SL Green Posts Loss As New York Office Market Struggles With Higher Rates, Economic Concerns


SL Green Realty, Manhattan’s largest office landlord, posted a first-quarter loss after its interest rate expenses almost tripled and office occupancy declined in an example of how added borrowing costs and economic concerns are seizing the New York real estate market.

Funds from operations, or FFO, a closely watched performance metric, declined to $105.5 million from $115.8 million, SL Green said. It had a net loss attributable to common stockholders of 63 cents a share, compared to net income of 11 cents for the first quarter of 2022.

The results come as trouble in the post-pandemic office market is spreading through the banking industry as property values decline amid persistently high vacancy. Citizens Financial Group, Morgan Stanley and U.S. Bancorp told analysts Wednesday that they’re gearing up to restructure loans in the coming months.

SL Green, a significant landlord in the nation’s biggest commercial property market, is viewed as a barometer for the rest of the country.

The real estate investment trust signed 41 office leases in Manhattan spanning 504,682 square feet last quarter.

Manhattan same-store office occupancy, including leases signed but not yet started, fell to 90.2% from 93% a year earlier. SL Green kept its forecast to increase that rate to 92.4% by Dec. 31.

SL Green said its average starting cash rent declined to $66.44 from $68.04 a year earlier. The average lease term fell to 6.2 years from 8.5 years.

The REIT reported some improving signs. The mark-to-market rent on signed Manhattan office leases was 5.3% higher for the first quarter than the previous fully escalated rents on the same spaces, SL Green said. Tenant concession packages per square foot and free rent months given both declined.

SL Green said its leasing pipeline has risen to 1.2 million square feet, up 70% from January, including demand coming from new tenants.

What’s also signaling an improved market sentiment is the fact that demand is not just coming from the top end of the market but also from small- and medium-sized tenants, Steven Durels, SL Green’s executive vice president and director of leasing and real property, said on a Thursday earnings call. He said 18 deals alone are tied to leases in its Graybar building at 420 Lexington Ave. by the Grand Central Terminal transportation hub.

SL Green is “seeing more velocity in the price-sensitive market than we’ve seen in the past three years,” Durels said. The return of smaller tenants coming back is a “good harbinger of where the market is. … Whatever pause we saw by tenants spooked in [the fourth quarter] by rising interest rates and inflation, that explains the leasing slowdown.”

Durels want on to say tenants are showing more confidence. “The return to office narrative is prevalent today,” he said.

Major corporate giants including JPMorgan Chase have set different mandates that aim to bring more of their employees back to the office. JPMorgan, for instance, recently said its managing directors are to be in the office five days a week.

“There has been this [remote working] experiment over the past three years,” SL Green CEO Marc Holliday said on the call. Companies “concluded that experiment is not working. That trend is something we see on streets, in buildings and in mass transit. It makes sense for businesses’ competitiveness and our reimagination of [central business districts]. … It took longer than we expected. We now feel things are coming around in the right direction. … The [New York] office sector continues its recovery.”

The average office utilization rate at SL Green properties regularly exceed 60%, Holliday said, adding there are also other positive signs including transit ridership that recently reached its highest single-day level since the start of the pandemic.

Meanwhile, there are signs interest rate growth is “moderating,” which will have a positive impact on real estate debt and capital markets, Holliday said. He acknowledged “over-anxiety” affecting real estate, thanks to what he described as “headlines overamplifying messages of doom and gloom.”

As higher interest rates and tight financing have led many major real estate owners including Columbia Property Trust and Brookfield Asset Management to default on some office loans, many questions from Wall Street analysts centered on some loans tied to properties such as 717 Fifth Ave. and 919 Third Ave. that have maturity dates in the coming months.

New York’s overall office vacancy rates also have reached record highs. Blackstone Group, the world’s largest commercial property owner, said Thursday “office is one cautionary area.” The global alternative asset manager has cut its office exposure to 2% of its U.S. real estate from 60% at the time of its 2007 initial public offering, Blackstone CEO Stephen Schwarzman said on its earnings call.

“The skepticism on the market is evident,” Holliday said on the call, adding SL Green’s interest in such property as 717 Fifth is only about 10% and won’t have any impact on its results. “We have premium assets that have a lot of institutional, domestic and foreign attraction. We are keeping them well leased and highly improved. There’s a market for that. We’ll do whatever we have to get things done. There’s a … countless amount of capital. We have certain assets we are going to look to sell. We have other great core long-term holdings that we’ll look to do [joint ventures] with premier partners.”

He said SL Green is in talks to line up financing for 919 Third.

Amid concerns that Swiss investment bank Credit Suisse’s recent sale to UBS may affect its 1.18 million-square-foot anchor lease at SL Green’s 11 Madison Ave., Holliday said that lease is “intact” and won’t expire until 2037.

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