Sale prices for office buildings in the U.S. have tumbled by 25% over the last few years, and Morgan Stanley predicts they will keep falling.
Although prices for apartment, industrial and retail real estate have stabilized, office buildings will “continue to go down” due to what the big Wall Street firm described in a new report as “well-understood idiosyncratic issues” – apparently a reference to work from home.
Morgan Stanley knows this territory well. It has about $10 billion in commercial real estate loans on its books, including $3 billion to office buildings, and one is a slice of a $125 million loan to the Helmsley Building, a Park Avenue landmark that’s in foreclosure proceedings. The bank’s cautious commentary echoes that from Federal Reserve officials, who in January observed that credit quality in commercial real estate had “deteriorated further” since their last meeting, driven “largely by office and multifamily loans,” according to meeting minutes.
Morgan Stanley said prices for apartment and retail buildings nationwide have “bottomed out” after falling by 20% and 9%, respectively, since 2020. But for office buildings there is still “some more room to go,” even though they have fallen by nearly 24.7%, according to the firm’s estimates.
Vital signs remain shaky. The percentage of office loans 30 or more days delinquent nationally has doubled in the past 12 months, to 11.6%, Morgan Stanley said. Fewer than half of securitized office mortgages were paid off at maturity in the last year, compared to 86% of apartment loans and 79% for retail.
In Manhattan, some office towers are thriving, especially newer ones with lots of column-free space. But plenty aren’t, especially in Midtown South and the Financial District.
This week asset-management giant Brookfield sold a Garment District building to B&H Photo for $105 million less than it paid. The previous week a division of Massachusetts Mutual Life Insurance acquired 340 Madison Ave. at auction for $161 million after the previous owner, RXR Realty, defaulted on a $315 million loan for the 22-story tower.
Manhattan’s office vacancy rate was 23.3% in the fourth quarter, Cushman & Wakefield reported, a bit higher than the previous year’s 22.8%. The sheer availability of space has seemingly forced even owners of Class A buildings to grant unusual concessions.
Consider Park Avenue Tower at 65 E. 55th St., which carries a $308.5 million mortgage written last year by Morgan Stanley. Eleven firms that collectively rent a third of the building’s 600,000 square feet have negotiated the right to opt out of their leases in exchange for termination payments equal to around a year’s rent. Brokers say such opt-outs are typically granted when an owner is preparing to renovate a building, but Park Avenue Tower was recently renovated at a cost of $170 million by owner Blackstone Group.
The tower is 87% leased, about average for Park Avenue, Cushman & Wakefield data show.
Credit-rating agency KBRA, which detailed the lease-termination agreements in a note Wednesday, said one tenant that could have opted out, East Rock Capital, did not do so. The 10 others haven’t reached their decision date. Blackstone had no immediate comment.
