JLL: 15M SF Of New York City Office Is Underwater

Slow leasing and rising interest rates have taken their toll on the U.S.' largest office market, with scores of New York City office buildings now with loan balances that are larger than their valuations.

Commercial real estate services firm JLL has identified 73 office properties in the city, spanning a total of 15.1M SF, that would be classified as underwater, a list that includes trophy buildings as well as Class-A and Class-B properties. That figure is likely to increase as the office market isn't projected to turn around until 2024 at the earliest.

“The numbers we are expecting probably to grow, just given two things: one, the state of the market now, but also the fact that we have been expecting a correction — both in terms of asking rents, which obviously feed into valuations, and loan underwriting — for some time,” JLL Director of Research Andrew Lim told Bisnow Thursday. "It's happening more slowly than we expected.”

JLL’s data is based on analysis of public loan information and assessments from the brokerage’s valuation team, and paints a gloomy picture of the impact the last three years has had on New York's 470M SF office market.

In all, 1 in 4 buildings in the city are now valued at less than their last sale price, according to JLL. In terms of a dollar figure, $10.6B in value now has been wiped from the city’s office buildings.

Lim said office landlords have been able keep their rents high by offering concessions and tenant improvements, which has helped sustain values three years out from the pandemic's onset. But as the interest rates have risen and uncertainty around the office has continued, the values are now being chipped away.

"What we may end up seeing is landlords who suddenly are unable to offer those concessions may have to pull that last lever they had in the negotiation, which is coming down on their rents,” he said, adding he expects a widespread revaluing of buildings lies ahead. “That's what will also affect their valuations. And then once their loans mature, then it goes into how much they can refinance and get more capital through their assets."

The buildings with loans larger than their valuations, for the most part, locked in financing in the years since 2018, Lim said. He noted while 73 is a far higher number of buildings in that position than in a typical year, it is a relatively small number of the 1,200 buildings analyzed.

“[Those 73 buildings] run the gamut between what you would expect, a building that's pretty commodity, that's older, that has struggled," he said. "There are buildings that are quite new, that otherwise are leasing well, but they were either refinanced or took out a loan when interest rates were low and the office market was really strong.”

Leasing has slowed significantly in recent months, with just 1.5M SF of office leases signed in Manhattan during the month of April, according to Colliers, marking a nearly 44% decrease from a year earlier and a 7.7% drop from March. And although companies are beginning to enforce return-to-office mandates, office occupancy in New York is still below 50%, per Kastle Systems data.

The country’s largest office owners are feeling the pinch, with stocks down significantly in the last year. Many are watching what happens when debts come due, with some $16B in loans backed by New York City commercial real estate set to mature this year. 

One of the largest loans, a nearly $1B loan on RFR Realty’s Seagram building at 375 Park Ave., was extended last month. That extension has been perceived as both a positive and negative for the market.

Lim said there are likely to be several assets that change hands, but so far it seems like the market is not ready for “opportunistic” buyers.

“There's plenty of capital sitting and waiting right until general macroeconomic conditions are better," he said. "Interest rates need to come down, the prices, I think, need to come down a little more to make it worth their while. And so I think eventually, yes, that will happen ... but the question is when that shoe drops.”