In Dante’s “Inferno,” there are nine layers of hell, each marking a deeper descent into depravity.
New York commercial real estate has been stuck in Dante’s first level: limbo. Deal volume is low. Companies are noncommittal on return-to-work policies. Banks are reluctant to foreclose. The predicted doom loop has yet to occur. Prices just won’t reset. Heaven isn’t close. But we haven’t fallen into hell, though fiery might be preferable to dull.
“Kicking the can is not a great strategy because values are not just coming back up,” said Scott Rechler, RXR’s overlord.
Rechler was among the first large-scale office owners to sound the alarm on the asset class. He’s called commercial real estate a slow-moving train wreck and said his firm would hand the keys back on a few office buildings.
Since the Federal Reserve started hiking interest rates in 2022, lenders and property owners have appeared content to hope, and 2025 had been their finish line: That will be the year interest rates fall, when banks and big money sitting on the sideline will return to New York City real estate. Things will get better. They must!
The industry even embraced the mantra “Survive ’till 25.”
But despite recent prognosticating that we’ve reached a bottom, Rechler suggests limbo will occupy the industry for longer — even if transactions pick up, the lack of comps will keep pricing difficult.
“It’s really going to be: Survive through ’25,” he said, adding the next mantra: “The fix will come in ’26.”
The result is that New York City real estate, a bloodsport with robber barons and literal shadowy backrooms, is boring. At least right now. Developers, instead of scraping together strips of land to construct their tall towers, are spending their days sending emails or waiting to join conference calls with lawyers about how to extend their loans. Lenders, loath to take possession of offices, approve extensions again and again and again.
The weather report
Rechler, whose firm owns over 30 million square feet in real estate, said banks have been bulking up their reserves and are thus willing to take write-downs for bad loans in 2025.
By the following year, they’ll be in growth mode, he thinks.
About $2 trillion in commercial real estate loans are set to mature across the country over the next three years, according to the Mortgage Bankers Association. But a majority of the $700 billion worth of loans set to mature in 2023 were extended, according to the brokerage CBRE, and the crash never came. The brokerage similarly expects loans to be pushed out into future years.
Rechler compares the situation now — and for the year ahead — to the period when the storm is hovering out at sea.
“Interest rates higher for longer have been feeding the storm, but the longer it stays off the coast, it gives us more time to batten down the hatches,” said Rechler.
But waiting isn’t just boring; it also takes a toll.
Last year, no New York City commercial sale cracked the $1 billion mark. The year’s top 10 deals totaled $4.83 billion, down from $7.63 billion the previous year, according to The Real Deal’s research.
The missing bargain bin
Office brokers like to talk about the tale of three markets in New York City. There are very, very nice ones like One Vanderbilt and Hudson Yards. There is the very nice stuff, such as the former HSBC Tower or the Grace Building near Bryant Park. Then there’s the rest, the undesirables, the schwag.
The problem is, no one seems to want the scraps, even if they’re cheap.
Earlier this year, Bloomberg re-signed its nearly 1 million-square-foot lease at Alexander’s 731 Lexington Avenue. Blackstone signed a 880,000-square-foot lease at Rudin’s 345 Park Avenue. At Related’s shiny 30 Hudson Yards, law firm Covington & Burling inked a 20-year lease for 235,000 square feet.
“If I put a hot dog stand in front of Carbone and offer everyone free hot dogs, do you think anyone is giving up their Carbone reservations?”
At the same time, Manhattan’s overall vacancy rate is at 23 percent, a historic high, according to Cushman & Wakefield’s second-quarter report.
A large portion of that vacancy resides in B and C buildings. But the demand for Class A does not trickle down.
“If I put a hot dog stand in front of Carbone and offer everyone free hot dogs, do you think anyone is giving up their Carbone reservations?” said Will Silverman of Eastdil Secured.
“I don’t care how cheap space gets,” he said. “If you have a law firm that wants to be near Grand Central, it wouldn’t take the side street Garment Center building for $10 a foot or for free.”
Related’s Jeff Blau also noted the missing bargain hunters.
“Everyone asks me why is it true that the space across the street costs $40 [per square foot] and you are $200,” he said at an event at TRD’s Midtown office last summer. “That should be an incredible opportunity for someone. And I don’t know if I really have an answer. It doesn’t make sense.”
Igal Namdar and a collection of scrappy investors from Great Neck thought they’d caught the bottom. They bought properties in Midtown Manhattan, including at 529 Fifth Avenue and 830 Third Avenue, in 2022 and 2023.
“The prices of these office buildings have dropped so much that it’s hard to not make money,” Namdar said in a June interview on Bloomberg TV.
But Namdar was wrong. Occupancy can fall, and asking rents can go lower still. He is now facing foreclosure at an office building at 345 Seventh Avenue after watching leasing fall from 59 percent at the time of acquisition in 2021 to 43 percent in September 2023, according to Commercial Observer.
Namdar is far from the only firm facing a foreclosure, and it’s still possible the deal could be worked out.
Please restart
The bigger problem than distress is that sizable office transactions are so few and far between that valuations, or comps, are difficult to determine. The lack of comps leads to fewer transactions, especially because New York City’s version of limbo has so many peculiarities.
In some cases, companies are buying buildings for their own offices. Wells Fargo acquired the abandoned Neiman Marcus space at 20 Hudson Yards from Related for an expansion. In another example, Hyundai paid $275 million for an eight-story office building in Tribeca.
There are other deals where one partner is buying out the other. Brookfield, the Canadian asset manager, bought out Blackstone’s 49 percent stake interest in One Liberty Plaza from Blackstone at a valuation of $1 billion.
None are clean comps.
There are signs that New York City can pass by the worst levels of the inferno.
From the end of 2022 to March, Moody’s Analytics found only three sales in public records nationally that reached $100 million less than the property’s previous sales price. Since April, at least seven such deals have appeared in records.
“While sales like this are typically very painful for equity holders and often bondholders,” they “provide the market with a tremendous amount of price discovery — which had been lacking,” the Moody’s report said.
But Rechler said the uncertainty comes from the exit cap rate, the term for an asset’s projected selling price.
“That’s where there’s debate within the marketplace,” he said. “It’s going to be a while for that to be debated, because I don’t think there are going to be any true institutional trades in office for the next couple of years.”
He’s not the only one soothsaying. Starwood’s Barry Sternlicht recently opined: “There’s a huge distressed cycle ahead of us.” Kathleen McCarthy, global co-head of real estate at Blackstone, believes the “shipwreck” has already happened.
But there is a third option. The New York office market won’t get to either heaven or hell anytime soon.
In “The Inferno,” when Dante finally meets Lucifer at the center, he escapes only to head into another waiting room: purgatory.