Developer RXR and investment giant Ares Management are working together on a joint venture with an initial $500 million investment that can be scaled up to $1 billion to purchase New York's distressed office properties, a real estate type they say is now ripe for a comeback.
New York-based RXR, with an office portfolio that includes properties such as 75 Rockefeller Plaza and the Helmsley Building by Grand Central Terminal, and Los Angeles-based Ares, with a website that lists $395 billion in assets under management, will invest $500 million initially that could rise to $1 billion, an RXR spokesperson told CoStar News.
The partners will seek out top-tier office properties in New York that are well located and have some amenities to respond to tenant preferences, the spokesperson said. In so doing, they will join other investors looking for high-end real estate instead of less expensive buildings in what's known as the flight to quality in the wake of the pandemic.
The capital to be invested is intended to be flexible, RXR and Ares spokespeople told CoStar News separately. It can take shape in the form of traditional equity, debt, and/or preferred/structured arrangements, Ares said.
RXR’s Senior Executive Vice President and Senior Managing Director of U.S. Investments Frank Patafio is the portfolio manager overseeing the joint venture for RXR, the RXR spokesperson said. The Financial Times earlier reported the news.
The move by RXR and Ares comes as New York, the top U.S. commercial market, hurts from record-high office vacancies since the COVID-19 pandemic made hybrid work schedules a permanent work fixture. Uncertainty about the economy also has led to a reduction or pause in activity by the tech sector, which had been a big driver of Manhattan leasing, while higher interest rates have seized up financing and investment.
“Office gets painted with an overly broad negative brush,” RXR Chief Executive Scott Rechler told CoStar News in an emailed statement. “We are still strong believers in the office market and we believe there is opportunity in this environment.”
Indeed, the broad office sector woes aside, the flight-to-quality trend has painted a sharp divide between the haves and have-nots in the office sector, driving up a record number of $100-plus-per-share-foot rent deals in the city last year, according to the brokerage JLL. A recent New York City Department of Finance study showed trophy towers led the increase in the city’s office market value despite what’s perceived as a downturn in the market.
“The office market isn’t dead,” Ares said in an emailed statement to CoStar, adding the venture will “provide important funding and resources for office building owners to improve and modernize their buildings for success.”
Well-located, top-tier New York office buildings are “well positioned to attract tenants and outperform as society continues to emerge from the global pandemic,” Ares said.
Future ‘Clarity’
The move also signals a reckoning of sorts by property owners and alludes to the potential opening of investment activity that’s been curtailed by higher borrowing costs and by banks seeking to limit their exposure to the sector. It comes as the Federal Reserve has signaled interest rate cuts may be in the offing this year, boosting market sentiment.
“We have clarity as to where rates are,” Rechler said. “We have clarity about the future of offices, and which buildings are going to be competitive, and we have a capitulation, I think, to a recognition that values aren’t just bouncing back like they did in ’08. There’s a reset and that this is more permanent.”
Other investors also see potential opportunity to capitalize on the market dislocation.
Blackstone Group, the world's largest commercial property owner, has said that it has plenty of so-called dry powder to spend and has said it will lend more among other investments to take advantage of the market dislocation.
Erin Patterson, global co-head of research and strategy at Manulife Investment Management, recently told CoStar News that there's "a general shift in sentiment" in the market "where sellers will start to come to market and that is what leads to price discovery.”
A CBRE real estate market report for 2024 said secondary office properties have already seen “sharply lower pricing,” thanks to the hybrid work arrangements and rising vacancies.
“Compelling opportunities will emerge for commercial real estate investors in 2024, as high interest rates and an economic slowdown — perhaps even a mild recession — lead to bargain pricing for certain assets,” CBRE said. “Once interest rates begin to fall and inflation eases further, rehabilitation or conversion of underperforming office buildings to other uses will become more attractive and financially viable.”