A Bleak Outlook for Manhattan’s Office Space May Signal a Bigger Problem (2024)

New York City’s biggest corporate landlords had it great for years — benefiting from a booming economy in a city where companies clamored to set up offices and from low interest rates that buoyed the economics of an industry built on debt.

Those days are over. Three years into the pandemic, floors of office buildings throughout Manhattan have been emptied by tenants who have shrunk their footprint and employees who work from home.

Now, there is another problem.

Rapidly rising interest rates have intensified concerns that the New York City office market, the largest in the country and a pillar of the city’s economy, could be at grave risk. That one-two punch could be worse than anything corporate landlords have experienced before, experts on the sector say, leading major banks and real estate analysts in recent weeks to warn that languishing properties along with falling property values and higher borrowing costs could increase the odds of a recession nationally and a budget crisis for the city.

More than two-thirds of all commercial real estate loans are held by small- and medium-size banks, prompting concern that regional banks might be unable to withstand a wave of defaults if landlords cannot pay off loans. Some analysts have forecast a dim future for city centers, likening the crisis to the slow death of many American shopping malls.

In the latest snapshot of the nation’s most significant office market, New York City’s largest office landlord, SL Green Realty Corporation, revealed that more of its properties lost tenants during the first months of 2023. Across its 25 buildings, including some of the city’s premier office buildings, 90.2 percent of the space is occupied, down from 95.5 percent at the start of 2020.

The consequences extend far beyond the balance sheets of the city’s landlords, who borrowed billions at low rates in the years before the pandemic to build, buy and upgrade offices and attracted marquee tenants like Meta and Apple to the city.