Office Market “Thaw” Includes Discounts on Lower-Tier Buildings

Manhattan’s chilly office market is ready to warm up some, but sellers could be in for some frosty deals.

Owners of some of New York’s lesser quality office buildings are selling at a discounted rate, the Wall Street Journal reported. Developers in the city are assessing the amount of pain they’re willing to inflict upon themselves as prospective building values fluctuate regularly in the weak post-Covid office leasing environment.

Last week, Scott Rechler’s RXR defaulted on its office tower at 61 Broadway in the Financial District. RXR is turning over ownership to whoever buys the $240 million defaulted loan, which may sell for roughly half of the building’s $440 million valuation from 2016.

In March, Empire Capital Holdings agreed to buy 529 Fifth Avenue in Midtown from Silverstein Properties for $105 million. Silverstein refinanced the property fewer than three years ago for $171 million and also recently spent $20 million on renovations.

The same month, Brookfield Properties moved to buy back a piece of One Liberty Plaza from the Blackstone Group, its partner at the 2.3-million-square-foot property. While the sale six years ago came at a valuation of $1.5 billion, the most recent sale came with just a $1 billion valuation.

While the discounts may be disappointing to the sellers, it also provides an opportunity to get the office market moving again after it was stalled by a poor return-to-office movement and high interest rates.

“We’re starting to see a thaw and more product coming to the market,” Eastdil Secured’s Gary Phillips told the publication.

The properties going at discounted rates are of lesser quality than the top-tier buildings, beneficiaries of the clichéd “flight to quality.” Those buildings remain in demand for tenants motivated to bring employees to the best space they can afford. Landlords are more willing to move the lesser properties to try and focus on making the better properties profitable.

The next shoe to drop on Manhattan’s office market may be the $60 billion offloading of commercial assets owned by the failed Signature Bank, which is being marketed by Newmark. The firm’s co-head of capital markets, Doug Harmon, said the sale (or sales) could be a “catalyst” for the market.

— Holden Walter-Warner