Opportunistic buyers snag U.S. office buildings for steep discounts

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Daytime View of the 1740 Broadway Building in New York City from another Tower (Credit: Raygeorge, CC BY-SA 3.0, via Wikimedia Commons)

Commercial real estate bargain hunters snap up aging office buildings in the U.S. for steep discounts of as much as 70%, a sign of the pain in the property market, The New York Times reported.

Earlier this month, two real estate firms paid less $50 million for Midtown Manhattan tower, according to Bloomberg. In April, Yellowstone Real Estate forked over a mere $185 million to purchase the historic Mutual of New York tower, now simply called 1740 Broadway. The investment giant Blackstone had paid $600 million for the famous office building near Columbus Circle in Manhattan a decade earlier. 

“Distressed deal-making is one of the more visible illustrations of trouble brewing in the sector that could lead to large losses for hundreds of banks and investors in real-estate-backed loans” the New York Times report says.

The Mortgage Bankers Association recently estimated that nearly $1 trillion in commercial debt will mature by the end of the year. Office REITs and developers have been hammered by high vacancy rates and a sharp rise in borrowing costs, since the end of Covid. The stay-at-home orders crippled markets like Manhattan when remote working become the new norm for whole companies.

The famous triangular Flatiron building has been vacant since 2019. The owners said it would be turned into condos.  360 Park Avenue South, has been empty since 2021 for redevelopment. About 20% of office space around the US was unleased at the end of 2023 – the highest vacancy rate in more than 40 years, according to Moody’s Analytics.

“So far this year, the mortgages of 16 office buildings packaged into commercial real estate bonds were foreclosed on or extinguished — resulting in $500 million in losses for investors nationally, according to Trepp, a data and research firm. Last year, 26 mortgages packaged into bonds were foreclosed on or extinguished, resulting in $265 million in losses for investors” The New York Times continues.

A ray of hope? Last month, Manhattan enjoyed 70% more office leasing, on an annual basis, signaling a welcome return to pre-Covid trends, according to Colliers. The recent report by the real estate firm shows that nearly 2,000,000 square feet of office space was leased in May 2024 with a few large deals accounting for most of the two million square feet leased.

The largest of the deals was a lease extension by Bloomberg on its 946815-square-foot (87,962 square meters) office at 731 Lexington, a Midtown office tower owned by Alexander’s real estate investment trust. The Bloomberg deal accounts for about one-third of the total square footage and is the biggest deal since 2019. Additionally, three separate deals at 22 Vanderbilt totaled more than 300,000 square feet.

Is the Manhattan office market beginning to make a comeback? According to Franklin Wallach, director of research and business development at Colliers, we must continuing to monitor supply-demand dynamics throughout the year to see how the market shapes up.

731 Lexington, Bloomberg Tower in Midtown Manhattan (Credit: Kidfly182, CC BY-SA 4.0, via Wikimedia Commons)