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"Mortgage Coming Due" on Large-City Office Buildings

A January 2024 investigative journalism piece by 60 Minutes shined a light on the plight of commercial real estate owners reeling from remote work consequences. The underutilization of offices is a trend that has been covered previously by the Emerging Real Estate Digest:

At the same time as office occupancy and utilization rates are at all-time lows, capital is harder to come by and becoming more expensive by the day. Repricing will be an issue not for another day, but for today since $1.5 trillion in commercial real estate loans expire in the next two years. It used to be assumed that refinancing every five to ten years would be a frictionless process, but that is no longer the case. Banks now sometimes tell their landlord customers that they no longer value the building the same as before, and that loan amounts and covenants must change for the new loan.

Highrise buildings in major cities can be appropriately viewed as "monuments to commerce standing proudly shoulder to shoulder." Peeking into many major cities' office buildings will illicit one question, "where is everybody"? More than 95 million square feet of NYC office space is currently unoccupied, the equivalent of thirty Empire State buildings.

Office building owners are discovering that many of their properties are outdated, obsolete, and worth less than previously thought. In major cities, office buildings have tanked as much as 40% making the calculus work in favor of just handing over the building to the lender rather than do the heavy (and expensive) lifting of repurposing the building. Columbia Business School's Stein Van Nieuwerburgh, a professor of real estate, calls the problem a trainwreck in slow motion. He's modeled out the impact of hybrid work on the pricing of buildings and the results are stunning. He stated:

"...and this is just the beginning, and the reason this is just the beginning is because there's a lot of office tenants that have not had to make an active space decision yet. Do I want to renew this space, do I want to vacate, or maybe I sign a new lease for half as much space? This is what tenants have been doing for the last three years so when you take all the current and future declines of cash flows into account we end up with about a 40% reduction in the value of these (NYC) offices."

"Anything that is not an office" is the mantra for many big-city developers today, but not all. Trophy office buildings in major cities are thriving like never before. A flight to quality has convinced corporations with deep pockets to flock to amenity-rich towers, often taking less space than before and paying similar total rentals. Many employees now require trophy-building amenities to find the courage to pull themselves out of their homes to return to the office.

Marc Holliday, CEO of SL Green and NYC's largest office landlord, owns a handful of trophy buildings so is benefiting from the trend. But not all of his buildings are in this illusive category and his share price is down 50% from before the lockdowns. What does he think of remote work?

"One of the biggest societal problems we're facing right now is work from home. I think it's bad for business, it's bad for cities, it's bad for people."




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