JLL has tracked how the total market valuations of office buildings in New York City have seen widespread declines when comparing their value in the second quarter of 2023 to each building’s last sale price, a critical metric for lenders and borrowers.
The change came as a result of the impact of rising rates, volatility in the banking market, and a prolonged work-from-home environment that has softened the leasing market, says Andrew Lim, director of research in New York for the Chicago-based advisory.
The numbers are not surprising given the broader macroeconomic picture. “When you are talking about these statistics, it is a general reflection of the market, rather than individual stories about particular buildings,” he added.
The firm tracked three key metrics it believes will be valuable for borrowers and lenders as they assess what is next for trophy, class A and class B office buildings. JLL found that 45 percent of these offices, or 561 buildings, are valued at levels that are lower than their previous sales price.
“When we first ran these numbers at the end of the first quarter, it was concerning, but not entirely surprising. We know the market has been in a difficult position for a couple of quarters, since interest rates started to rise and we had a mini-banking crisis,” Lim said.
“This quarter’s results suggest that the current estimates of the value of buildings perhaps better reflects the state of the market. If you look at the last sale or financing, those prices took place in a market that was in a much different, higher place in the years leading up to 2020.”
JLL also found a significant difference between the current and last sale price among devalued assets, with Lim estimating this number at about $38 billion. “Market-wide, there has been a net total loss in value of $4.9 billion across all existing trophy, class A, and class B buildings,” he said.
Lim added, however, that one thing to keep in mind is that prior to the pandemic, property values were driven up by a strong leasing market fueled by tech companies, particularly in 2018 and 2019.
Finally, JLL found that 112 existing trophy, class A and class B office buildings, totaling about 33.4 million square feet, have loan balances greater than their most recent valuation. “Even if a building is performing well, it might have a lower value. But there are also buildings where there are significant challenges and have had vacant space on the market for some time,” he added.
JLL also found that vacancies are highly concentrated. One percent of all trophy, class A and class B buildings comprise more than 13 percent of all vacancies in the city. “We have a vacancy rate of 16.7 percent, or about 79 million square feet, and almost 11 million square feet of that space is concentrated in just 13 buildings,” Lim said.
Lim’s take is that while the value loss is more pervasive than it was during the first quarter, the losses are not as stark. “The net lost value across all buildings dropped from over $10 billion to $4.9 billion while the debt exceeding market value rose from 73 buildings, totaling more than 15 million square feet, to 112 buildings totaling 33.4 million square feet, in line with above trends showing that value loss is now more widely distributed and not as concentrated in particular buildings,” he said.