They are not easily recognizable, but they are out there all around us, on the streets of Midtown and Lower Manhattan.
They are a growing breed of office towers, not quite alive but not entirely dead either. They are New York’s City’s zombie buildings. And within the commercial real estate world, once a building is tagged as a problem site, it has a difficult time shaking off the negative label, attracting tenants and finding rental income to nurse itself back to health.
“It is a super-slow-motion thing that is occurring,” said Glenn Markman, a commercial broker for Cushman & Wakefield, explaining the vicious cycle that many Manhattan buildings have gotten stuck in since the start of the downturn.
Indeed, as more commercial loans mature in New York, more buildings here are in choppy financial waters, defaulting on loans, sliding into special servicing and potentially going into foreclosure. Now add to that a more cautious and thriftier tenant base (which is also being wooed with concessions and discounts from a wide array of landlords) and you have the recipe for a slow-motion death spiral for a commercial building.
As the commercial market continues to worsen, prospective tenants are asking more questions about the financial guts of a building. And when they don’t like what they hear, they are often walking away.
Some of those potential tenants are also avoiding buildings with financial problems because their brokers are steering them clear of properties where the loan is in default or the owner seems to be in financial hot water. That fear stems from a concern that there will be an erosion of services in the building, a lack of upkeep and — in the event of absentee ownership or foreclosure — confusion over who has authority to renegotiate in the future.
“You don’t want to enter into a long-term relationship and long-term commitments when you can see that things are going to have the potential to unravel,” Markman said.
“It’s one thing when you are in a tight market, but there are very good alternatives out there, so a well-brokered tenant is going to be able to cherry-pick and avoid the buildings that could go into bankruptcy or absentee ownership.”
By some rough estimates these troubled buildings may account for up to 20 million square feet of commercial space in Manhattan, according to lists provided by Real Capital Analytics and brokers who talked to The Real Deal.
What’s more, that amount of problem space is expected to grow in the next couple of years, as more loans are scheduled to come due.
A number of landlords are scrambling to avoid a morbid fate. Some are offering deeper discounts to quickly fill the vacant space.
Take Worldwide Plaza: Before George Comfort & Sons purchased the 47-story office complex from Deutsche Bank in July, it had hundreds of thousands of square feet of vacant space that couldn’t be leased, according to Woody Heller, who heads Studley’s capital transactions group.
The building was tainted because it was part of Harry Macklowe’s portfolio of Manhattan office towers that was purchased at the height of the market and then returned to lenders. “It had 700,000 square feet available, but if you wanted to lease space in that building, could you have? Not really,” Heller said. “You could have gotten a space tour, but who was authorized to sign the lease? Who was authorized to sign a check or concession?”
Since their purchase of the building, George Comfort & Sons has reportedly been in active negotiations for 1.5 million feet of potential leases at Worldwide Plaza, indicating that once a financially healthy owner steps in, things can turn around.
Heller noted that there are two categories of available buildings: those that can make deals and those that can’t. “Until the financial structure solidifies, it is unlikely a tenant broker will put their tenants in a position of peril,” he said.
In the case of 290 Madison, the building’s deteriorating financial health appears to be tied to a growing vacancy rate.
According to new reports, the six-story office building is owned by APF Properties, whose $11 million note was 60 days delinquent in October. The building was reportedly fully occupied at the time of the purchase in 2006.
Today, it is 71 percent vacant, according to data from research firm Costar Group. Howard Kessler of Newmark Knight Frank is representing the building, but declined to comment.
In response to a growing number of defaults, the Treasury Department released new rules in September designed to make it easier for distressed property owners to restructure loans that were packaged by Wall Street firms and sold as securities.
The Timekeeper Building at 307 East 53rd Street is dealing with its own distress situation. “It really is a very, very frustrating situation,” said Jerry Marshall, president and CEO of Amerimar, which owns the 31,000-square-foot building.
Last month, the loan on the Timekeeper fell into default status. According to Marshall, Amerimar was procedurally forced to go into default after the firm reached out to their loan servicer for more time to invest in a build-out of their vacant space.
Marshall said that Amerimar has a vacant suite and floor, but is hopeful that it can find a tenant in the coming weeks. He said the firm was not having trouble attracting tenants because of the default on the loan. He also said Amerimar was offering “competitive market deals without special incentives.”
One broker, who is representing a midsize Manhattan office building but asked to remain anonymous, said that attracting new tenants was a greater challenge than retaining current ones in buildings with financial problems.
“If it is an educated tenant or broker, they are going to ask for certain measures to be taken and it is going to limit the owner’s ability to make deals,” the broker said.
The most common measure, according to the broker, is a “non-disturb” agreement between a tenant and the landlord’s lender. It is designed to ensure the tenant will remain in possession of the leased space even if there’s a foreclosure action against the landlord.
