NYC Real Estate Investors Are Betting On an Office Comeback

Urban doom loop or commercial real estate buy-low opportunity? 

Property manager RXR and alternative-asset investor Ares Management think the darkest hour is nearly over for New York City’s commercial real estate sector, as they partner to build a $1 billion fund to invest in distressed office buildings, the Financial Times reported. 

This One’s Just Right

The pandemic made water cooler conversations a thing of the past as employees shifted to working from home with video calls and team management systems. Once-bustling skyscrapers became corporate liminal spaces. Even as infection rates waned, many businesses either adopted a hybrid work schedule or chose to not return to the office at all. 

That meant nothing good for the value of the city’s office-building inventory, and the future doesn’t look much brighter. A joint study from New York University and Columbia University predicted that remote work will decrease office values in the city by nearly 50% by 2029 compared to pre-pandemic levels. And roughly $117 billion of commercial mortgages tied to US offices needs to be either repaid or refinanced this year, according to the Mortgage Bankers Association.

However, some of the city’s biggest commercial real estate players are betting against that dour forecast: 

• RXR CEO Scott Rechler told the FT that his group and Ares are taking a Goldilocks approach to the office buildings they buy. If they’re too new, both the cost and rents would be too high; too old, and they’d require extensive renovations and debt restructuring.
• Craig Snyder of Ares said the two businesses are looking to identify what buildings will be “long-term winners” because “the broad, indiscriminate flight of institutional capital from the office sector has resulted in many high-quality properties trading down to historic lows.” 

Building up slowly: RXR and Ares aren’t just playing a hunch on the city’s office comeback. In the fourth quarter of 2023, the city’s office leasing activity jumped by 27% from the previous quarter to 8.23 million square feet, The Real Deal reported. In December, Law firm Paul, Weiss, Rifkind, Wharton & Garrison signed a 20-year deal for 765,000 square feet at a building on 6th Avenue, making it the largest commercial real estate lease in the country all year.