SL Green, NYC's Biggest Office Owner, Reports Deepening Losses, Dropping Rents

New York City's largest office landlord painted a cheery picture of the outlook for the coming year in its earnings call Thursday despite its financials showing a marked slowdown toward the end of the year.

SL Green reported a net loss of $93M for all of 2022, compared to a $434.8M profit in 2021. Its occupancy rate, including leases signed but not yet commenced, was 91.2% at the end of December, compared to 92.1% at the end of September.

The publicly traded REIT said it signed 33 office leases across 196K SF in Manhattan during the fourth quarter, far fewer than it signed the previous quarter or in the fourth quarter in 2021. 

But SL Green CEO Marc Holliday said the firm had seen a busy January, kicking off what he expects will be a “pivot” year. 

SL Green signed a total of 2.1M SF of leases in 2022, and executives said another 343K SF of leases have already been signed this year, including a new 15-year lease with 777 Partners, an alternative investment platform, which will be taking 18K SF at One Madison Avenue.

“Coming out of the markets we've experienced over the past couple of years, [we] hope to see some more positive news seeping into the market throughout the year,” Holliday said on the earnings call Thursday. "We've seen notable pickup in tour activity over the last 10 days, and we received a round of fresh new proposals, so we're optimistic. We're getting stuff done.”

But in the fourth quarter, the leases being signed were on average lower than in previous periods, showing the decline in demand for many of SL Green's older properties.

Excluding deals at the firm’s trophy asset One Vanderbilt, SL Green signed leases in Q4 at an average rent of $69.70 per SF with an average term of eight years. The tenant concessions were at an average of seven months free rent and an improvement allowance of $59.60 per SF.

Major lease deals of the fourth quarter included AECOM’s renewal for 45K SF at 100 Park Ave., a downsizing from 109K SF the company previously leased at the building, per Commercial Observer.  The Roundabout Theater Co. renewed 28K SF at 1185 Sixth Ave., while Bank of OZK took a new lease of nearly 9K SF at 289 Park Ave.

TD Securities also  signed up for an 11-year expansion lease for 25K SF at 125 Park Ave., per the company. CBS Broadcasting signed a 187K SF renewal at 555 West 57th St., which one analyst pointed out on the earnings call represented a 40% reduction in its space.

The last few months of the year, typically a busy time of the leasing market, were muted across the city. Total leasing volume for Q4 in Manhattan was 4.42M SF, down 27% on the five-year quarterly average, according to CBRE. 

News of tech layoffs, a sector that had supercharged the office market in recent years in the city, overshadowed the start of the year. Amazon, for example, laid off nearly 300 people from multiple locations in the city this week, as part of its global staff reduction, and Google is laying off nearly 900 workers from its New York offices.

Holliday said job losses weren't significant enough to take a real hit to the leasing market in New York City. His comments came a day after IBM, which signed a 328K SF anchor lease at One Madison last year, announced it would lay off 3,900 workers.

“The guys that have announced layoffs, these are mature technology businesses,” SL Green Director of Leasing Steven Durels said on the earnings call. “They may not be adding bodies and driving additional leasing velocity, but it is still a very significant part of the overall direction of the economy, which is the most diversified business economy in the United States right now. It's not like the West Coast, which is a one-trick pony.”

Holliday said he remains confident this year, as the job market “normalizes” and will bring office usage to over 70%, a rate he would typify as normal.

“Every [business] leader says they want to be on a three-to-four-day-in-the-office workweek for the majority of their companies,” he said. “The market is not setting up to be in our mind any measure of a major pullback in jobs or economic activity, based on what we see.”

This year, SL Green is aiming to find “one or more” joint venture partners for 245 Park Ave., the 1.8M SF office building it acquired out of bankruptcy from HNA Group in September. The company is also shopping a 10% stake in One Vanderbilt and expects to sell a handful of assets this year to focus on paying down debt, Holliday said.

“There's still a standoff between buyers and sellers in the market, but we definitely see, as financing hopefully returns … we think we'll see that that standoff fall off a bit,” SL Green President Andrew Mathias said. “We think there's still a lot of interest in prime New York City assets.”

The company closed on the sale of part of 885 Third Ave. for $300M to Memorial Sloan Kettering in December, a deal which generated net cash proceeds of $281M and a loss of $18.4M due to basis allocation. The company also agreed to sell the retail condominium at its 121 Greene St. joint venture for $14M in a deal expected to close in Q1.

The REIT isn't insulated from the roiled financial markets. It owns 50% of 1552 Broadway, and its joint venture with Jeff Sutton failed to pay off the $193M loan on the building when it matured in December. It is in negotiations with the lender, according to its quarterly supplemental report. It owns 11% of 717 Fifth Ave., which it is still in negotiations after the venture failed to pay off its debt maturity in July.

"I think lenders are going to have to work with borrowers at this time," Mathias said. "So it's somewhat in our partners' hands, and it's somewhat in the lenders' hands."

And while the earnings discussion focused more on selling assets and equity stakes — Mathias said executives traveled to the Middle East and Asia this year to court investors — Holliday said distress at the bottom of the market could present SL Green with a buying opportunity.

“In the second half of this year, I would think you might see us start to poke our heads up again,” he said. "We definitely have our own capital resources, we have access to third-party capital resources, that could make us acquisitive or re-entering the investment market opportunistically."