By:  Benyamin Davidsons

Landlords of Manhattan’s sprawling office buildings are continuing to feel the oppression of the COVID-19 pandemic.  First the landlords dealt with nonpayment from tenants.  Next, they were ailing from vacancies due to growing work-at-home trends.  Now, even as offices are starting to fill up, landlords are hurting from rising interest rates which will affect their maturing loans which will need to be refinanced at higher rates.  General office conditions are “worse” than during the 2008 financial crisis, wrote Morgan Stanley analyst Ronald Kamdem said in a client report last week.   It “may be a headwind for risk appetite on the part of lenders and buyers,” he wrote.

As reported by Crain’s NY, the pressure landlords are facing may lead them to sell properties, and potential buyers are waiting on the sidelines, anticipating lower prices in the near future which will reflect the change in the market.  The bit of good news is that vacancy rates at office towers near Grand Central Terminal, Park Avenue and Sixth Avenue are nearly two percentage points lower than their spring 2021 highs, Kamdem said.  The net absorption rate, a key performance metric, was at 0.2% citywide in the third quarter of the year, meaning slightly more space was occupied than vacated, per data from CBRE and Evercore ISI.  The bad news is that last quarter’s absorption rate was half that of the previous 12 months, showing that demand has dropped. Return-to-office was at roughly 50% overall in New York for the week of Oct. 9, per Kastle Systems, indicating that the latest Labor Day push from employers didn’t work to substantially bring workers back into the office full time.

As earnings season is set to start, office landlords are doing their best just to stay alive and wait for better days.  “I would call this stay alive till ’25,” Paramount Group CEO Albert Behler said in a May conference call.  Investors on Wall Street will have astute eyes on the landlords, their incoming rent collection and their debt.  Per Crain’s, many of the larger commercial real estate companies and developers are suspending dividend payouts to investors for the year to improve cash flow.  Investors will be carefully looking at which companies have big loans coming due, because those loans will need to be replaced by more expensive, higher interest rate loans on par with today’s market.

Vornado Realty Trust , established in 1982 and led by CEO Steven Roth, is looking to sell or borrow against the Farley Office Building to raise cash. It stopped paying out  dividend earlier this year and said the next payout might be in stock.  Investors will be looking closely to find out the company’s taxable income for the year.

Paramount Group, which owns large commercial buildings in the West Coast, cut its dividends by 55 percent.  Crain’s reported that one of its San Francisco buildings faces the loss of two major tenants, namely Google and Visa, in 2025.  Investors are also eying a $975 million which will come due for Paramount in February.  The rate for a new loan could be 8.5%, Evercore ISI said.  That’s more than double the firm’s current rate, and would increase the landlord’s interest expense by $8 million annually, eating away at roughly 10% of the company’s cash flow.  The stock price has plummeted close to 25% this year, reaching roughly $4.30 a share last week.