Hybrid work leaves offices empty and building owners reeling | 60 Minutes

looking for signs the US economy can continue to Stave off a recession avert your gaze from commercial real estate city office buildings are in trouble for a century the towers have been propped up by two pillars one workers filling the buildings all week two money flowing freely in the form of loans to borrow buy and build those days are over as hybrid work hardens from Trend to New Normal office occupancy rates have hit alltime lows meanwhile interest rates have spiked to Historic highs and now the mortgage comes due $1.5 trillion in commercial real estate loans expire in the next two years it's enough to make you rethink the future of cities we chrisc cross Manhattan talking to players big and small about a sector Rock to its foundations the story will continue in a moment what is New York City without its Skyline monuments to Commerce standing proudly shoulder toosh shoulder more office space than any city in the world but Peak inside all this vertical real estate and there's a fundamental question where is everyone more than 95 million square ft of New York office space currently unoccupied the equivalent of 30 empire state buildings this building had a lot of law firms had some government Scott reckler is CEO of rxr a New York real estate company with more than 20 billion in Holdings we walk through his property at 61 Broadway near Wall Street every other floor half the building lies empty I think this is an existential moment you know I call it crossing the chasm what's the chasm specifically this postco world of higher interest rates the changing nature of how people work and live we're not going back to where we were it's a different world and it's going to be turbulent it already is the return to office has stalled out Fridays are dead Mondays are aren't much busier as tenants shrink their office footprint office landlords are confronting the fact that some of their buildings have become obsolete if not worthless ever the pragmatist reckler decided not to throw good money after bad at 61 Broadway and defaulted to his bank on a $240 million loan I could see people saying it's a lot of money how did he sleep last night we invest a lot of equity if it works we make a lot of money if it doesn't work the lender um can take over the building you got to face reality right reality is coming your way the reality is the price of Office Buildings is tanking as much as 40% since the pandemic uptown at Columbia business school Stan Van Newberg a professor of real estate has modeled out the impact of hybrid work on pricing and calls it a train wreck in slow motion and this is just a beginning and the reason is just a beginning is because there's a lot of uh office tenants that have not had to make an active space decision yet do I want to renew this space do I want to vacate maybe I sign a new lease for half as much space this is what tenants have been doing for the last three years so when you take all of those current and future declines of cash flows into account we end up with about a 40% reduction in the value of these offices consider this office building near Penn Station one of a handful of sales in the city last fall built in 1920 and showing its age eight empty floors with a 99 cent store on the ground level cocoa butter is 80% off real estate Partners Tony Park and a drawer told us they'd been eyeing that building for years and pre pandemic offered the owner $80 million they didn't get very far he doesn't answer he didn't even answer you guys he do answer yeah we didn't have his attention at all so what do you think happened the whole building is now empty in September Park and drawer got the building for less than half their original offer and they have planned to convert the place did you ever think of just keeping it as an office building no never you laugh anything that is not an office anything that is not an office miss hallowe good morning so much for the prestige Hollywood has for decades conferred on Manhattan office life suffice to say they didn't set Mad Men in succession above a 99 Cent Store it has gotten weird okay it has gotten very weird but you might set a glitzy office drama in a place like this one Vander built part of a crop of so-called trophy buildings one resilient sliver of this changing real estate market to the very very top Mark holiday is CEO of SL Green New York's biggest office landlord also the 60 Minutes landlord he took us to the top of his new $3 billion skyscraper probably see half halfway to Philly from here yeah oh for sure that's from here that's a chipshot there's a view but more critically the building is connected underground to Grand Central Terminal for an e commute trophy buildings reflect a flight to Quality corporate tenants with Deep Pockets flocking to a Medi Rich Towers this one includes two Michelin star restaurants all of it designed to motivate employees to leave their homes one Vanderbilt is 99% occupied a hedge fund here a consulting firm there but when we talked to him in September holiday was obsessing over occupancy across all of SL Green's properties our goal was 92% for this year now we've got some work to do uh to get there your occupancy rates now are about 89% you said ideally about 92 would be great I could see people saying it's two three points difference what's the big deal no and when you have 30 million square feet like we do every 1% is a big difference you know we pride ourselves in in keeping our occupancies historically at 95% and above do you accept that work from home is a fundamental shift in in how we work and that it's here to stay it's one of the biggest societal problems we're facing right now is work from home I think that it's bad for uh business it's bad for cities it's bad for people it's also been bad for his stock price down 50% since the pandemic a culture of smooth talk and sharp elbows commercial real estate is a world built on loans big ones and the assumption that those loans will be refinanced with little friction every 5 to 10 years not any more the bank will look at that building and say well I used to be willing to lend you $80 million against this building but I don't think that building is worth as much anymore as it used to be so maybe today I'm only willing to lend you $60 million against that same building right and now the office owner got they got a choice to make you know do I come out of pocket for that $20 million difference or do I walk away the rubber meets the road when it comes time to refinance right and to make matters worse interest rates are now much higher interest rates have essentially doubled so the cost of that new mortgage even if you can get one will be much higher what happens when that cost becomes too high pursuant to the terms of sale on the lawn in front of a Manhattan Courthouse we saw something you won't see on a double-decker bus tour 9 million 6t a mortgage foreclosure on an office building 10 million going once 10 million going twice here no one in the crowd is willing to outbid the bank holding the loan on the building and if the bank rep doesn't look thrilled it's because he has an empty office building dragging down his balance sheets Professor van Newberg has been meeting with captains of industry and the Federal Reserve on this very point so commercial real estate is a huge part of the book of business of your typical bank and I'm talking mostly about these smaller and medium-sized maybe Regional Banks they have a lot of exposure that is their bread and butter activity about 30% of all their loans are commercial real estate loans and here we are sort of seeing weakness in office is that it's something like that we have never seen before and Banks need to come to grips with that are you comfortable calling this a crisis I think we're at the beginning there's a potential crisis here in December Nationwide office loan delinquency rates crowded 6% almost four times what they were a year ago but banks have been reluctant to write down those losses you know Ender David Aaron from Maverick real estate a firm he and his partner founded after the 2008 financial crisis their specialty buying distress debt on the cheap avaram keeps tabs on the debt on every office building in the city he says New York is a wash in billions worth of commercial real estate loans at risk of not being paid we know that there's this buildup of bad debt in the system but it's not being dealt with just yet and it's in large part because the banks have been kicking the can down the road as best they can trying to push this off as far as they can what does that mean it me means that banks are entering into extensions on a lot of their bad loans which essentially uh change their classification from a non-performing loan a loan that's in distress to a performing loan a healthy loan even though they haven't received a pay down on the loan and the collateral value on that loan continues to drop extend and pretend that's right and it works really well when interest rates are low because the banks can just keep the status quo going but once rates are high it doesn't really work anymore a downturn in real estate made worse by bad loans contaminating Banks and potentially the entire economy Echoes of the global financial crisis of 2008 are hard to ignore but whether the trouble with Office Buildings ends in a simple pricing correction or becomes a systemic crisis likely there's pain coming not just for building owners and Banks but for cities themselves in the long run property taxes on those buildings will also Fall by 40% and these commercial property tax revenues are an important component of the budget of local governments which means less money for police departments trash collection and some people are going to decide that you know the quality of life has deteriorated too much and they want out and in fact that's what we've seen in the last three years about our largest 10 cities have lost about 2 million residents you're losing that tax base as well and now you're losing that tax base and now this cycle continues and we end up in something that we have called an urban Doom loop it's awfully quiet around here the urban Doom Loop sounds scary and it's making the rounds threatening cities Beyond New York Dallas Chicago to say nothing of San Francisco a question posed across the country especially given the housing shortage why not convert empty Office Buildings to Apartments some developers are the elevators here we standing at all Tony Park and aad drawer are are turning the former 99 Cent Store building into 77 units renting at market price developers we talked to say they simply can't turn a profit converting to affordable housing less than half of New York office space is zoned for conversion and even then it's not so easy we visited this residential conversion near Wall Street where developers from Van Barton group were making an end run around a city ruer that says you can't add to existing square footage what is this call this the void they call this the void a giant 30-story hole they cut through the middle of the building it's one of the tricks of the trade you take the center section of the office floor the part that doesn't get a lot of light and air seal it up and preserve that square footage so you can apply it somewhere more valuable say a penthouse residents may not even know it's here they'll never know maybe not but the void offers a larger lesson in Urban real estate where there's space there's potential this would be the tallest commercial building in the Western Hemisphere by floor for Scott reckler that means doubling down even in a down market near Grand Central he's lined up financing to build his own trophy building part office part hotel but for Professor van Newberg the reimagining can and should be far more ambitious a sweeping New Deal combining public and private money and I ideas for what to do with old office space it's no longer fit for purpose we got to redesign it you know more space for communities more space for artists maybe pickle ball courts or basketball courts there's lots of different uses for these buildings especially when you can buy them at at a depressed price if an Newberg gave us the term Urban Doom Loop he also gives off a certain optimism about the current point of inflection for all of human history humankind has been tied to to work where it lives we were farming the farms and we lived on our Farms we were working in the factories and living close to the factories we no longer have to live where we work and that's a very transformational idea and I believe Society is only at the beginning of realizing the full potential of that idea who wants to live in a converted office building from the 70s what would this floor have been cubicles at 60 Minutes overtime.com sponsored by FIS sir

Channel: 60 Minutes

Views: 1,051,966

Keywords: 60 Minutes, CBS News, hybrid work, office space, real estate, business

Id: TfUhykd1Ifc

Length: 13min 31sec (811 seconds)

Published: Mon Jan 15 2024