Nothing demonstrates the plight of commercial real estate today more than the sale of this mid-sized building in Manhattan. Bought in 2006 for $332 million, 135 West 50th Street in Midtown sold for a mere $8.2 million last Wednesday, July 31, 2024.
It was the most significant drop-off in commercial real estate property value in New York since the pandemic.
This sale has led real estate companies and multinational corporations holding long-term leases in the city to reconsider their investment and exit strategies. Do they hold on to the lease, sell it or spend money on expensive renovations?
Remote work driving the collapse
The latest data shows that, on average, only 56 percent of workers visit their offices during the weekdays. Only 11 percent are back full-time, while 89 percent have various hybrid and remote work schedules.
That is a horrific sign for commercial real-estate landlords. If demand does not pick up, occupancy rates could plummet to a level unsustainable and prompt defaults and sell-offs.
Not much of a loss
However, UBS Realty Investors says the sale of the land beneath the property in 2019, at about $285 million, mitigated much of the loss. The new owner of the building, however, will have to pay the building’s monthly lease payments, which are set to increase every five years and do not expire until 2123.
With only 35 percent occupancy of the building, making payments to that lease appears particularly challenging.
Option to renegotiate the lease
New York follows the “freedom of contract” principle. This means that both parties to a contract have significant flexibility to renegotiate the terms of the contract. However, there is no automatic right to renegotiate a lease unless provisions for it are included in the contract.
Lessees can still try, however, as the prospect of default is more unpalatable to most landlords. Seeking legal advice to help renegotiate lease terms may be an option lessees can explore.