NEW YORK CITY–Scott Rechler has made good on his vow earlier this year to “give the keys back to the bank” on older office buildings owned by RXR Realty but now considered “obsolete” by the company, one of the largest office building owners in NYC.
RXR, which stopped making payments in December on a $240M loan backed by 61 Broadway, a century-old 33-story office building in Manhattan’s Financial District, defaulted on the loan when it came due on May 1.
A lending syndicate led by Aareal Bank has tapped JLL to solicit bids for the loan, a senior loan that originated in 2019. To facilitate the sale, RXR has agreed to hand the property back in July through a deed-in-lieu of foreclosure that will facilitate the sale of the building, Green Street reported.
The tower at 61 Broadway—considered a crown jewel of the Financial District when it was built in 1914—is 59% occupied with a weighted average remaining lease term of 4.2 years.
The sale of 61 Broadway may establish a benchmark of how much distressed properties in a distressed market—according to NYC, half of Manhattan’s 450M SF office industry is under water—will fetch, meaning how far their valuations have dropped.
RXR, in any event, won’t be losing any money on the transaction. According to Rechler, the company has already recouped its equity in 61 Broadway, which RXR acquired in 2014 for $330M. In 2016, RXR sold a 49% stake in the building China Orient Asset Management, increasing the value of the property to $440M.
In 2019, RXR and China Orient refinanced the property with $325 million of debt. Aareal, acting on behalf of a lending group, structured $240 million as senior debt and another $35 million as senior mezzanine debt. SL Green Realty also originated a junior $50 million mezzanine loan.
According to marketing materials, 61 Broadway underwent major renovations in 1985 and 2019, with the latter upgrade including updated heating and air conditioning systems, bathrooms and common corridors. The building includes ground-level retail space.
In February, Rechler signaled in a bombshell interview with the Financial Times that RXR was preparing to halt debt payments on several older Manhattan office buildings and “give the keys back to the bank.”
After what the company described as an “exhaustive” review of its office portfolio, Rechler told FT that RXR has concluded that an unspecified number of these assets no longer make economic sense—Rechler called them “obsolete”—in a post-pandemic office market driven by a flight to quality in new Class A buildings and hybrid work that is emptying out older buildings.
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.
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.
Earlier this month, NYC’s two economic development agencies declared that more than half of Manhattan’s 450M SF office industry is “underperforming” and unveiled a new incentive program designed to spur renovations of aging buildings.
The New York City Economic Development Corp. (NYEDC) and the New York City Industrial Development Agency (NYIDA) jointly announced the Manhattan Commercial Revitalization Program, which offers property tax abatements of up to 20 years and a tax exemption on construction materials to building owners who renovate aging office buildings south of 59 Street in Manhattan.