Office landlords are fumbling with their properties — and their debt. As tenants rethink leases amid lingering work-from-home habits, a growing number of property owners are defaulting on loans. In February, commercial real estate data firm Trepp reported that five to 10 office towers are added to the list of properties at risk of defaulting every month.
According to another snapshot by Trepp, the office sector was responsible for 53% of April’s $2.75 billion new special servicing transfers. Institutional landlords struggling with debt include Tishman Speyer and RXR. As a result, lenders are being forced into a reckoning relating to repositioning historically successful office buildings.
New York Business Journal: You work a lot with Class A office types, which have been most popular among companies still signing leases. The New York City Economic Development Corp. recently announced it will incentivize renovations into Class A. What will an increase of supply mean for demand and current high rents for these property types?
Tom Vecchione: What’s really interesting is this seismic shift of [how] we used to classify properties in their categories and how they’ve changed. What was an A-minus property – maybe our Third Avenue or Lexington or Sixth Avenue that had a nice big, bulky user like a midlevel law firm or an insurance company – those have shifted in value. What we think of as A-minus might now be B-minus because it’s less in demand.
Also, what is functionally obsolete? There’s 25% of office buildings that cost so much to invest in, they’re really low-quality products. Maybe they were built for a different time period. Are they ever going to be as successful as office properties?
The other ones in the middle are being reset.
Now, buildings like One Vanderbilt and Hudson Yards, which really hit the market over the last two to five years, those are A-plus buildings we never had. That reduces the value of what might have been an old-school A.
New York Business Journal: Are lenders really thinking of repositioning, converting and renovating assets the way landlords have traditionally been responsible for doing?
Tom Vecchione: Because we’re seeing different alternative financing come in, the market’s competitive. We’re working on a few buildings: one on Park Avenue, one on Third, one on Sixth. How do we thoughtfully see what is going to get the most amount of value from a leasing side, but also an investment side as well? We’re working with lenders to study this and to put out proposals. They are much more curatorial and analytical than in the old days.
New York Business Journal: Are there certain types of landlords that lenders are more favorable toward? Is a small family company viewed differently from someone like Vornado Realty Trust?
Tom Vecchione: I work across the board with the old New York families and the big REITs. There are some of the properties that are in portfolios of smaller families that are just damn good, right? I don’t want to say anything across the board [but] I hesitate to say that the big REITs are necessarily 100% better and easier to work with than some of the smaller families.