Swell of maturing debt pressures office owners
$7B of loans coming to term in NYC — more than in past 3 years combined
Scott Rechler’s RXR went out in January looking for $1.5 billion to refinance its 5 Times Square office tower, one of the largest such deals in the era of hybrid work and rising interest rates.
The firm is still negotiating the tricky financing, which requires a big equity injection to renovate a 1.1 million-square-foot property that will soon be 75 percent empty.
“It’s a big loan in a market that’s still choppy,” Rechler said. “The current environment has definitely made refinancing in general more complicated.”
The 5 Times Square refinancing could be a bellwether for the New York City office market, where a surge of big-ticket loans are expiring this year. Some $7.16 billion worth of CMBS office debt is maturing in 2022, according to Trepp. That’s more than in the three previous years combined.
It’s a challenging time for property owners to negotiate with lenders, as tenants are still figuring out how much space they need with most employees working from home some or all of the time.
In Manhattan, available sublease space is at a near-record 20 million square feet. And nationwide, leases on a record 243 million square feet of office space — roughly 11 percent of the country’s total inventory — are set to expire this year, which will place more pressure on landlords.
At the same time, borrowing costs are going up after the Federal Reserve started hiking interest rates to tamp down inflation. Rising rates and falling operating income are a double whammy for building owners who can’t increase rents, given the soft market.
“If you don’t have that NOI lift of value creation, definitely a rate increase is going to hurt you,” said David Eyzenberg of the capital advisory firm Eyzenberg & Company.
Trepp head of research Manus Clancy said the pile-up of maturing debt resulted from borrowers extending the terms of their loans in recent years.
Owners who signed deals for higher rents in the past few years may be able to get favorable financing, he said. Those that haven’t, however, could struggle.
“All things being equal, if you’ve the same rent rolls and the same amount of income you had five years ago, I certainly don’t think values are higher today than they were in 2018,” Clancy said.
Among the loans due this year are $1 billion that Vornado Realty Trust and SL Green Realty borrowed at 280 Park Avenue, a 1.3 million-square-foot office tower; $515 million by Brookfield Properties on the New York Times building, 620 Eighth Avenue; and $463 million by Savanna on 5 Bryant Park.
Some owners have even started defaulting. In March Blackstone agreed to hand over the keys to its 26-story office building at 1740 Broadway after falling behind on the $308 million mortgage.
On the sales side, rising interest rates could dampen buyers’ appetite and chill investment sales in the city. Buyers and sellers traded $8.9 billion worth of property last quarter, an eye-popping 320 percent increase from the first quarter last year, according to Ariel Property Advisors.
But that trend is expected to wane as borrowing costs shoot up.
“The first quarter marks a drastic change in the cost of debt and the expectation is that interest rates will continue to rise,” said Ariel Property’s Shimon Shkury. Buyers rushed to lock in low rates, a surge that Shkury expects to ebb in the second half of the year.
At 5 Times Square, where earlier this year the digital media manufacturer Roku signed a lease for 240,000 square feet, Rechler said he was always planning to put in some of RXR’s own cash — about $500 million, he now estimates — to complete the renovations.
“Were we thinking we might get some good-news money? Maybe we thought we had a shot,” he said. “But we were always prepared to write a check if needed.”