Marc Norman, associate dean of NYU School of Professional Studies’ Schack Institute, has identified what could emerge as an important metric for the potential for properties with near-term debt maturities to find refinancing: the amount of near-term lease maturities.
Building capital stacks will be very different for different sponsors in the coming year, Norman told Real Estate Capital USA. Some sponsors appear to have ready access to equity and debt capital while others will struggle.
“If the debt financing is coming due in addition to leases coming up, it will affect people differently,” Norman said. “The way we look at lease expirations could change, and they could become an interesting indicator of the health of the market.”
Over the past few months, it has become apparent that debt providers and debt investors have more flexibility than market participants concentrated on the equity side of the equation. This is particularly true for investors focused on the office sector, where the lack of clarity over meaningful return to work in New York is apparent.
“There is a notion that people would much rather hold debt than hold an asset right now because holding the debt gives you more flexibility right now,” Norman said. “I think one of the issues we are facing and part of the reason why we are in this holding pattern is because of the on-going question of ‘When are people going to go back to the office?’”
Still, the coming year could be an important turning point for what will become the new normal for the office sector, Norman said.
“At some point, starting in 2023, the market is going to have to reconcile itself to the new normal of fewer days in the office and that necessitates changes to the office space. That doesn’t mean that people will downsize, but they will shift the way they use that space,” Norman said. “There is a notion that people might not necessarily downsize, but they could shift the way they use the space.”
There is a bright spot – supply has been significantly less than it could have been for new office properties and a handful of older assets have been taken off the market via conversions.
“We are not seeing the kind of supply we have been seeing and the diminishing number of new office buildings means we might be able to absorb what is coming onto the market,” Norman said, citing the second phase of Hudson Yards or buildings slated for construction in Brooklyn that have been put on hold.