Hybrid work leaves offices empty and building owners reeling | 60 Minutes

looking for signs that the US economy can continue to avoid a recession aside looking at commercial real estate the city's office

building

s have been in trouble for a century the towers have been supported by two pillars a

work

er filling the

building

s all week With money flowing freely in the form of loans to borrow, buy and build, those days are gone as

hybrid

work

tightens from the trend to the new normal, office occupancy rates have hit record lows, while Interest rates have soared to all-time highs and $1.5 trillion in commercial real estate loans are now coming due. expiring in the next two years is enough to make you rethink the future of the cities we crisc we crossed Manhattan talking to players large and small about a sector Rock to its foundations the story will continue in a moment what is New York City without its monuments Skyline Commerce stands proudly on its shoulders with more office space than any city in the world, but it peaks within all this vertical real estate space and a fundamental question arises: where is each of the more than 95 million square feet? squares of New York office space currently unoccupied, the equivalent of 30 Empire State Buildings? buildings this building had many law firms it had some government Scott Reckler is the CEO of rxr a New York real estate company with over 20 billion in Holdings we walked around his property at 61 Broadway near Wall Street every two floors the half the building is

empty

I think this is an existential moment, you know, I call it crossing the chasm, what is the chasm, specifically this postco world of higher interest rates, the changing nature of how people work and live, we're not going back to where we were, it's a different world and it's going to be turbulent it already is the return to the office has plateaued Fridays are dead Mondays aren't much busier as tenants reduce their office space office

owners

are facing the fact that some of their buildings have become obsolete, if not useless, since The pragmatic Reckler decided not to throw good money after bad at 61 Broadway and defaulted on a $240 million loan from his bank. .

I could see people saying it's a lot of money, how did you sleep last night? We invest a lot of capital if it works. a lot of money if it doesn't work out the lender can take over the building you have to face reality, right, reality is approaching you, the reality is that the price of office buildings has plummeted up to 40% since the pandemic in the upper Columbia. Business school real estate professor Stan Van Newberg has modeled the impact of

hybrid

work on prices and calls it a slow-motion train wreck and this is just the beginning and the reason is just the beginning because there's a lot of office . tenants who have not yet had to make an active decision about the space Do I want to renovate this space?

Do I want to evict him? Maybe sign a new lease for half the space. This is what the tenants have been doing for the last three years. So when we take into account all of those current and future declines in cash flows, we end up with about a 40% reduction in the value of these

offices

. Consider this office building near Penn Station as one of a handful selling in the city last fall built in 1920 and showing its age eight floors

empty

with a 99 cent store on the ground floor cocoa butter is 80% real estate discount Partners Tony Park and a drawer told us they had been eyeing that building for years and before the pandemic they offered the owner $80 million that didn't get very far, he doesn't respond, he didn't even respond to you , yes he answers, yes, we didn't have his attention at all, so what do you think happened?

The entire building is now empty in September Park and the box received the building for less than half its original offer and have planned to convert the site. Have you ever thought about keeping it as an office building? No, you never laugh at anything that isn't an office, at anything that isn't an office, Miss Hallowe, many good mornings. To understand the prestige that Hollywood has conferred for decades on life in Manhattan

offices

, it is enough to say that they did not put Mad Men in succession on top of a 99 Cent store. Like this one, Vander built part of a crop of so-called trophy buildings, a resilient slice of this shifting real estate market to the top.

Mark Holiday is the CEO of SL Green, New York's largest office landlord, and also the owner of 60 Minutes that he took us to. The top of their new $3 billion skyscraper probably sees half the way to Philadelphia from here, yeah, oh, sure it's from here, it's a chip shot, there's a view, but more importantly the building is connected underground to Grand Central Terminal for an electronic ride. Trophy buildings reflect flight. to quality corporate tenants with deep pockets flocking to Medi Rich Towers, it includes two Michelin-starred restaurants, all designed to motivate employees to leave their homes. A Vanderbilt is 99% occupied.

A hedge fund here. A consulting firm there. But when we spoke to Him over the September holidays he was obsessed with the occupancy at all the SL Green properties. Our goal was 92% for this year. Now we have some work to do. To get there, their occupancy rates are now about 89%. You said the ideal would be around 92. Great, I could see people saying there are two three points difference, what's the problem? No, and when you have 30 million square feet like we do every 1%, it's a big difference. You know, we pride ourselves on keeping our occupancy historically at 95% or higher.

Do you accept that working from home is a fundamental change in the way we work and is here to stay? It is one of the biggest social problems we face right now. Work from home. I think it's bad for business. It's bad for. cities, it's bad for people, it's also been bad for their stock price, which is down 50% since the pandemic, a culture of soft talk and sharp elbows, commercial real estate is a world built on big loans and the assumption that those loans will be refinanced with little friction. Not every 5 or 10 years anymore, the bank will look at that building and say, "Well, I used to be willing to lend you $80 million for this building, but I don't think that building is worth as much as it used to be." Maybe today I'm only willing to lend you $60 million against that same building and now the office owner has the option of letting you know if I pay that $20 million difference out of pocket or walk away from the rubber.

The road when it comes time to refinance properly and to make matters worse, interest rates are now much higher. Interest rates have essentially doubled, so the cost of that new mortgage, even if you can get one, will be much higher. What happens when that cost becomes too high? According to the terms of sale on the lawn in front of a Manhattan courthouse we saw something you won't see on a double-decker bus tour 9 million 6t a foreclosure on an office building 10 million going once 10 million going twice here not one in the crowd is willing to outbid the bank that has the loan on the building and if the bank representative doesn't seem enthusiastic it's because they have an empty office building dragging their balance sheets.

Professor van Newberg has been meeting with captains of industry and the Federal Reserve at this very point, so commercial real estate is a big part of a typical bank's book of business and I'm mainly referring to these more regional banks. small and medium-sized, which have a lot of exposure, which is their bread. and the butter business, about 30% of all their loans are commercial real estate loans and here we are seeing a kind of weakness in the position is that it is something like this that we have never seen before and the banks need to understand if they are comfortable calling this. a crisis I think we are at the beginning there is a potential crisis here in December National office loan default rates reached 6%, almost four times higher than a year ago, but banks have been reluctant to write off those losses , you already know Ender David Aaron from Maverick real estate, a company he and his partner founded after the 2008 financial crisis, his specialty is buying distressed debt through cheap avaram, he controls the debt of every office building in The city, says New York is a laundering of billions in commercial real estate. loans at risk of not being paid, we know that there is a buildup of bad debt in the system, but it is still not being resolved and it is largely because the banks have been kicking the can down the road as best they can trying to push this into as much as possible, what does that mean?

It means that banks are granting extensions on many of their bad loans that essentially change their classification from a non-performing loan, a distressed loan, to a performing loan, a healthy loan. loan even though they have not received a down payment on the loan and the value of the collateral on that loan continues to fall, they extend and pretend that that is correct and it works very well when interest rates are low because the banks can simply keep the status quo, but once rates are high, a slowdown in the real estate sector compounded by bad loans that contaminate banks and potentially the entire economy no longer works.

The echoes of the 2008 global financial crisis are hard to ignore, but whether the problem with office buildings ends in a simple price correction or turns into a systemic crisis, there are likely to be problems not only for the

owners

of the buildings. buildings and banks, but also for the cities themselves. In the long term, property taxes on those buildings will also fall by 40% and these commercial property tax revenues are a major component of local governments' budgets, which means less money for police departments to garbage collection and some people are going to decide that they know the quality of life has deteriorated too much and they want to get out and in fact that is what we have seen in the last three years our 10 largest cities have lost about 2 million residents, you are also losing that tax base and now you are losing that tax base and now this cycle continues and we end up in something we have called an urban Doom cycle, it is terrifyingly silent.

Around here, the urban Doom Loop sounds terrifying and is circulating threatening cities beyond New York, Dallas, Chicago, not to mention San Francisco, a question being raised across the country, especially given the housing shortage, why not convert empty office buildings into apartments? Some developers are elevators. Here we are at Tony Park and Aad Drawer, who are converting the former 99 Cent store building into 77 market-rate rental units. Developers we spoke to say they simply can't make a profit by converting less than half of New York's offices into affordable housing. the space is zoned for conversion and even then it's not that easy.

We visited this residential conversion near Wall Street where the Van Barton Group developers were circling around a city ruer that says you can't add existing square footage, what's it called? This is the void, they call it the void. A giant 30 story hole they cut in the middle of the building. It's one of the tricks of the trade. Take the central section of the office floor, the part that doesn't receive much light. and air seal it and preserve that square footage so you can apply it somewhere more valuable, for example, the residents of an attic may not even know it's here, they'll never know, maybe not, but the vacuum offers a lesson broader view on urban real estate where there is space.

This would potentially be the tallest commercial building in the Western Hemisphere by floor for Scott Reckler, which means doubling down even in a bear market near Grand Central. He has prepared financing to build his own trophy building, which is part office and part hotel, but for Professor van Newberg it is a reinvention. can and should be much more ambitious, a radical New Deal combining public and private money and ideas about what to do with old office space, it's no longer fit for purpose, we have to redesign it, you know, more space for communities , more space for artists, perhaps a problem. baseball fields or basketball courts, there are many different uses for these buildings, especially when they can be purchased at a low price.

If Newberg gave us the term Urban Doom Loop, he also emits some optimism about the current tipping point for everyone. human history humanity has been linkedto work where you live we were farming the farms and we lived on our farms we worked in the factories and we lived near the factories we no longer have to live where we work and that is a very transformative idea and I think society is just beginning to realize the potential full of that idea. Who wants to live in a converted 1970s office building? What would this cubicle floor have been on 60 Minutes overtime.com sponsored by FIS sir?