For much of 2023, Commercial Observer headlines have been filled with reports of the hardships experienced by some of the country's largest owners of office real estate as interest rates rise, vacancy rates soar, demand plummets and property values plummet.
Last May, RXR Chairman and CEO Scott Rechler walked away from the 33-story office building at 61 Broadway in the Financial District after failing to repay a $240 million loan that came due. But the loan is now being repaid.
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In December, Savannah handed back the keys to 1825 Park Avenue, a 12-story office building in Harlem, in a transaction valued at $56.2 million. The transaction was a transfer-in-lieu, which is generally considered a less onerous method of disposition than a pure foreclosure.
And then there's SL Green, New York City's largest owner of office buildings. CO reported last fall that three of its major office buildings — 245 Park Avenue, 280 Park Avenue and One Worldwide Plaza — were on the special administration watch list or had failed to pay loans when they matured. (So far this year, SL Green has done about $2 billion in expansions and restructurings.)
“It's an interesting phenomenon,” said Thomas Taylor, a senior CRE and CMBS researcher at Trepp. “It's an outcome that nobody wants, especially at this size and institution, but it's concentrated in major urban areas.”
And then something interesting happened: The landlords who had been returning the keys and managing their assets below the surface
Finance companies with billions of dollars of debt are buying up more distressed office buildings.
In the past six months, SL Green announced its intention to launch a $1 billion debt fund focused on investment opportunities in distressed real estate, specifically offices, in New York City. RXR and Ares Management have established a $1 billion joint venture fund to invest in distressed office space. Green Street also reported in March that Savannah is launching its own credit fund to invest in distressed office space, also targeting $1 billion in equity investments.
“You can't fully understand the mind of an LP writing a check or a CEO betting on themselves to make better decisions than they've made in the past,” Trepp's Taylor explained, “but if I had to guess… the biggest takeaway for us is that a lot of markets are doing well and we have the opportunity to get in on good terms with these new funds.”
But it begs the question: why trust these landlords to make better decisions when other once-prime office properties have already suffered adverse results?
Megan Chekovsky, head of appraisals at Walker & Dunlop, said the post-COVID downturn and the era of high interest rates have changed how nearly all office property is valued, and investment in distressed properties, even by previously hurt landlords, is a necessary component of what will ultimately be a corrective valuation of the overall market.
“It really comes down to resetting your base, and that's what owners need to do in this environment,” Chekovsky said. “This market, particularly in the office market, offers a huge opportunity to buy at a lower cost, which resets your base cost and allows investors to finally execute on their investment plan and get the return they expect.”
Unfortunately, this type of “reset” doesn’t work for homeowners or renters who have fallen behind on their payments.
Brian Pascus can be reached at bpascus@commercialobserver.com.