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How is commercial real estate doing in NYC?
The upshot: “I think all the loans that were originated over the last eight years are today underwater,” Okada said.
While there are parallels to the GFC in 2008-09, today’s crises are not as cataclysmic, he suggested. What’s more, homeowners will be safe once the economic tide turns, unlike those during the Great Recession with subprime mortgages that soon went underwater. “I would like to say that the monetary tightening aspect and the interest rates aspect brought down valuations,” he said. “I believe in the next three years, rates will come down. The Fed funds rate – not to zero but certainly half of where we’re at. If we’re at 4.85% or 5% funds rate today, we’ll be 2%, and 2.5% in three years. It’s just not sustainable because of Treasuries and US debt. Comparing this to 2008 to 2010, we did $1 billion in distress and the difference before March 10, banks could just kick the can down the road because there was no major, headlining FDIC involvement compared to 2008. That’s gone! Now, the FDIC will come and seize on a Sunday night – they will now work weekends. And now the question is the value of all mortgages on balance sheets.”
The exception is home mortgages: “Not single-family,” Okada said. “If you locked in a 3%, 3.5% — heck, even a 4%, 4.5% — you’ve got 20, 30 years left; you’re fine. Homeowners are protected because no-one wants to sell. Why would you sell? You bought a house for $700,000 that by now is worth $650,000 but you have a 2.95%, 30-year fixed mortgage. What are you going to do?”
The office market has not been as insulated, Okada said, due to a “perfect storm” of factors, as outlined in the study.
Office use and hybrid work
According to a survey conducted by the Partnership for New York City published in February, 49% of Manhattan office workers were present at the workplace on an average weekday. The study also showed that, on average, employers project 56% daily occupancy will be the “new normal” in Manhattan offices. Additionally, 77% of employers plan to adopt a hybrid work model, largely based on employee preference, with 55% of employees in the office at least three days a week. Data from Kastle Systems, which tracks security card swipes in office buildings around the country, showed that workplace occupancy in the New York metropolitan area was 48.7% on Feb. 1, 2023, up from 47.5% on Jan. 25, 2023.
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