Receive free updates on commercial properties. Get the latest news on commercial property delivered to your inbox every morning with our myFT Daily Digest email. Standing tall among the buildings surrounding Grand Central Station is the 20-storey tower at 529 Fifth Avenue. What sets it apart is the surreal pink designs of an Alice in Wonderland-inspired art exhibit on its ground floor, filling vacant retail space. This tower is one of the few that have changed ownership recently, offering insight into the value of older Manhattan offices now that the commercial real estate sector has moved away from an era of cheap money. Silverstein Properties sold the building for $105 million, even lower than the price of an adjacent plot of land in 2015. “Buildings in New York are selling for less than the value of the land,” says Will Silverman of Eastdil Secured. “Prices are the lowest they’ve been in 20 years.” It’s evident that the US commercial property industry is undergoing a long-anticipated reckoning, and 529 Fifth Avenue is at the forefront of this transformation. Rising interest rates, a regional banking crisis, and the trend towards remote work are all causing havoc in the industry. Older office buildings have been hit hard, but other real estate categories are not immune. Strain can be seen across the country – New York developers are handing back outdated office buildings to lenders, heavily indebted apartment complexes in Houston are facing foreclosure, and hotels and shopping malls in San Francisco are defaulting. To cope with this situation, banks, under scrutiny from regulators and investors, are now selling performing property loans at a loss. “I’m not sure people fully understand the extent of the damage and how long it will last,” warns Scott Rechler of RXR. “The potential severity of the situation is being underestimated.” Property developers and investors thrived in the low interest rate environment that followed the 2008 financial crisis. They were then supported by lenient lenders when the Covid-19 pandemic hit. However, the situation has changed drastically. Office buildings in New York, the world’s largest office market, have lost $76 billion in value, and 73 of them are now worth less than their loan balances. Only the most modern and luxurious offices, such as SL Green’s One Vanderbilt, are fetching record rents. The situation is different for buildings like 1330 Avenue of the Americas, which recently sold for a third less than its 2006 price. The crunch is hitting the office market hard. According to one investor, only the top 10% of office buildings in New York are not distressed. “Forced sales are just beginning,” they say. The financial damage may be masked by low transaction volumes, but there are signs of distress. Blackstone recently sold One Liberty Plaza for $1 billion, down from its $1.55 billion valuation in 2017. Tower 56 was sold for $110 million, down from the $158 million paid for it in 2008. As more owners are forced to refinance, sales are expected to accelerate. Nearly $900 billion in US commercial property debt is due in the next two years, and if owners can’t refinance or inject fresh capital, they may have to sell or walk away. It’s not just the office sector that’s under pressure – rental apartment properties are also struggling. A refinancing crunch is creating opportunities for alternative lenders to fill the gaps, but at higher interest rates. The future of offices is uncertain, and it’s the largest sector of commercial real estate. “Office is going through a massive paradigm shift,” says Julie Ingersoll of CBRE IM. “It will take over five years to adapt to the fundamental shift in demand. This real estate cycle is unlike any we’ve seen before.”
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