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Interest Rates, Recession Fears Destabilizing NYC's Investment Sales Market

Rising interest rates are resetting the New York investment market — killing deals, causing headaches for owners in need of new financing and, in some cases, creating a new set of opportunities.

TPG Real Estate Partners CEO said the firm has more than $5B in dry powder for asset acquisition.

“I know of a couple of buildings that were pulled off the market,” Marcus & Millichap Senior Managing Director Eric Anton said. “There is a lot of repricing. If buyers signed a contract a month ago, after 30 days of due diligence they’re coming back and saying ‘I can’t do that.’”

Last month, the Federal Reserve introduced the steepest hike of its benchmark interest rate in more than two decades, half a percentage point, in an attempt to curb soaring inflation. Policymakers at the central bank have said they expect rates to keep going up this year; June and July meetings are expected to bring half-percentage point increases, respectively. President Joe Biden has made it clear he backs the Fed's attempts to stem the rapid cost increases hitting Americans this year.

The hikes have already forced the country's largest office landlords to rethink their strategies over the next 12 to 18 months and in some cases lower expectations for their operating performance growth for the year

Now it is playing out in the investment sales market, sources said, making some deals even harder work to get across the line and forcing some sellers to lower expectations.

Speculation is swirling that Innovo Property Group’s attempt to buy HSBC Tower at 452 Fifth Ave. went south because of interest rates. The $855M deal fell apart last month after Innovo was unable to lock down financing, according to The Real Deal.

Property and Building Corp., the building owner, is instead refinancing the property with a $385M loan from JPMorgan Chase at a rate of 3.9%. HSBC announced last month it would be vacating the property to move its U.S. headquarters to The Spiral in Hudson Yards.

HSBC Tower in Midtown Manhattan

“Office buildings in Midtown that were going to sell for $800 a foot now will be $50 to $100 a foot less — especially if they're vacant. That means risk,” Anton said. “Lenders are very nervous, more nervous than usual about the office building market.”

Owners of office buildings that haven’t done so well on leasing and are facing debt maturities are more likely to sell than pump more money into their properties, Anton said, pointing to capital that has been “on the sidelines” waiting for the last two years.

For all-cash buyers and those looking to pick up properties that need investment, the environment is looking ripe for the picking. But brokers said deals require extra legwork in this environment.

“We have a lot of volume and we are signing deals, but it’s requiring triple the amount of effort and focus,” Meridian Capital Senior Executive Managing Director Helen Hwang told Bisnow in an email. “The market enjoyed record-low interest rates during the past two years of Covid disruption, but most investors expected rates to return to pre-Covid levels — still historically low — they just didn’t know the exact timeline or catalyst.

"The volatility in the market makes it challenging to pinpoint the cost of debt and therefore the value of an asset," Hwang added.

Interest rates are just one piece of a complex story, JLL Senior Managing Director Michael Gigliotti said. Uncertainty about rent growth and recession anxieties are also factoring in at the negotiating table.

“Certainly, there are leveraged buyers out there that are getting less of a return," Gigliotti said. "So, the interest rates do have an effect. I just think there's more to the story than that … It's about people's recession fears or not, it's about how much conviction people have in the rent growth story."

Plus, now that real estate has had so much interest from investors, asset values move quicker than they have in the past. Add in uncertainty about rates, and it makes it even more challenging to reach a consensus between buyer and seller.

“[Real estate] is way more liquid than it's ever been, so these price movements are going to be very fluid," Gigliotti said. "How quickly does the investment sales market adjust for price and get sellers and buyers meeting in the middle and deciding to trade?”

Meridian Capital Senior Executive Managing Director Helen Hwang and GreenOak Real Estate partner Mark Van Zandt speak at Bisnow's 2018 NYC Forecast Dec. 12, 2017

Longtime players are also quick to point out that rates are still far lower than they were in decades past.

“I've seen this rodeo before,” Himmel + Meringoff Properties partner Leslie Himmel said at Bisnow’s State of the New York City Office Market event last week. “I think everyone has to take a deep breath and not be deer in the headlights. Just keep going about your business, be patient.”

Marx Realty CEO Craig Deitelzweig is expecting the current environment to help in the quest for assets. His New York company is on the hunt to acquire office buildings in New York, D.C., Atlanta and Austin, and while the math on deals has changed, he expects the environment will benefit those looking to buy.

“We might see assets come to market that might not have been available to us. And then in terms of interest rates, that would just be part of our calculus,” he told Bisnow. “So we'll just have to make sure that we get it for a price that makes sense in order for us to do the improvements with the higher interest rates and still get the returns.”

In the first quarter of the year, some $5.4B in commercial property sold in New York City, putting the market on pace to more than double 2021's investment volume. 

But Compass Vice Chair Adelaide Polsinelli said the uncertainty will “cast a shadow” over the market — just as people were feeling comfortable buying once more.  

"The market is not stable, the market is trending lower by the day,” she said. “We are in a down cycle, unequivocally."