New York Office Buildings Emptying Out

Long time readers of this blog and my Substack will not be surprised. Commercial real estate New York city is being hollowed out. There are fewer tenants, paying lower rents, exposing landlords and the lending institutions that finance them to severe calamity.

All signs suggest that this is not going to end well. For now most people are barely cognizant of the problem, but stockholders and executives are now scrambling to avoid defaults and bankruptcy. The Wall Street Journal has the story.

In part, the problem is a failure of workers to return to the office. The stock market has figured it all out:

Share prices for some of the largest office landlords have dropped to near historic lows, reflecting a sluggish return-to-office rate and a rise in the number of investors betting that these stocks will keep falling. 

SL Green’s share price closed at $22.54 on Friday. That is barely above the New York office firm’s 1997 initial-public-offering price and a fraction of its post-global-financial-crisis peak of more than $140 in 2015. Vornado Realty Trust, which owns marquee office buildings in San Francisco, Chicago and New York, closed at $13.13 a share on Friday. Vornado’s share price topped $67 as recently as 2020.

Both Vornado and SL Green shares are down more than 30% so far this year, while the broader stock market is higher. 

More vacancies and lower rents, it’s a bad combination:

Most other office real-estate investment trusts are also under selling pressure from soaring vacancies and declining rents. The return of employees to offices showed signs of a rebound earlier this year. But it has stalled at roughly 50% of prepandemic usage levels. Leasing activity for office REITs fell 20% on average in the first quarter compared with a year earlier, according to real-estate analytics firm Green Street.

This is very bad news, indeed:

The result is the worst stretch for the office market in decades, with few signs of hope for a turnaround even if a recession is averted. A growing number of office owners have started to capitulate and are selling their properties at large discounts to their prepandemic values. About 84% of the $7.8 billion of commercial mortgage-backed securities office loans maturing in 2023 will face refinancing difficulties, according to a May report by Moody’s Analytics.

And, of course, the banking system is largely implicated in the problem, given that it holds mortgages on these properties:

The turmoil in the office sector risks spilling into the broader economy because small and regional banks have tens of billions of dollars in office loans to private landlords on their balance sheets. Concern about the value of the buildings backing those loans has been growing this year with the failure of Silicon Valley Bank and the rise of delinquencies and defaults by office landlords.

And then there are the REITS, the real estate investment trusts, which have collapsed:

Since the start of 2020, shares of office REITs have declined 48% compared with a 0.1% increase for the FTSE Nareit Equity Index, a broader commercial-property index, according to John Kim, a real-estate analyst at BMO Capital Markets. Over that same period, the S&P 500 index is up 37%. 

Obviously, as you might have guessed, things are looking brighter in Sunbelt states:

Most landlords that focus on office buildings in Sunbelt states, which are benefiting from inflows of population and businesses, reported better performance in the first quarter than those with high concentrations in cities such as San Francisco and New York.

Obviously, by the laws of contrary opinion, the more inverstors become negative, the more it feels as though things are about to sort themselves out. When things cannot get worse, they tend to get better. Of course, in another sense things can always get worse. It hardly feels optimistic.

While shops on New York’s streets are suffering too many vacancies, residential real estate has been booming. Go figure.