By:  Benyamin Davidsons

Major New York City developers and big time office landlords didn’t think that interest rates would stay high for long.  In recent weeks, mortgage rates jumped up significantly again, as it became evident that the Federal Reserve does not plan to ease rates any time soon. The implications of the higher than expected interest rates will be significant for the city’s big landlords.

As reported by Crain’s NY, last year, Steve Roth, CEO of Vornado Realty Trust, was among those who brushed off rising interest rates as a short-lived phenomenon.  “If past is prologue, we expect rates to climb quickly up a mountain, slow the economy and inflation, and then quickly fall down the other side,” Roth, 82, said during a conference call in May 2022.  As founder and chairman of the largest commercial landlord in New York City, he will pay a price for that miscalculation.  The cost of borrowing money is generally the largest cash expense for landlords– even higher than maintenance.

This is true even if no new acquisitions are made, because old loans mature, and they need to be replaced by new loans– at existing higher interest rates. As per data from Morgan Stanley, a total of approximately $20 billion worth of debt will come due in the second half of this year for the biggest real estate investment trusts.  Next year another $50 billion in loans will mature, needing to be replaced.  Landlords, who are already suffering from commercial vacancies and a slow leasing market, will be hard hit by the increased cost of borrowing money.

As per Crain’s, for Vornado, some $300 million worth of debt is slated to mature next year. The debt’s blended interest rate is 6.2%, but they won’t be able to obtain a new loan for a rate lower than 8 percent interest. Furthermore, in 2025 the developer has another $1.3 billion worth of debt that will mature, and that loan had a blended rate of just 3.4%.  Getting a new loan will sharply increase the developer’s costs and eat into its cash flow.

Also, many companies will fare significantly worse than Vornado.  As an example, Paramount Group has a San Francisco office building loan for $975 million which will come due in February.  The rate for a new loan could be 8.5%, Evercore ISI said in a report Sunday. That estimated rate is 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.  That’s just one of the firm’s buildings.

Later this month, the firm has a $273 million mortgage coming due for another second San Francisco tower.  The current loan had a rate of 3.65% rate, and again it’s expected to be replaced with a loan at an 8% rate.  This would raise the annual cost of holding the building by an added $4 million, per Evercore.  Paramount’s growing obligations has understandably led the stock price to plummet close to 25% this year, reaching roughly $4.30 a share.

Landlords which face less debt maturities next year, are seeing higher stock prices, as investors are clearly concerned about the impact the new more expensive loans will have on building owners.  Per Crain’s, some office landlords have cut dividend payouts on their stocks, in order to conserve cash.