Vornado Realty Trust Chairman and Chief Executive Steven Roth said nearly 60% of New York’s properties are "well past their sell-by date."

Of New York’s total 422 million square feet, 245 million is “old, tired, obsolete," Roth said in his closely followed annual shareholders letter, adding that means the New York developer is competing in a “much smaller market of 177 million square feet.”

As higher interest rates have frozen deal flows and seized up financing, Roth also expects Vornado will “have a few [financing] workouts to deal with over the next couple of years.”

There’s “big trouble in debt markets,” he said. “Office towers, nationwide, are the common enemy. Most office loans will have to be restructured and extended as they aren’t refinanceable at their current levels. Defaults and ‘give back the keys’ have already started, led by some of the industry’s largest landlords.”

Still, against that backdrop, he said he and the Vornado team are “optimistic and excited” and see opportunities to participate in what he described as “this death and rebirth cycle.”

Why? Most lenders don’t really want keys back to those properties and want to get defaulted loans off their books, and that means they’ll eventually unload those holdings “at whatever discount,” he said.

“There is no new debt available for office, so no buying, no selling, no new builds,” he said. “When a loan comes due, the only real refinance option available ... is from the existing lender. There is a mere trickle of equity at deal-stealing prices. How long and deep this all goes is unknowable. So, coming out of the cycle, many good but overleveraged buildings will change hands, will be de-levered, and the second or third owner will enjoy a much lower basis.”

He added that “we are clear-eyed and realistic about the near-term financing market challenges,” he said. “It is not pretty when 3% debt rolls over to 7%, or even up to 10%. … Office, in the public markets, is on offer at … a more than 50% discount from ‘normal’ pricing of several years ago.”

For New York, Roth expects “frozen capital markets and sky-high interest rates have and will continue to shut down new builds and tenants’ normal growth,” which he said, “will lead to a very tight New York City office market.”

He pointed to the example of Manhattan’s corporate headquarters-heavy Park Avenue having an office vacancy rate of under 7%, with rents going from what he described as a range from the mid-$80s to $120s.

New York’s office vacancy has reached what CoStar data shows as a record high of 14.2%.

In another example, Vornado’s Penn District development, with 9 million square feet surrounding the Penn Station transit hub, is what Roth called “the highest growth opportunity” in Vornado’s portfolio. Combined with Related Cos.’ Hudson Yards and Brookfield’s Manhattan West developments, he said the three combined, now totaling 36 million square feet, is “the fastest grower” in town. “There will always be Park Avenue but for an increasing array of occupiers, Manhattan is tilting to the south and to the west,” he said.

He also reiterated the pandemic-driven work-from-home or work-from-anywhere trends don’t pose an “existential threat” to the office sector.

“While companies are still grappling with hybrid work policies and the right level of flexibility, overall sentiment is shifting toward pre-pandemic norms,” he said, adding Vornado is seeing an increase in office activity throughout its portfolio, particularly Tuesday through Thursday. Utilization rates are about 65%, with the momentum “improving month by month,” he said.