Price points are starting to emerge for lenders and borrowers looking at New York offices, as sponsors pull the trigger on the sale of properties with near-term debt maturities or that have business plans that no longer work in today’s market.
While these properties are being sold or expected to be sold at steep discounts, potential buyers have the chance to step into a market at a very low basis, says Chris Okada, founder of Okada & Company, a local broker, manager and developer.
A May report from Okada & Company cited the examples of 25 Water Street, 260 West 36th Street and 111 West 24th Street, all of which traded in recent months at levels significantly below the peak pricing seen for similar assets in their specific submarket. Meanwhile, advisory JLL is preparing to accept bids for 61 Broadway, a downtown office building that is on the market after former owner RXR Realty handed back the keys last month.
“We are seeing a perfect storm when it comes to the office sector due to incredible price discounts, some of which have not been seen in 14 years,” Okada says.
The 1.1 million-square-foot 25 Water Street was sold for $225 per square foot, compared with a $650 per-square-foot peak pricing seen for similar assets in the Downtown market, while 260 West 36th Street was sold for $347 per square foot, compared with a high of $850 per square foot for the surround submarket. Meanwhile, 111 West 24th Street was sold for $349 per square foot, compared with a peak pricing of around $1,000 per square foot for similar properties in the West 20s.
The eventual sale price for 61 Broadway – a Class A, 750,000-square-foot office building in Manhattan’s Financial District expected to trade imminently – will provide another important metric, market participants tell Real Estate Capital USA.
The property at 61 Broadway went up for sale after local real estate investment trust RXR Realty opted to hand back the keys to lender Aareal Bank after the loan matured on May 1. RXR acquired the building from Broad Street Development in 2014 for $330 million, according to published reports.
A JLL Capital Markets team led by senior managing director Andrew Scandalios is representing Aareal in the sale, which market participants see as an indicator of where such lender-driven transactions may be headed as loan maturities, office vacancy and debt service pressure continue to torment the sector.
One of the problems affecting the market is the availability of debt financing. “It is very difficult to get financing on this asset class,” Okada says. “Many traditional lenders are experiencing an overweight level of real estate risk on their balance sheets, and the usual active lenders are not taking on new loans.”
The market is also feeling the impact of office-related foreclosures, mortgage defaults and deeds in lieu of foreclosure negotiations, which have skyrocketed in 2023.
“This perfect storm has resulted in operators with high debt levels in the office sector to default on their loans and/or give back the keys to their lenders,” says Okada. “With discounts ranging from 30-60 percent off from peak pricing, we feel there are remarkable opportunities in this asset class.”
Market participants believe office transaction activity will start to rise, albeit slowly, as a clearer picture of the overall economy starts to emerge. A part of this picture began to emerge after the US passed its debt ceiling extension earlier this month, a development that is expected to drive the Treasury department to flood the market with new offerings over the next six to 12 months.
Market observers have noted an uptick in negative leverage during the Federal Reserve’s prolonged effort to fight inflation with interest rate hikes, and potential buyers are now underwriting properties on an all-cash basis.
“If the debt on a property is at 10 or 12 percent and a buyer is seeking a cap rate in the range of 5 or 6 percent, the math simply does not work,” one analyst tells Real Estate Capital USA. The solution, according to brokers, is either working with all-cash buyers, or lender groups offering seller financing.
New York-based law firm Olshan Frome Wolosky believes soon it may be a good time to be an owner of office assets. “What I am seeing is some landlords handing down fees, and some of those landlords, [some of which are institutional] accede to solid office buildings, [which is a] real eye opener,” says Nina Roket, co-managing partner, co-chair of the real estate group and chair of the commercial leasing practice.
While Roket stresses that the next six months are going to be a challenging time for the office market, more opportunities lie ahead.
“[There will be] more opportunity for lenders – and if they’re able to set the property values at a place where it starts to make some sense, then you might see some traditional lenders coming in [to the sector],” she says. “I’m not seeing traditional lenders come in on office deals [as of yet]. We are so very much in a gray area.”
Roket is, however, hopeful for the future of the US office market. “While it might not be getting resolved fully, [the debt crisis is] coming under the umbrella of people [who] are going to figure out ways to make it work,” she says. “And hopefully, more people will be coming back into the office over the next however many months [so the crisis] will start to get a little softer.”