Has Commercial Real Estate Bottomed In New York?

Few industries have been hit by the fallout from the COVID pandemic more than the commercial real estate industry. In general, workers were first ordered to stay away from the office for perhaps the first two years of the crisis, roughly from the spring of 2020 through the spring of 2022, and the same workers have fought to retain the flexibility to work from home since then.

With fewer occupants and far too much empty space, the value of commercial real estate has plummeted. A managing director at Eastdil Secured, a real estate investment bank, neatly summarizes the situation: “In New York, buildings are selling for less than the value of the land they sit on. We are seeing prices lower than they have been in 20 years in absolute dollar terms.”

Owners of commercial real estate with some of the best addresses in the world have absorbed steep losses. For example, in May 2023, a group agreed to buy a 22-story, 298,000-square foot glass and stone tower at 350 California Street in San Francisco for just US$68 million, or US$200-US$225 per square foot, which is far below replacement cost. 

The seller was Mitsubishi UFJ Financial Group. In 2020, Mitsubishi had sought US$250 million for the property. Of course, at that time, San Francisco’s office vacancy rate was 4%; now it is nearly 33%.

Similarly, a joint venture of Blackstone Inc. (NYSE: BX) and RXR sold 1330 Avenue of Americas in New York City in July 2022 for about US$325 million, only about two-thirds of the price for which the 40-story building located between 53rd and 54th Streets traded for in 2006.  

However, a commercial real estate sale, probably the largest in the U.S. for more than a year, was announced on June 27, 2023 that could signal this asset class has bottomed. Japanese developer Mori Trust bought a 50% stake in 245 Park Avenue in New York City from SL Green Realty Corp. (NYSE: SLG) for about US$1 billion, which implies an overall building value of US$2 billion. The Park Avenue building has 1.7 million square feet and sits just north of the world-famous Grand Central Terminal.

245 Park Avenue in Midtown Manhattan

Importantly, the current US$2 billion valuation is consistent with its valuation when SL Green acquired the 1960’s-era building out of bankruptcy in September 2022. The office building had previously changed hands in 2017 at a price of US$2.2 billion. 

Of course, details of subsequent transactions will be the proof, but the just-completed 245 Park Avenue deal could limit further declines in commercial real estate values in major North American cities. 

Information for this briefing was found via Bloomberg, Reuters, San Francisco Chronicle and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

Leave a Reply