By: Serach Nissim

As commercial buildings have seen more vacancies, some have tried to brush it off by saying that only older office buildings are being left behind.  The argument maintains that “Class A” buildings, or top of the line office buildings with amenities, are doing well and it’s basically just the buildings that need updates that are struggling.  This theory, known as “flight to quality”, however, suffered a set back last week.

As reported by Crain’s NY, last week, a security linked to the mortgages at Vornado Realty Trust’s 650 Madison Avenue was downgraded by Fitch.  The news shook the entire commercial market—including the poshest real estate.  The 27-story greenish-glass tower at650 Madison Ave is by every measure a Class A building.  The 601,000-square-foot office building boasts an esteemed lobby designed by Armas & Shannon.  Located in Midtown Manhattan’s Plaza District, the submarket is considered a trophy standout, not considered affiliated with any of the hardships other commercial real estate may suffer.

Then, along came rating agency Fitch, lowering its rating for securities backed by a mortgage at the tower, and warning investors about the risks.  “The downgrades reflect deterioration in performance,” the agency said.   Fitch warned about a drop in occupancy at 650 Madison Ave.  The building, which boasts Central Park views for floors above 15, is the global headquarters of Ralph Lauren.   Per Crain’s, the fashion house leases floors 5 through 10, plus the 14th floor. It had once rented 46% of the tower but now has 41%, per Fitch. What’s more troubling, though, is that Ralph Lauren’s lease will be up in 2024, posing a “high rollover risk,” as per Fitch.

The fashion giant can easily downsize or vacate when its lease ends in December 2024, the ratings agency said. Fitch also cited the fact that Cancer center Memorial Sloan Kettering vacated a portion of its office space in 2021, a year before its lease was up, marking this as another troubling sign. Other distinguished tenants at the building include Willett Advisors, Sotheby’s International Realty brokerage and British financial firm BC Partners. Vornado Realty Trust had purchased the building, together with Oxford Properties Group and Ontario Municipal Employees Retirement System, for $1.3 billion in 2013.

Per Crain’s, the downgrade rocked not only Vornado’s building but the entire prestigious Plaza District—which includes the blocks around the Plaza Hotel in the East 50s.  Other Class A buildings in the Plaza District, which no one thought to worry about, include Soloviev Group’s 9 W 57th St., the 50-story General Motors Building at 767 Fifth Ave, Olayan Group and RXR Realty’s 550 Madison Ave. and CarnegieHall Tower at 152 W. 57th St.The worry is that real estate struggles like leases rolling over, are real for all buildings.  Additionally, remote-work trends seem solid, even three years after the Covid-19 pandemic, and even at blue-chip companies.

In May, the availability rate in Midtown Manhattan was close to 16 percent, representing a modest improvement over last year, as per firm Colliers. Average asking rents in Midtown were $75 a square foot annually, which is close to the rental prices in May 2022, Colliers added.