New York City’s biggest corporate landlords had it great for years — benefiting from a booming economy in a city where companies clamored to set up offices and from low interest rates that buoyed the economics of an industry built on debt.
Those days are over. Three years into the pandemic, floors of office buildings throughout Manhattan have been emptied by tenants who have shrunk their footprint and employees who work from home.
Now, there is another problem.
Rapidly rising interest rates have intensified concerns that the New York City office market, the largest in the country and a pillar of the city’s economy, could be at grave risk. That one-two punch could be worse than anything corporate landlords have experienced before, experts on the sector say, leading major banks and real estate analysts in recent weeks to warn that languishing properties along with falling property values and higher borrowing costs could increase the odds of a recession nationally and a budget crisis for the city.
More than two-thirds of all commercial real estate loans are held by small- and medium-size banks, prompting concern that regional banks might be unable to withstand a wave of defaults if landlords cannot pay off loans. Some analysts have forecast a dim future for city centers, likening the crisis to the slow death of many American shopping malls.
In the latest snapshot of the nation’s most significant office market, New York City’s largest office landlord, SL Green Realty Corporation, revealed that more of its properties lost tenants during the first months of 2023. Across its 25 buildings, including some of the city’s premier office buildings, 90.2 percent of the space is occupied, down from 95.5 percent at the start of 2020.
The consequences extend far beyond the balance sheets of the city’s landlords, who borrowed billions at low rates in the years before the pandemic to build, buy and upgrade offices and attracted marquee tenants like Meta and Apple to the city.
Office workers in the city make about 75 percent more in annual salaries than the rest of the private sector, according to the Office of the State Comptroller, and their absence from the office every day deprives a host of businesses of their spending.
And the value of New York City office buildings could tumble $48.75 billion in the coming years, according to a recent study by researchers at Columbia and New York Universities, hampering a vital source of the city’s tax revenue.
Stijn Van Nieuwerburgh, a real estate professor at Columbia University’s business school, has warned that New York City faces an “urban doom loop” sparked by remote work. While the current commercial real estate downturn shares similarities with previous declines, including periods in the early 1990s, after the Sept. 11 attacks and during the 2008 financial crisis, this drop has a new twist: The lower demand for office space appears permanent, he said.
“We can debate whether we need 10 percent or 20 percent or 30 percent less office in the long run than we did before,” Dr. Van Nieuwerburgh said, “but everybody agrees that the number is greater than zero.”
Wall Street investors have taken a particularly dim view of the office sector throughout the pandemic, but their assessment of the sector has worsened in recent months. Large banks like JPMorgan Chase and Wells Fargo have increasingly warned that a heap of commercial loans are coming due by the end of 2025 — estimated to amount to $1.5 trillion nationwide — and that the companies may struggle to repay or refinance them.
Shares of SL Green and two other publicly traded office landlords in the city, Vornado Realty Trust and Empire State Realty Trust, are all trading near their lowest level since the pandemic started.
SL Green’s stock has fallen 76 percent since early 2020. Vornado is trading at its lowest territory since 1996. Empire State Realty, which owns the Empire State Building, is near its record low. Collectively, $17 billion of their market value has been erased since the pandemic started.
“All three of them are office-centric, all three of them New York City-centric,” Mr. Van Nieuwerburgh said. “Those are the stocks, the office stocks, that have been clobbered. It’s staggering.”
Vornado and Empire State Realty will report their quarterly earnings in the coming weeks. At the end of 2021, Vornado’s New York City buildings were 90.4 percent occupied, down from 96.7 percent at the end of 2019; Empire State Realty’s buildings in Manhattan were 86 percent occupied, down from 89.8 percent.
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