RXR: Time to Give Lenders Keys to Old Office Buildings

RXR Realty, one of the largest office building owners in New York City, has disclosed that it is preparing to halt debt payments on several older Manhattan office properties and “give the keys back to the bank.”

After what the company described as an “exhaustive” review of its office portfolio, RXR has concluded that an unspecified number of these assets no longer make economic sense in a post-pandemic office market driven by a flight to quality in new Class A buildings, according to a report in Financial Times.

“With some of those [office properties], I don’t think there’s anything we can do with them,” RXR CEO Scott Rechler told FT.

RXR is preparing for what it has decided is the most sensible path forward, Rechler said: “Give the keys to the bank—and you’ve got to be disciplined about it.”

Rechler said RXR has decided not to invest in its older buildings unless it can find a way to convert them to another use—most likely residential—or has determined in its evaluation that the asset can still prosper as a low-rent alternative to newer office buildings.

However, the RXR CEO suggested that time is running out for building owners to make the call on which of their older assets to hold and which to fold. “[You have to] be concerned, because they’re becoming competitively obsolete quickly. So, milk what you can get out of it, figure out what to do and move on,” Rechler told FT.

Rechler declined to specify how many office buildings owned by RXR the company’s review had deemed obsolete, but he estimated that as much of 10% of RXR’s office portfolio may be heading in that direction.

Office owners in large urban markets across the US are grappling with the same conundrum faced by RXR: older office assets that prior to the pandemic generated reliable, but not hefty, returns now are faced with what CBRE has called “structurally higher” vacancy levels that are the new normal in the post-pandemic environment.

With hybrid work patterns a fixture in the post-pandemic office market, many experts now believe the days of five-day-a-week occupancy are over. As Rechler put it, the hybrid work “genie is out of the bottle” and it won’t be going away.

“We’re a real estate company and we still let people work hybrid on Friday,” the RXR boss told FT. “So, it’s here to stay.”

This assessment stands in contrast to the glimmer of hope provided this week by Kastle’s latest office occupancy survey, which showed the 10-city occupancy average rising above 50% for the first time since the beginning of the pandemic.

In its new 2023 office outlook, CBRE said “the slow and uneven recovery of the US office market in the aftermath of the pandemic has created a deep divide between primary and secondary office buildings that will continue to widen in 2023.”

“Demand for the best buildings in attractive locations will support rent growth in top-tier office towers. By contrast, there will be a smaller pool of tenants interested in older office buildings,” the report said.

CBRE also has projected that office-to-apartment conversions will accelerate in 2023, encompassing more than 20M SF by the of the year, GlobeSt. reported.

Like several other leading NYC office developers, RXR is pushing its chips over to the high end of the table: spectacular new Class A towers loaded with amenities. The crown jewel of the company’s Class A offerings is under construction at 175 Park Avenue, a building that will become the tallest building in the Western Hemisphere when it is completed.

“We’ve had more showings for that building in the last 60 days then we’ve had for the rest of our portfolio,” Rechler told FT.

RXR also is spending $300M to renovate 5 Times Square so the building can compete with new office towers in Manhattan.