Harbor Group CEO Jordan Slone: We're 'Flooded' With Distress Takeover Deals
Jordan Slone, the CEO of real estate investment firm Harbor Group International, predicted that distress would hit the commercial real estate market in late 2022 or early 2023.
He now says he was a little early on his prediction — but on the other hand, he no longer needs to predict when distress will land in earnest.
"It's here. It's now," Slone said last week at Bisnow's New York State of the Market event. "Our team, from everything to our acquisitions group to our property management and asset management teams, they are flooded with deals right now that are distressed."
HGI was the buyer of one of the largest office deals in the country in the last two years, dropping $760M on the Black Rock building in Midtown Manhattan in 2021.
The Norfolk, Virginia-based investment firm, which has $20B in assets under management, hasn't made another office buy in New York City since then, but it has executed its business plan for the 38-story building at 51 West 52nd St., signing renewals and new leases for 41% of the building's square footage, Slone said at the event, which was hosted at Black Rock.
"The really good buildings are actually leasing," Slone said. "They are leasing well. They're also achieving the rents that they want to achieve."
That is the likely story for a minority of office buildings in the market, he said.
"As it relates to office buildings, not just New York but in the other major cities, there's just a lot of inventory that either needs to be repurposed or maybe even abolished," Slone said.
HGI's Black Rock purchase came with some $558M in CMBS financing, Commercial Observer reported at the time. It also owns office properties at 55 Broadway and 24 West 40th St., and last year it provided a $90M senior mezzanine loan for a new medical office tower by Extell Development at 1520 First Ave.
Office owners are facing a slew of challenges right now, as workers lean toward remote work and companies are reluctant to lock in office leases in an uncertain environment. While many new buildings are seeing activity, many Class-B and C owners are experiencing less activity — and those who have refinancing deadlines are under pressure.
Nearly $80B of commercial real estate loans were in distress in the third quarter, the highest volume of distress in the industry since 2013, when Global Financial Crisis loan workouts were still in the system, according to real estate research firm MSCI.
"We're seeing stress, particularly those with floating-rate debt, bridge loans, because it's a double whammy. Not only have interest rates gone up, but those bridge loans require caps to be purchased, and the cost of those caps are astronomical, so in some cases, it's like having double debt service,” Slone said in his keynote discussion with Hunton Andrews Kurth partner Laurie Grasso.
"That's really going to be a headache — and is a headache for a lot of people — and we're seeing it too," he said. "It's a bit of a headache for us."
Offices across the country are facing distress, he said, and there are even challenges in the multifamily market, where the fundamentals are normally solid. The majority of HGI's portfolio is in multifamily, and the company owns about 60,000 units nationwide, Slone said.
Owners have seen debt payments balloon while their rents have flattened, and Slone said even if they are solvent and trying to hold on to their properties where the cash flow has turned negative, it is having an impact on borrowers.
"You wouldn't believe how many borrowers, owners are more mentally, in some cases, more mentally exhausted than they are financially exhausted," he said. "In some cases, it's both, but writing a check every month with negative cash flow, mentally, is not fun."
