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New York office landlords entered 2024 believing interest rates would fall and relieve some of the pressure caused by persistently weak demand for space. Now that rates will evidently stay higher for longer, these owners are facing double-digit increases in borrowing costs while asset managers slash their real estate exposure.
At SL Green, Manhattan’s largest commercial landlord, interest expense is expected to increase by 17% in 2025, Evercore ISI said in a new report. A 15% increase is forecast for Vornado Realty Trust, the city’s second largest office landlord. Higher borrowing costs are expected to take a more than $50 million bite out of earnings at both Manhattan office owners. Evercore anticipates SL Green’s funds from operations will decline by 30% in 2025, and Vornado’s by 8%.
“We expect heightened attention across the board towards managing against [rate exposures],” Evercore analyst Steve Sakwa wrote, “as they are largely impacting the earnings potential.”
Borrowing costs are typically a landlord’s biggest cash expense. They are rising when demand for office space remains muted while vacancy rates in many Midtown and Financial District buildings continue to slowly rise.
In light of deteriorating fundamentals, money managers are heading for the exits, a Bank of America report Tuesday showed.
Among asset managers, 28% are net underweight the real estate sector this month, a stark decline from April’s figure of 15%, according to BofA’s global fund manager survey released Tuesday
“Real estate collapsed…[to] the lowest allocation since June ‘09,” said the bank, which between May 3 and 9 surveyed 245 investors who manage $642 billion in client assets.
Years ago, sensing that rates could increase, SL Green and Vornado both made arrangements with lenders to mitigate their exposure. Unfortunately, some of those arrangements are winding down.
This year caps expire that limit $745 million worth of rate exposure for SL Green and the loans will move to a higher rate. Interest-rate swaps that help Vornado hedge $840 million worth of rate exposure also burn off this year, Evercore said, putting more pressure on interest expenses.
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Aaron Elstein , 2024-05-15 20:34:25
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