Marc Holliday: 40M SF Of NYC Offices Could Be Converted If Housing Bill Passes

Editor's Note: New York passed a budget deal Saturday that includes multiple pieces of housing legislation and includes tax abatements for residential conversions.

SL Green Realty Corp. CEO Marc Holliday thinks a tidal wave of residential conversions is about to cleanse New York City's office market.

In a call with investors Thursday, the head of Manhattan’s largest office landlord said that the real estate investment trust played an “instrumental role” in a state office-to-residential conversion bill that he expects to be signed this weekend, a piece of legislation he called “transformative.”

While the bill hasn't been released publicly, Holliday said it is designed to incentivize office owners to move quickly. 

“The way this bill is structured, to get the maximum tax benefits you have to file for your permits by sometime in '26,” Holliday said on the call. “That means you got to get going right now.”

Holliday estimated that 25M SF to 40M SF of space will be converted under the proposed program and that the reduction in office supply will lead to higher absorption in the remaining office buildings around the city.

“Imagine dozens of buildings converting, being taken offline, tenants being relocated out,” he said.  

The bill would incentivize conversions in Midtown, including at 750 Third Ave., where the firm plans to turn an 81% vacant office tower into 543 units of housing.

“Don't get the impression that these Midtown buildings are bad buildings,” Holliday said. “They're just buildings that can be optimized as residential and should be optimized as residential, and don't necessarily warrant the same level of investment as buildings [where] we’re achieving $90 a SF and above. That's where that investment should go.”

Holliday's comments came on the firm's first-quarter earnings call, during which he and other SL Green executives brimmed with confidence about the upward trajectory of its New York-centric portfolio, especially after completing more than $2B of loan modifications and extensions, which included discounted payoffs that helped boost its earnings beyond expectations.

Its first-quarter funds from operations, a measure of cash flow for REITs, was roughly double the previous year. And it generated $13.1M of income after registering a $39.7M loss in Q1 2023.

It attributed the boost to a deeply discounted payoff of debt at 2 Herald Square, where it settled the $182.5M mortgage for just $7M. At 280 Park Ave., SL Green, in partnership with Vornado Realty Trust, extended and modified a nearly $1.1B securitized mortgage, as well as modified, extended and subsequently repaid a $125M mezzanine loan for just $62.5M.

SL Green has continued to shed assets from its portfolio. In December, the REIT announced that it was under contract to sell 625 Madison Ave. for $632.5M. Holliday expects that deal to close by the end of the month. It also entered into contract to sell 719 Seventh Ave. in Times Square and a suburban conference center for $30.5M and $26.25M, respectively.

Holliday said those deals were part of its plan to sell off assets and reinvest the proceeds. It is still looking to sell a stake in One Vanderbilt, but the REIT also entered into a contract to acquire Canada Pension Plan Investment Board’s 45% interest in 10 East 53rd St. for $7.2M in cash and $99M in assumed debt in a deal that is expected to close in Q4. 

When analysts asked about the REIT's ability to pay discounts of 50 cents on the dollar or more to get out from office debts, Holliday declined to get into specifics but indicated that it was a result of financial institutions wanting to wash their hands of commercial real estate as regulators enhance scrutiny on their portfolios.

“This is not at all unusual. There are lenders that have mandates to kind of reduce real estate as a percent of assets, period,” he said. “In those cases, there can be negotiations around what is and isn't the right price and value for a debt instrument at a moment in time.”

Its raised outlook is a bet on the market's future, while the performance of its office portfolio is still a far cry from a pre-pandemic peak. For the quarter, SL Green’s revenue was nearly $188M, down from $246M during the same period last year, and $304.3M in the first quarter of 2019. 

The company signed 60 office leases in its Manhattan office portfolio totaling almost 634K SF with an average rent of $72.38 per SF, excluding leases signed at One Vanderbilt and One Madison, two of its top office towers. The average rent of its new leases signed during the period was below the previous deals at those spaces, which SL Green executives chalked up to a handful of deals in lower-rent buildings. 

Last year, SL Green sold a 49.9% interest in 245 Park Avenue to Tokyo-based Mori Trust Co. In today’s call, the company said that leasing has been strong at the 1.8M SF office property ahead of plans for redevelopment. 

At the same time, SL Green is continuing to diversify its portfolio.

Holliday said that the REIT has made “enormous progress” on its push for Caesars Palace Times Square casino plans, despite bids not being due until 2025. 

Earlier this year, the firm also began fundraising for a $1B opportunity debt fund. Initial closings are targeted to take place this summer, Holliday said. 

“Fundamentally, we're looking to replicate our approach for the last 26 years of investing in the best properties in New York City,” Holliday said of the fund.