Now that there aren’t any banks immediately and obviously on the brink of collapse any more, attention is shifting to commercial real estate, the doomed asset class du jour.
The current outpouring of angst has felt a little overdone, and belated (swaths of CRE has been cruising for a bruising since the pandemic). And as Alex wrote last month, it’s just hard to see how this becomes The Next Big Crisis.
However, this from the WSJ is, well, a little unnerving. Alphaville’s emphasis below:
Some of New York’s best known real-estate developers are unloading their least viable office buildings at deep discounts, cracking open a sales market that had all but closed in the first quarter.
RXR defaulted on the $240 million loan on its 33-story office tower in lower Manhattan. The developer, which owns and manages dozens of commercial and residential properties in the New York City area, has said that it will turn over ownership of the office tower at 61 Broadway to whoever buys the defaulted debt. That mortgage is being marketed by commercial real-estate services firm JLL and will likely go for about half the $440 million valuation of the building in 2016, market participants said.
Silverstein Properties, best known for its redevelopment of the World Trade Center, has agreed to sell a 20-story office building on Fifth Avenue near Bryant Park for $105 million, or $66 million less than the amount that Silverstein refinanced the building for in 2020.
Giant investment firm Blackstone also recently sold a 49% stake in One Liberty Plaza valuing the tower at $1 billion, down from the $1.5 billion valuation when Blackstone bought the stake in 2017, according to people familiar with the matter.
These cut-rate sales and sales efforts attest to the troubled state of the office market, which is suffering one of its worst downturns since World War II because of the weak return-to-office and high interest rates.
Now, NYC is not the US. And not all of NYC real estate will be hit as hard as this (some may be worse). And as the WSJ notes, the fact that some deals are now happening is vaguely positive. A frozen market is even more unnerving. But those markdowns are pretty astonishing.
The Federal Reserve certainly seems to be wary of the shakeout, and how it might both feed and be fed by the recent banking shenanigans. From the minutes of the Fed’s meeting in May:
The staff noted that the CRE sector remained vulnerable to large price declines. This possibility seemed particularly salient for office and downtown retail properties given the shift toward telework in many industries. The staff also noted analysis that found that while losses to CRE debt holders could be moderate in aggregate, some banks and the CMBS market could experience stress should prices of these properties decline significantly.
Further reading:
— Just how bad is office CRE, anyway?
— Inside Blackstone’s ‘beloved’ $126bn crown jewel
Letter in response to this article:
Perfect storm brewing for commercial real estate / From Christian Liedtke, Düsseldorf, Germany