What Now for New York City?

New York City’s descent seems inevitable and inexorable. 

This morning we saw a story about the impact of migrants on local businesses. Since the city has chosen to house migrants in local hotels and motels, the local businesses that depend on tourism are being killed. You see, migrants have no money. They do not spend money in restaurants or even bars. These street level businesses are now dying.

As for the tourist hotels and motels, they are being destroyed by the migrant population. And the city has rented them for another couple of years-- so, say goodbye to more and more small businesses. And say goodbye to more and more tourism.

And then there is remote work. As we noted yesterday, the more remote work there is the less need there is for office buildings. So, developers are now beginning to default on their mortgages.

The Wall Street Journal has the story:

The loan backing the office tower at 1740 Broadway in Manhattan became distressed because a major lease was expiring.

The number of big office landlords defaulting on their loans is on the rise, fresh evidence that more developers believe that remote and hybrid work habits have permanently impaired the office market. 

The giant investment manager Brookfield Asset Management recently defaulted on a total of over $750 million in debt for a pair of 52-story towers in Los Angeles, according to a February securities filing. Real-estate firm RXR is in talks with creditors to restructure debt on 61 Broadway, a 34-story tower in Manhattan’s financial district, according to people familiar with the matter. Handing over the building to the lender is among the options under consideration, these people said. 

Very few people are paying very much attention to this, but surely it is relevant to the ability of the city to stay afloat:

Five to 10 office towers each month join the list of properties at risk of defaulting because of low occupancy, expiring leases or maturing debt that would have to be refinanced at a higher rate, according to Manus Clancy, senior managing director with data firm Trepp Inc.

How bad is it? Perhaps not bad enough to destroy the financial system, but certainly bad enough to be cause for serious concern.

The delinquency rate for office loans that back commercial-mortgage-backed securities remains low, but it is heading higher. The rate last month rose by a quarter of a percentage point to 1.83%, its largest increase since December 2021, according to Trepp. Loans backed by office buildings in Philadelphia, Denver and Charlotte, N.C., have also either been transferred to special servicers in recent weeks or have been parts of bond issues that have been downgraded by credit-rating firms.

For most landlords, losing buildings to creditors after a default would be painful but not devastating. Many investors structure buildings as separate financial entities. If they default on debt, creditors generally can foreclose on the building but have no recourse against the rest of the company. 

But the pain from foreclosures is likely to ripple through the financial system. About $1.2 trillion of debt was backed by office buildings at the end of the third quarter last year, according to Trepp.

But then, what happens when it all ripples through the financial system. Assuredly, nothing good happens. 

Few media outlets are following this story closely. And yet, it deserves attention, even if only as a canary in a coal mine.