What a $1 deal says about America’s office market

The famous Flatiron building has been vacant since 2019. Around the corner, there’s work under way on a new office fronting Madison Square Park. But its next door neighbour, 360 Park Avenue South, has been empty since 2021. The building’s owners said it would be turned into condos.

The 20-storey building, which sold for $300m (£233m) that year, recently drew headlines after one of the owners handed over its 29% stake to one of its partners. Sales at Mr Yavrodi’s Taza Cafe amp; Deli, which have sunk 70% since 2020, tell a different story. About 20% of office space around the US was unleased at the end of last year. That number is forecast to rise over the next 12 to 18 months.

Property values have already plunged an estimated 25% on average across the country. One paper estimated that the US saw more than $660bn in value wiped out between 2019 and 2022. An estimated 44% of office mortgages in the country are in that position. The declines have coincided with a sharp rise in borrowing costs.

This has created incentives for even well-financed firms to walk away from their properties, as the value of their buildings sinks below what they owe on their loans. In the US, some 300 banks are at risk of failure due to the problem, according to a recent paper. The issues are especially acute among local and regional firms, some of which, such as New York Community Bank, have already seen shares swoon perilously as investors flee possible trouble. So far, many of the defaults have been strategic - reflecting shifting investment priorities rather than financial distress, says Thomas LaSalvia, head of commercial real estate economics for Moody’s Analytics.

But the coming months, when many. of the mortgages that were taken out before the US central bank raised interest rates will need to be refinanced, will prove a test. In New York City the city could face a shortfall of more than $1bn. In San Francisco the city is preparing to cut spending by 10%.

In Atlanta, the city has been forced to find new ways to raise money. In Dallas, more than a third of the city’s revenue comes from commercial property. Vacancies may cause issues in the next few years, says Mr Yavrodi. But declines in value will also create opportunities for new firms to come in, he says.

He says his neighbourhood is arguably among the best positioned to weather the transition. It is where many firms are ploughing money into upgrades. The tech firms that once drove demand in the area have retreated. Peter Turchin, vice chairman at property firm CBRE and the leasing agent for the building, says he’s still seeing interest from financial and legal firms.

The firm that sold its stake, which invests funds for the Canadian pension plan, declined to comment. Just 12% of Manhattan’s office workers are estimated to be showing up in person five days a week. So many firms are using free or heavily subsidised food to try to make back-to-office orders easier to swallow. After shrinking his workforce from 12 to five, Mr Yavrodi sees little anyone can do to address the problem.

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