Real estate investment trust Vornado Realty Trust signaled further challenges for New York’s commercial property market by reporting office leasing slowed in the past few months and a retail joint venture on a prime Fifth Avenue property defaulted on a $450 million mortgage loan.

On Dec. 21, Vornado’s Fifth Avenue and Times Square joint venture defaulted on the loan tied to the retail property at 697-703 Fifth Ave., Vornado said in its fourth-quarter earnings report. The joint venture is in talks with lenders regarding a restructuring, Vornado said, adding it doesn’t believe the discussions will result in further impairment losses on its investment in the joint venture. The property counts among tenants the luxury labels including Harry Winston and Blancpain, according to CoStar data.

“There are very few transactions on Fifth Avenue and Times Square,” Vornado’s Chief Executive Steven Roth said on a conference call Tuesday. “It’s still a sluggish and impaired market.”

As higher interest rates seized market activity and made it difficult to secure financing, the default is the latest to hit prominent developers. For instance, Brookfield’s downtown Los Angeles office REIT disclosed Monday it’s defaulted on office tower loans.

“The financing market remains highly constrained” because of the Federal Reserve’s move to raise interest rates, Michael Franco, president and chief financial officer of New York-based Vornado, said on the call, adding the default doesn’t have a significant effect on Vornado’s cash flow. The commercial mortgage-backed security “market remains largely closed. Market won’t thaw until the Fed ends its tightening cycle.”

Vornado swung to a fourth-quarter loss from a profit after it wrote down the value of its equity investment in the Fifth Avenue and Times Square joint venture by $595.9 million, $483 million of which relates to its common equity investment in the venture, the company said.

As of Dec. 31, Vornado owned a 51.5% common interest in the joint venture, which also includes other Fifth Avenue and Times Square properties, according to its annual filing. The remaining common interest is owned by a group of institutional investors.

Still, there are some signs of improvement in the market. Retail sales in New York have returned to pre-pandemic levels as tourism rebounds, Franco said. While retailers remain concerned about inflation and the economy, they are “starting to lock in given lower rents,” he said.

Vornado has or could lower rents for its expiring Times Square retail leases housing tenants such as Swatch and Levi’s. Franco said Vornado has finalized an agreement with Swatch to stay put at a lower rent and is expected to do the same thing for Levi’s when its termination option comes up.

“We are in active negotiations with those tenants as well as others,” Roth said. “The rents will be lower than in-place rents. We’ll retain the tenants but at lower rents.”

On the office leasing front, Franco said “activity is lumpier,” adding companies still “grapple with” the hybrid work policies of employees working just some days in the office.

Vornado’s share of fourth-quarter commercial space leased totaled 186,000 square feet, the lowest leasing volume in any quarter since the third quarter of 2017, Truist analyst Michael Lewis said in a report. That included 147,000 square feet of New York office space leased. The total also included New York retail space leased and the amount leased in theMart office and trade show complex in Chicago.

Vornado’s leasing scorecard comes as the office vacancy rate in New York has surged to a new record high of 12.7%, according to CoStar data.

Boston Properties Chief Executive Owen Thomas recently said “commercial real estate markets are in a recession,” Roth said on the call. “I wouldn’t quibble with that.”

Still, there are some encouraging signs.

Office tenants surveyed by Vornado have affirmed their commitment to stay in the city, Roth said. As frozen capital markets are making it “almost impossible” to build new developments, “constrained supply,” in the history of New York real estate, foretells “it will be landlords’ market,” he said.

In a sign of the flight to quality trend that has driven many of the major leases in the office market across the country, Roth pointed to hedge fund giant Citadel’s plan to master lease Vornado’s 585,000-square-foot tower at 350 Park Ave. and Vornado’s raising its return estimates on its Penn 1 and Penn 2 office redevelopments by the Penn Station transit hub.

“Quality products win today,” Roth said, adding the premium charged by new construction has gone up to $100 from $20 “not long ago.”

As hybrid work schedules are widely expected to be a new work norm, Vornado observed an office use pattern noted by many other landlords: The office-use rate is highest between Tuesday and Thursday.

“Friday is dead forever,” Roth said. “Monday is touch and go. … The world is coming back to normal slowly but surely. Every [company] board wants people back. Many of the people want to be back. … Some of the bosses have power. Others have no power. … Call me crazy but companies that embrace work from home will be left behind.”

Employees at Citadel, which Roth described as “at the head of the class,” for instance, go to the office five days a week, Roth said, citing Citadel’s billionaire founder and CEO Ken Griffin. Citadel’s return-to-office rate is a “significant differentiator” to its outperformance, Roth said.

As a chorus of developers have announced their interest in bidding for a New York casino license, Roth said Vornado is still “mulling” and “studying” a possible bid but has yet to make up its mind. He also said Vornado’s interest in separating its Penn District development into a tracking stock remains “very much on the table.”