top of page

Weekly Market Report - March 20, 2023


A record amount of commercial mortgages expiring in 2023 is set to test the financial health of small and regional banks already under pressure following the recent failures of Silicon Valley Bank and Signature Bank. Smaller banks hold around $2.3 trillion in commercial real estate debt, including rental-apartment mortgages, according to an analysis from data firm Trepp Inc. That is almost 80% of commercial mortgages held by all banks. With the banking industry in turmoil, regulators and analysts are growing increasingly concerned about commercial real estate debt, particularly loans backed by office buildings, according to industry participants.

Many skyscrapers, business parks and other office properties have lost value during the pandemic era as their business tenants have adopted new remote and hybrid workplace strategies. High interest rates also have wreaked havoc with commercial property valuations. Many owners with floating-rate mortgages have to pay much more monthly debt service, cutting into their cash flows. Owners with fixed-rate mortgages will feel the pain of higher rates when they have to refinance. This year will be critical because about $270 billion in commercial mortgages held by banks are set to expire. Most of these loans are held by banks with less than $250 billion in assets. If those loans pay off, it would reassure markets. But a large number of defaults could force banks to mark down the value of these and other loans, analysts say, reinforcing fears over the financial health of the U.S. banking system.

While a number of banks have seen drops in the value of their bond holdings—a key factor in Silicon Valley Bank’s collapse—figuring out by how much the value of their mortgages has dropped is trickier because they aren’t publicly traded and every building is different. That drop in value puts 186 banks at risk of failure if half their uninsured depositors decide to pull their money, the economists estimate. Real-estate loans account for more than a quarter of the shortfall. The good news is that banks lent more conservatively in recent years compared with the period before the 2008 financial crisis.

Many buildings might still be worth more than their mortgages even if they suffer a loss in value. Also, government regulators have given banks ways to avoid taking losses even when loans are in trouble and are restructured to give borrowers more time and more flexibility to pay what they owe. Much of the guidance the Federal Reserve and other regulators are following was enacted during the global financial crisis to shore up the economy. Moreover, if interest rates stay at current high levels, low rates won’t come to the rescue of banks’ commercial property portfolios as they did in the years following the financial crisis. Indeed, a rise in interest rates would further erode the values of these portfolios.


Signature Bank’s sudden demise this week may leave some of Manhattan’s largest office landlords holding the bag. The prolific multifamily lender occupied at least 472,000 square feet across seven offices in the borough, when regulators seized the bank Sunday to protect depositors. Signature has three other offices in Manhattan, although it is unclear how much space it leases at those locations. About 83 percent of the company’s office leases were not slated to expire before 2032, which could leave the bank’s landlords on the hook to re-rent space it expected to be full for the next decade.

Only 10 percent of its office leases expire in 2025 or sooner. It was placed in receivership by New York state and is being run by the Federal Deposit Insurance Corporation. Its senior executives have been ousted and its shareholders wiped out. The fate of the bank’s leases is unknown, but Tony Malkin’s Empire State Realty Trust may be in the most precarious position. Signature expanded its footprint last April at ESRT’s 1400 Broadway in the Garment District to more than 313,000 square feet across 11 floors — a third of the 37-story, 938,000-square-foot office tower. Only three months earlier, the lender had tacked on more than 168,000 square feet to bring its footprint at 1400 Broadway to about 280,000 square feet.

The January deal was for $67 per square foot, or $169 million over 15 years. The price of the previously leased space could not be determined, but it included 91,000 square feet leased for 15 years in 2018, when the asking price was $67. Signature’s closure comes as its main landlord, which owns the Empire State Building, has sought to expand its portfolio into multifamily as a hedge against the office sector’s uncertainty in the Covid era. Investors haven’t looked fondly upon ESRT during the pandemic, cutting its market capitalization by more than half. The percentage of its publicly tradable shares being shorted has hovered for several months near or slightly above 10 percent, a threshold that indicates a bearish outlook on the company. The firm’s share price is down 32 percent in the past year and 17 percent in the past eight days. The lender pays about $70 per square foot at the 47-floor, 1-million-square-foot office tower, or about $6.3 million annually. Signature’s lease runs to 2033.


Brookfield’s One Liberty Plaza office tower is set to take a $500 million hit as the private equity giant is buying back a piece of the Financial District building it sold six years ago at a valuation of $1.5 billion. Brookfield Properties, the majority owner of the 2.3 million-square-foot skyscraper at 165 Broadway, is negotiating to buy a 49-percent stake from partner the Blackstone Group at a valuation of $1 billion. That’s a significant drop from the $1.5 billion the 1970s-era tower was valued at in 2018 when Brookfield sold the minority stake to Blackstone, which at the time was one of the most expensive deals ever in the Financial District.

The deal is the latest sign of stress for older office buildings, and an acknowledgement from two of the biggest players in the space of just how far values have fallen in the past few years. In early 2020, Brookfield and Blackstone were looking to sell the building for $1.6 to $1.7 billion. No deal materialized, though, and the onset of the pandemic and the shift to hybrid work have since seriously impaired office values. Brookfield disclosed last month it had defaulted on $784 million worth of loans backing two of its trophy office towers in Downtown Los Angeles. The firm chose not to extend the maturity date on the loans — one on the Gas Company Tower at 555 West 5th Street and the other at 777 South Figueroa Street — when they expired Feb. 9, which triggered the default.

Blackstone’s 10-building, 1.5 million-square-foot Hughes Center office campus in Las Vegas, meanwhile, recently saw its $325 million CMBS loan sent to special servicing after the private equity company said it was unable to fund future monthly payments. A spokesperson for Blackstone told the Observer the 2013 investment was “substantially written down beginning three years ago due to the headwinds facing U.S. traditional offices.” The spokesperson added that U.S. traditional offices represent only 2 percent of the company’s global portfolio. The company last year bought a 49 percent stake in Brookfield’s One Manhattan West at a $2.9 billion valuation.


The amount of office space on the sublease market in Manhattan surpassed its pandemic-era peak last month and is higher than at any point since 2008. Corporate belt-tightening — especially in the tech sector — has led many companies to see if they can recoup some real estate costs by finding a taker for excess space. Already this year, the Winklevoss twin's crypto firm, Gemini Trust Co., has put 51K SF of its office on Park Avenue South up for sublease, and this month, Roku started marketing a quarter of the 240K SF office deal it signed last year at 5 Times Square. There was roughly 24M SF of sublease availability in Manhattan at the end of February. By the end of this month, he expects that number to hit 25M SF, which would be "a two- or three-decade high," he said.

Manhattan currently has 93M SF of office availability, which is a 75% increase since March 2020, which found that nearly 22M SF of that availability was sublease space, a number that is only set to increase as tech companies like Twitter and Amazon are expected to add space to the market. Tech is far from the only sector reconsidering previously signed leases. For the past 18 months, Pfizer has been seeking a long-term subtenant for over 150K SF of its upcoming 800K SF headquarters at The Spiral. The pharma giant's 20-year lease with developer Tishman Speyer kick-started construction of the 2.85M SF tower, which is expected to wrap up in the first half of this year.

Subleasing is part of any healthy office market, and many companies sign for larger spaces than they need, then sublease a piece on a short-term basis while they grow. The key factor driving those deals is location, experts said. More sublease space has become available in Lower Manhattan than Midtown, which is seen as more accessible, and streets that are a few long blocks from a transit hub are performing demonstrably worse than towers like One Vanderbilt, which sits atop Grand Central Terminal and is nearly fully leased at record rents. But office owners looking to backfill space in Class B and C properties will face increasing downward pressure on pricing as they compete with tech companies making an unexpectedly robust appearance to the sublease market. Class B and C owners that can’t afford to refinance or upgrade will face challenges, but when that reckoning comes and which owners get hit is yet to be seen.


bottom of page