Will empty offices hurt the US economy?

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Ethan Wu (0:36)

Thank Pushkin.

It's Thursday, so at the FT's office in lower Manhattan, it's about two-thirds full here, but you come here tomorrow on Friday. And man, it will be an absolute ghost town. If you are a commercial office owner, that is a big problem for you. And in fact, if you're somebody that participates in the US economy, it might be a problem for you, too. This is Unhedged, the new markets and finance show for the Financial Times and Pushkin. I am reporter Ethan Wu, joined in the New York studio today by my boss, Rob Armstrong, a grizzled financial crisis and downturn veteran.

Rob Armstrong (1:15)

Hi, Ethan.

Ethan Wu (1:16)

Grizzled.

Rob Armstrong (1:17)

I don't know if I like grizzled.

Ethan Wu (1:18)

Veteran?

Rob Armstrong (1:19)

Yes.

Ethan Wu (1:20)

Is veteran an insult or a compliment? Wise. Seguecious.

Rob Armstrong (1:23)

Yes, not grizzled.

Ethan Wu (1:24)

Yes, not grizzled.

Well, Rob, today we're talking commercial property. And just to set the scene here, right? There's work from home. Everyone knows about that. Office attendance is way down, but there's two other problems for commercial property too. And one is this blistering increase in interest rates that we've seen in the US.

5% higher than it was a year and a half ago. And because offices are bought on debt, because you can't just pay in cash that you have in your wallet or on your balance sheet, you need to borrow money. An increase in interest rates makes that harder, more expensive to do.

On top of that, there's also tech and finance, which pay for a lot of office space. They're undergoing contractions right now. Everyone's heard about layoffs in these industries. It's not a great time to necessarily work at a bank or work at a major tech company. And that's having pressure on offices too.

The problem is though, it's hard to know where we are in that cycle. How much damage is work from home doing? How much damage are higher interest rates doing? Because transaction volume in the commercial property sector, it's down like 70 to 80%. And what that means is how much an office building is worth becomes kind of like a theoretical abstract question that you can't really answer with up to the minute data. You have to piece it together.

Rob Armstrong (2:39)

And even if the market was liquid, and there was lots of transactions, you'd also want information about what occupancy rates are in buildings in Midtown Manhattan and downtowns all across the country. You'd want to know which buildings were making their loans and which were falling behind with their banks.

You would want to know how rent renegotiations were going, and we know this only in bits and pieces.

Ethan Wu (3:06)

But there were these two transactions in the office market that we wrote about recently. Both of these are New York examples, but I think there's a broader point in these two deals, which is that they represent something of a divergence between the high end of the commercial office market and the rest of it.

Rob Armstrong (3:21)

One of these transactions, Ethan, was near and dear to my heart, because it was 1336 Avenue, which was the FT's office.

Ethan Wu (3:29)

Is that right?

Rob Armstrong (3:30)

Yeah, I think we were on the, were we on the eighth floor? Anyway.

Ethan Wu (3:34)

This is why we have the grizzled veterans on.

Rob Armstrong (3:36)

So listeners will remember this building because it had the big pink FT sign. It's on Sixth Avenue, up near the Museum of Modern Art, and it was a good enough looking building. It's a beautifully located building in the heart of Midtown, near Central Park.

However, the inside was a wretched cubicle warrant with low ceilings and the desks were closed together, and I remember it not smelling that great, although maybe I'm making that up. And that building recently sold for a third less. Am I getting that right?

Ethan Wu (4:11)

I think it's a third less than its 2006 price, and that's nominal terms, not inflation adjusted.

Rob Armstrong (4:15)

Yeah, so that building has gotten a lot less valuable, and that is kind of shocking. Even just looking at where it is, you would think that wouldn't have happened, whatever the inside looks like. The contrast case is 245 Park, which is a very glossy new building, and that recently sold at a tiny little markdown from its price of a few years ago. And the news of that sale to a group of Japanese investors, I think, was greeted with euphoria in the industry, because it was like, oh, we get to live.