Some of New York’s best known real-estate developers are unloading their least viable office buildings at deep discounts, cracking open a sales market that had all but closed in the first quarter.
RXR defaulted on the $240 million loan on its 33-story office tower in lower Manhattan. The developer, which owns and manages dozens of commercial and residential properties in the New York City area, has said that it will turn over ownership of the office tower at 61 Broadway to whoever buys the defaulted debt. That mortgage is being marketed by commercial real-estate services firm JLL and will likely go for about half the $440 million valuation of the building in 2016, market participants said.
Silverstein Properties, best known for its redevelopment of the World Trade Center, has agreed to sell a 20-story office building on Fifth Avenue near Bryant Park for $105 million, or $66 million less than the amount that Silverstein refinanced the building for in 2020.
Giant investment firm Blackstone also recently sold a 49% stake in One Liberty Plaza valuing the tower at $1 billion, down from the $1.5 billion valuation when Blackstone bought the stake in 2017, according to people familiar with the matter.
These cut-rate sales and sales efforts attest to the troubled state of the office market, which is suffering one of its worst downturns since World War II because of the weak return-to-office and high interest rates.
Still, the activity offers a bit of relief for the market. Until now, market upheaval has frozen sales activity, making it very difficult for owners, lenders, appraisers and others to determine how far office building values have fallen.
In the first quarter of 2023, investors purchased only $489.5 million in Manhattan office properties, the lowest volume since the fourth quarter of 2009, around the height of the global financial crisis, according to data firm MSCI Real Assets. By comparison, volume was $5 billion in the first quarter of 2022, MSCI said.
Sales for the mortgage on 61 Broadway and Silverstein’s Fifth Avenue office building could help jump-start the market, because other buyers and sellers will use those transactions to help determine values.
“We’re starting to see a thaw and more product coming to the market,” said Gary Phillips, managing director of Eastdil Secured, a real-estate investment banking firm.
Deeply discounted sales reflect the emergence of a two-tiered office market. One tier includes the highest quality space with amenities such as rooftop decks, extensive food offerings and stellar views. These properties can still attract top rents from tenants who are looking for ways to reward employees for returning to the office.
But there is still a glut of run-of-the-mill space that requires a big capital investment by landlords for upgrades necessary to attract tenants.
Landlords who own both types of buildings are getting rid of the weaker properties to focus on the ones that can still be profitable.
For example, Silverstein decided to sell its property at 529 Fifth Ave., a 65-year-old tower that it has owned since 1978, partly because its largest tenant, accounting firm Citrin Cooperman, decided to vacate, according to a person familiar with the matter. Silverstein instead is focusing on its trophy properties, like its space in the World Trade Center, which is 95% occupied.
RXR went through a culling process of its entire office portfolio, which Chief Executive Scott Rechler dubbed Project Kodak. The firm’s top quality properties, like 75 Rockefeller Plaza at Rockefeller Center, were designated as “digital” keepers. Older properties in less popular locations, such as 61 Broadway, were labeled as “film” and targeted for possible removal.
“People coming back to the workplace want to come back to higher quality buildings,” Rechler said.
RXR isn’t losing money on 61 Broadway because it sold a 49% stake in the building to China Orient Asset Management in 2016, enabling RXR to take out all the equity that it had invested. Also, the $240 million loan that RXR defaulted on was structured so that the lender’s only recourse in a default is foreclosing on the property, Rechler said.
The lender, a syndicate led by Aareal Bank of Germany made a non-recourse, which means that the lenders cannot go after other assets held by RXR or any of its principals. “This is one of the reasons you sign non-recourse loans,” Rechler said.
A spokesman for Aareal Bank declined to comment.
The office-building sales pipeline in New York is beginning to grow, market participants said. One of the next big deals will likely be the Federal Deposit Insurance Corp.’s sale of the $60 billion portfolio of commercial property assets that had been owned by the failed Signature Bank.
The FDIC has hired Newmark Group to handle the sale. Douglas Harmon, Newmark’s co-head of capital markets, declined to discuss the sale. But he agreed that it will help determine market values.
“It will be a catalyst for a lot of activity,” Harmon said.
A lot of buyers have been steering clear of New York office buildings, especially traditional office buyers like insurance companies and pension funds. But investors are beginning to notice the low price tags.
“When New York gets cheap, people around the world talk about it,” said Will Silverman, an Eastdil managing director.
By Peter Grant (WSJ)