The Long-Awaited New York City Office Repricing Wave Is Here

After three years of pandemic-induced paralysis for office owners, more are finally beginning to lower the asking price on their buildings and accept prices far lower than they paid.

Office assets are under pressure caused by record-high vacancy rates and loan maturities coming due after the fastest interest rate-hiking campaign in history. Those pressures aren't likely to abate this year, and as employers sink into hybrid work patterns for employees, experts said the discounts aren't going anywhere soon.

“It’s a frightening tsunami of problems coming at us, because there’s not a lot of demand for office — especially for Class-B and C buildings,” said Adelaide Polsinelli, vice chair at Compass. "This is absolutely the new normal where properties, especially office, are selling at losses and definitely selling at prices way below what they were at between 2016 and 2018. Valuations have dropped significantly."

Last month, the Chetrit Organization sold 850 Third Ave. for $266M after buying it in 2019 for $422M. In February, Columbia Property Trust sold 149 Madison Ave. for $10.7M less than it paid for it, despite investing $16M into renovations and upgrades. And Argentic Investment Management is looking to sell 115 Seventh Ave., the original Barney's New York Building, for a $27M discount, or a nearly 50% haircut, on the price it sold for in 2014.

“We're just getting started on this,” said Jim Costello, MSCI’s head of real estate economics. “That's clear from just the stickiness of the leasing market.”

Office valuation drops have been gathering momentum for years and are now picking up speed, data from MSCI shows. Manhattan office asset prices turned negative in Q3 2020, shrinking by 1% year-over-year after seven consecutive quarters of gains. But that price drop has been picking up steam in recent quarters: Prices were down 13% year-over-year in Q2 2022, then 17% in Q3 and 18% in Q4.

Now, lenders are allowing for “short sales” — swallowing a loss — instead of the long-winded process of foreclosing, sending properties to special servicers or navigating the process of handing the keys back, Avison Young Tri-State Investment Sales Group Head James Nelson said.

“We’re starting to see a lot of those types of deals happen now, and lenders allowing for those sales to happen is expediting the process,” he told Bisnow. "For office properties that are upside down, it makes sense."

The repricing is overdue, MSCI’s Costello said: Last year, even before office property values began to sink, office REITs saw their stocks decline by roughly 35% as investors grew bearish on continued low occupancy.

Part of the reason for the downward shift in values is that leasing up older buildings has remained tricky for landlords even as a return to in-person working patterns solidified, experts told Bisnow.

Vacancy in Manhattan’s 470M SF of office space reached a record 16% in the first quarter of this year, according to JLL’s latest report. Approximately 1.5M SF of office space was delivered between January and March. 

Competition from brand-new, well-amenitized office space in good locations — like the yet-to-be-completed Two Manhattan West from Brookfield and The Spiral from Tishman Speyer — is making it harder for older properties to find tenants or even subtenants.

“Until you see the trends within office leasing change, this is going to be an issue for the market,” said Bob Knakal, JLL’s senior managing director and head of New York private capital group. “When we see a positive absorption that is sustainable and upward pressure on rents, then the challenges within the office market will start to go away. Until that happens, I think there will continue to be challenges within the office market.”

Stubborn asking rents are part of the problem, JLL New York Director of Research Andrew Lim said. Office owners are under pressure from lenders and shareholders to do everything they can other than lowering rents, from concessions to several months rent-free. But the market isn’t moving, he said.

“From 2020 to today, asking rents haven’t really budged. They've moved perhaps half a percentage point downwards,” he told Bisnow. “We've been looking at that for the last two years because we would expect to see it and we just haven’t seen it.”

That's starting to change — asking rents on trophy buildings dropped from $105.74 per SF to $103.49 per SF between Q4 2022 and Q1 2023, according to JLL. Class-B asking rents fell to $62.20 per SF in Q1 from $62.76 in Q4. Class-A office asking rents, meanwhile, bumped back up to $88.54 from $85.09 per SF.

For office owners struggling with leasing, the only options remaining are expensive. Landlords can perform building upgrades and renovations to attract new tenants and bring the building into compliance with Local Law 97’s impending standards, but the question becomes whether they can afford the debt to do so.

“I think that there are a number of buildings where the owner is trying to figure out the best path to the future,” Knakal said. “Does the owner have the capital? If they have it, do they want to put it into that building? Is that building competitive as an office building? These are conversations that I'm sure every owner is having.”

The high cost of debt will likely remain a barrier that will force some landlords to follow in the footsteps of the Chetrit Organization and arrange sales at a discount, Costello said.

“The capital markets were providing a little bit of a cover to folks to not to force a realization of the pain early in 2022 when interest rates were still at record lows,” Costello said. “Now we're in a situation where you don't have that cheap money to tide you over anymore. And so people may be more willing to have that come-to-Jesus moment with their lenders.”