronted with the task of re-leasing a significant portion of its space amidst a shifting office market landscape. The complexity of the situation is further exacerbated by the intricacies of its CMBS debt and the uncertain trajectory of WeWork, its second-largest tenant. While the firm’s designation as a Class A property and the lead time to secure new tenants offer some protection against immediate repercussions, the strategic approach adopted by the property’s stakeholders will be instrumental in steering through the forthcoming changes.
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