SL Green Sees Occupancy, Rents Drop As It Reckons With 'Moment Of Significant Change'
Manhattan’s largest office landlord's earnings are taking a hit as office tenants sit on the fence about the future of their workplace.
SL Green’s 23.8M SF office portfolio was 90.2% leased at the end of the first quarter, down from 93% a year ago, it said Wednesday in its first-quarter earnings report. Excluding its One Vanderbilt and One Madison trophy offices, the company signed 41 Manhattan office leases in Q1 2023. Average rents were $64.83 per SF, a figure that reached $68.04 a year earlier.
“It is clear that we are now in another moment of significant change as businesses rethink their office needs,” SL Green CEO Marc Holliday said on the company’s earnings call Thursday, adding that he saw signs of a "slow but steady recovery" for the market.
The Manhattan-based real estate income trust reported a $39.7M loss in the quarter, and its operating revenues dropped by $2M from the fourth quarter while its operating expenses rose by nearly $5M.
The company described its occupancy as consistent with its expectations and said its aim is to increase occupancy to 92.4% by the end of 2023. The REIT has taken on more than $1B in additional debt over the past year, with liabilities increasing from $5.7B to $7.3B, per supplemental data published along with the company’s earnings report.
Holliday downplayed the risks posed to SL Green by the Federal Reserve's continued interest rate hikes, and said the company's strong financial position is helping it in negotiations with tenants who are wary of broader distress in the market.
"We are also benefiting from brokers and tenants who are scrutinizing much more carefully the financial wherewithal of landlords and the stability of the capital stacks in individual buildings that tenants want to locate in," he said.
Nonetheless, the company's funds from operations, a key metric of REIT profit, were down 7.3% year-over-year in the quarter, falling from $114.5M to $105.5M.
SL Green’s stock has reflected investors' pessimism about the performance of New York City offices. Its publicly traded shares have lost two-thirds of their value over the last 12 months, bringing its market capitalization from $5.5B to $1.6B. Its share price was down 3% as of Thursday afternoon after its earnings release.
Holliday said the company's stock performance is a result of "overanxiety" in the market over New York office owners.
"The commercial real estate sector seems to dominate much of the headlines these days, amplifying messages of doom and gloom and creating what I believe to be an over anxiety in the market that is most acutely felt in New York City, where many of the market opinion makers reside," he said. "Overly negative voices are overshadowing some of the positive signs that portend to a slow but steady recovery for a market that offers what employers want most: a highly educated, diverse, youthful and talented workforce."
Office landlords in Manhattan are broadly struggling with hybrid work reducing demand for space. Office vacancy topped 16% in the first quarter, a new record, according to JLL.
SL Green is seeing daily occupancy reach over 60% on a daily basis in its office properties, Holliday said, adding that calls for a full-time return to the office by companies like JPMorgan Chase, Disney and Twitter are reasons for optimism.
However, most companies in New York City don't appear to be requiring in-person work, decreasing the space potentially needed by office occupants. Daily occupancy by office tenants is stubbornly hovering at just over 45% in New York City, data from Kastle Systems shows.
SL Green is the first New York-focused office REIT to report its first-quarter earnings. Empire State Realty Trust, Vornado and the Paramount Group are due to report their Q1 earnings in the coming weeks.
“Until you see the trends within office leasing change, this is going to be an issue for the market,” Bob Knakal, JLL’s senior managing director and head of New York private capital group, told Bisnow earlier this month.
