Navigating No-fault Insurance: What New York Drivers Need To Know – New York’s biggest corporate landlords have had it pretty good for years, taking advantage of the city’s booming economy, where companies are clamoring for office space, and low interest rates that have fueled the economy of an industry built on debt.

Those days are over. Three years after the pandemic began, floors of office buildings across Manhattan have been vacated by tenants who have reduced their footprints and employees who are working from home.

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Rapidly rising interest rates have fueled concerns that New York’s office market, the nation’s largest and a pillar of the city’s economy, could be at serious risk. This one-two punch could be worse than what corporate landlords have experienced before, say sector experts, who have led major banks and real estate analysts in recent weeks to warn that property blights combined with falling property values ​​and higher borrowing costs could increase the odds. A recession in the country and a city budget crisis.

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More than two-thirds of all commercial real estate loans are held by small and medium-sized banks, raising concerns that regional banks may not be able to withstand a wave of defaults if landlords default on their loans. Some analysts predict a bleak future for downtowns, comparing the crisis to the slow death of many American malls.

In the latest snapshot of the nation’s most important office market, New York’s largest office landlord, SL Green Realty Corporation, revealed that more of its properties lost tenants in the first months of 2023. Its 25 buildings, including some of the city’s premier office buildings, are 90.2 percent occupied, down from 95.5 percent in early 2020.

The results far exceed the balance sheets of the city’s landlords, who in the years before the pandemic pumped in billions to build, buy and renovate offices at low rates, attracting the likes of Meta and Apple to the city.

According to the State Comptroller’s Office, office workers in the city earn an annual salary 75 percent higher than the rest of the private sector, and their daily absence from the office takes away spending from many businesses.

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According to a recent study by researchers at Columbia University and New York University, the value of New York’s office buildings could drop by $48.75 billion in the coming years, eroding an important source of city tax revenue.

Stijn van Nieuwerburg, a real estate professor at Columbia University’s business school, warned that New York faces an “urban doom loop” caused by telecommuting. While the current downturn in commercial real estate shares similarities with previous downturns, including those in the early 1990s, after the 9/11 attacks and during the 2008 financial crisis, this downturn has a new twist: Low demand for office space is persistent. said.

“We can argue about whether we need 10 percent, 20 percent, or 30 percent fewer offices in the long run than before,” said Dr. Van Nieuwerburg, “but everyone agrees that the number is greater than zero.”

Wall Street investors had a particularly dim view of the office sector during the pandemic, but their assessment of the sector has worsened in recent months. Big banks such as JPMorgan Chase and Wells Fargo are increasingly warning that a backlog of commercial loans will come due by the end of 2025 — estimated to total $1.5 trillion nationwide — and that companies may struggle to repay or refinance them.

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Shares of SL Green and two other publicly traded office landlords in the city, Vornado Realty Trust and Empire State Realty Trust, are trading at their lowest level since the pandemic began.

SL Green shares are down 76 percent since the start of 2020. Vornado is trading in its lowest territory since 1996. Empire State Realty, which owns the Empire State Building, is near record lows. Collectively, $17 billion has been wiped off their market value since the pandemic began.

“All three of them are office-centric, all three are New York-centric,” Van Nieuwerburg said. “These are shares, office shares, which are desolate. This is stunning. “

Vornado and Empire State Realty will report their quarterly earnings in the coming weeks. Vornado’s New York buildings were 90.4 percent occupied at the end of 2021, down from 96.7 percent at the end of 2019; Empire State Realty’s buildings in Manhattan were 86 percent occupied, down from 89.8 percent.

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Private equity firm Blackstone, the world’s largest owner of commercial real estate, said last week that its latest distributable earnings, which is cash used for shareholder dividends, was $1.25 billion in the first quarter, a 36 percent decline from a year earlier. . in front

Executives said on Friday that the firm had significantly reduced exposure to the office sector in its real estate portfolio and warned of potential challenges for those properties. Last year, Blackstone turned over the keys to its Manhattan office building, 1740 Broadway, to lenders.

In its latest quarter, SL Green reported revenue about 28 percent lower than the same period in 2020, but still beating Wall Street expectations. On Thursday’s earnings call, the company’s CEO, Mark Holliday, criticized what he called alarming forecasts for the industry.

“The commercial real estate sector seems to be dominating much of the headlines these days, fueling messages of doom and gloom and creating what I believe is over-anxiety in the market, which is most acutely felt in New York,” Mr Holliday said. said. “The overly negative voices are overshadowing some of the positive signs that point to a slow but steady recovery.”

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Alexander Goldfarb, managing director and senior research analyst at investment bank Piper Sandler, said SL Green’s better-than-expected earnings should ease some concerns about an impending office sector collapse.

However, many landlords may not recover. While larger landlords who own Manhattan offices, which are still in demand, or own properties elsewhere in the country, may be better positioned to recover, the many smaller firms that own older, less desirable properties could face a huge strain. According to analysts, about 80 percent of office leases signed in the first months of this year were in buildings considered to be at the top of the market, known as Class A.

In New York’s office market, which includes about 400 million square feet, Mr. Goldfarb said nearly two-thirds of its buildings are aging because they are decades old and largely unattractive to tenants.

Tenants are looking for new space that offers amenities and proximity to transit stations, such as One Vanderbilt, SL Green’s newest tower near Grand Central Terminal, he said. The building’s rent is one of the highest in Manhattan, at more than $200 per square foot.

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After denying the power of hybrid work at the start of the pandemic, executives at SL Green and Vornado now acknowledge that the workweek will change in the near future.

Vornado, for example, aimed to redevelop the Penn Station area into a large commercial district that could command some of the highest rents in the city, like its neighbors in Hudson Yards and around Grand Central Terminal. But company executives decided to shelve the project in recent months, citing higher interest rates.

All three firms scrambled to find new revenue streams. Empire State Realty sold several suburban office buildings and expanded into the apartment market, buying three Manhattan buildings starting in late 2021.

But there is no quick fix for office landlords. One attractive option—turning unused offices into residences—is prohibitively expensive at today’s interest rates and often structurally challenging.

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Vornado considered a bid to locate a casino near Penn Station in midtown Manhattan. It is also considering building more residential towers in 2019 after completing luxury condominiums at 220 Central Park South, where one residence sold for nearly $240 million, the most expensive home anywhere in the United States.

SL Green is also considering gambling: It is partnering with Caesars Entertainment to propose a new casino in Times Square that would compete with other groups for one of three casino licenses authorized in New York state.

The project will be “for everyone’s benefit,” Mr. Holliday said on Thursday’s call. “It’s going to be a huge catalyst for the revitalization and revitalization of New York, and I’d say the No. 1 most important tourist destination in the world.”

Matthew Haag covers the intersection of real estate and politics in the New York area. He previously was a general assignment and news reporter for The Times and worked as an education reporter for The Dallas Morning News. More about Matthew Hague

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