The Real Cost of New York City Office Real Estate

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Every time the real-estate market crashes, people say, “This time is different.” When there’s distress all around, it’s hard to grasp how there could ever be an upside. But with the benefit of hindsight, you can see that if you’d had enough money when things got bad, you could have made a killing by taking the other side of the bet. Let’s go back to 2009. There was calamity as far as the eye could see: bank bailouts, paralyzed credit markets, a toxic heap of mortgage debt crushing the world economy. Scott Rechler, having fortuitously sold his family’s real-estate company at the top of the market to a competitor for $6 billion, decided it was a good time to go shopping for office buildings. After raising more money from sovereign wealth funds, other institutional investors, and wealthy private individuals overseas, he went on an opportunistic buying spree. Over three years, he spent $4.5 billion on Manhattan office acquisitions. By 2020, his company, RXR, was a major office landlord with more than 22 million square feet of space in the city.

Today, three years after the pandemic emptied office buildings nationwide, Rechler has been forced to reckon with the possibility that the buildings that were worth so much not so long ago may now not even be worth keeping. Corporate tenants are typically locked into multiyear leases, which guarantee stability in the commercial real-estate market for a time. But every month, more leases expire, giving tenants an opportunity to rethink their space, and every day, employers are staring at empty desks. Many companies, which had been trying to squeeze more workers into less space for years, are not renewing. That leaves an office landlord facing hard choices. What should Rechler do, for instance, with 5 Times Square, a million-square-foot building that 20 years ago was a gleaming centerpiece of 42nd Street’s revival? After the departure of its longtime anchor tenant and major renovations, it’s currently close to empty.

Not long ago, real-estate industry leaders were urging the city’s workers to return to their office buildings. Rechler told me in 2020 that it was a “civic responsibility.” They’ve since surrendered to the changed reality. Sometimes tenants are downsizing and upgrading to more expensive spaces; sometimes they are economizing under the guise of offering flexibility. From the landlord’s perspective, motive hardly matters — space is space, and it’s got to be rented. Add in sharp hikes in interest rates, which make refinancing a huge commercial mortgage a potentially ruinous proposition, and you have a crisis that threatens not just the solvency of office buildings but the loans that are attached to them and the banks that hold them and, by extension, the whole economy.

“We’re crossing a chasm,” Rechler told me when I visited him at his office at 75 Rockefeller Plaza in early June. More than any of the city’s other major landlords, he’s been warning of what he calls a “slow-moving train wreck.” Like it or not, everyone suffers if banks collapse. And if you are a New Yorker, you have a great deal at stake in the market because of the enormous public revenue offices generate — 21 percent of the city’s property-tax levy — money that goes to pay for schools, public housing, fire trucks, pensions, parks, and so much else that makes life in New York tolerable.

According to Cushman & Wakefield, Manhattan’s office-vacancy rate is around 22 percent, the highest recorded since market tracking began in 1984. When you include sublet space, more than 128 buildings in Manhattan currently list more than 200,000 square feet of space as available for lease, according to data from the firm CoStar. The available space in these buildings alone amounts to more than 52 million square feet: the equivalent of more than 40 skyscrapers the size of the Chrysler Building. Certain areas and building types are particularly endangered — the Garment District lofts once favored by tech start-ups, the generic glass gulch of Third Avenue in the 40s and 50s — but the pain is widely distributed. Many large property owners are now performing triage, trying to determine which buildings are still worth anything like what they paid for them. In Rechler’s case, this reassessment has taken the form of a process he calls “Project Kodak,” after the once mighty film-and-camera company. He classifies buildings that are worth saving as “digital.” The duds he deems “film.”

Rechler, 55, is a bald, blunt real-estate dynast. He comes from a Long Island family that turned a small fortune made by his grandfather — he patented the folding aluminum beach chair — into a very large one, mostly by building industrial and office parks in the suburbs. When he was in his early 30s, Scott pushed the family company into Manhattan real estate before he sold it in 2007 to SL Green Realty Corp., which is now Manhattan’s largest commercial landlord. He took his peak-of-the-market profits and set out to build RXR on his own. Like any successful commercial-property owner, he has hedged his company’s risks by partnering with other real-estate firms, spending other people’s money — in his case, mostly from overseas investors — and selling off bits and pieces of his portfolio at advantageous moments.

Rechler said he began Project Kodak from a position of relative strength, which has allowed him to be cold-blooded when it comes to culling the buildings he owns. Of course, he would say that: Commercial real estate is a bluffing business, so it is rare for its players to admit they are in trouble. All the big landlords — SL Green, Vornado Realty Trust, Brookfield Properties, the old real-estate families — are facing the same problem of vacancy and shrinking demand. Where Rechler differs from the rest, though, is in his relative candor about the consequences. “Obviously, when we lose money, it hurts, and in many of these cases we will lose money,” he said. “You need to rise to the opportunity and re-create value.”

Rechler casts himself in the mold of businessmen like Nelson Rockefeller, Felix Rohatyn, Mike Bloomberg, and Dan Doctoroff, who have taken charge in times of distress, at least according to their own mythology. “There’s been a void of leadership,” Rechler told me. Under Governor Andrew Cuomo, Rechler played an influential role on the board of the Port Authority of New York and New Jersey, and he later served as the chairman of the Regional Plan Association. His desk is equipped with a ring light and a microphone for his frequent appearances on podcasts and CNBC, in which he pleads for action from regulators and policymakers. He speaks against a backdrop of graffiti art — a pair of pieces by Mr. Brainwash, collaged images of road signs and Superman and uplifting spray-painted slogans (FOLLOW YOUR DREAMS … NYC IS BEAUTIFUL).

Rechler also sits on a board that oversees the Federal Reserve Bank of New York and has been outspoken about the possibility of economic “contagion” emanating from distressed commercial-real-estate debt. Rechler predicts that within two years, there will be “500 to 1,000 fewer regional banks” owing to failures and forced consolidations. He has been advocating, with some success, for action from banking regulators, who can influence lenders’ decisions when it comes to troubled loans. He wants lenders to loosen up the credit markets, which would benefit the industry in general and Rechler in particular, though his self-interest doesn’t make him wrong. “Some people accuse Scott of speaking his own book,” says one of his real-estate competitors. “But what he says is right on the money.”

“I think raising the alarm is important,” Rechler said. “Government has been really good at responding to crisis. They’ve been really poor at proactively trying to prevent crisis. So we could wait three, four years until our tax revenues are down 20 or 30 percent, and our transit system once again is broke and falling apart, and we have crime on our streets and homelessness in these dark areas where we have vacant buildings, or we could try to get ahead of the game.”

Rechler is confident that, on the other side of the agony, there will be new opportunities for his business and for the city. “I was with Mike Bloomberg yesterday talking about this,” he said. “How anytime anyone bets against New York evolving, they lose that bet.” An inherent part of evolution, though, is elimination. Some real-estate companies will not survive the crisis. Office buildings will end up demolished. A group of people who have long owned the city, both literally and politically, could end up making less and mattering less. This time might really be different. That may not sound like a tragedy; few New Yorkers miss their sweaty daily commutes, their crammed open-plan galleys, their plastic-packed salads. But what is this city if its skyline is now obsolete?

Let’s start excavating the numbers. In normal times, Rechler said, making a value assessment is more straightforward. The industry’s key metric is a figure called the “cap rate.” To understand the cap rate, you have to think of an office building the way a real-estate investor does: not as a steel-and-glass object but as a snowcapped mountain that creates a river of cash. To calculate the cap rate, you take the cash flow and subtract expenses. Whatever is left is net operating income. Divide that by the building’s market value as an asset, and you get its yield, expressed as a percentage: the cap rate. At the moment, because there are few transactions outside distress sales, it’s hard to calculate a building’s underlying value. If you don’t have a denominator, you can’t figure out the cap rate.

“No one really knows where these values are,” Rechler said.

Since the mathematical method of valuation is broken, Project Kodak involves a more complex and — at least in Rechler’s description — subjective analysis of all 17 buildings in his New York office portfolio. It takes into account factors like activity, as measured by cell-phone tracking and security-card-swipe data, and the quality of amenities. Brokers have been advancing the hypothesis that the market is seeing a “flight to quality,” in which tenants are relocating to buildings that offer enticements like cafés, gyms, yoga studios, and meditation pods. Some spots are more adaptable to the office-as-spa concept than others. “We look building by building,” Rechler said. “What’s the quality of the tenant and the demand? And then, you know, can we fix the capital structure?”

That last factor — the existing debt — weighs heavily. But before he gets to the loans, Rechler wants to know whether the buildings are even capable of competing.

“We have broken it up into sort of a trifurcation of the market,” Rechler said. “There’s the new-construction class.” This includes Hudson Yards as well as projects like SL Green’s skyscraper One Vanderbilt and all the other supertall office towers now underway or proposed around Grand Central, one of which RXR is planning to build. “That market is in a market by itself,” Rechler said, “where tenants that want to be there are still willing to pay $150, $200 a foot.”

If you’ve got a trophy, you’re keeping it. The decisions get more complex when it comes to the next tier, known as “class A” buildings, which make up most of Rechler’s portfolio. These buildings used to be in the premier league, but now they have been relegated to the second division. There are said to be around 400 class-A buildings in New York, though that category is nebulous, a marketing term with no official parameters. “Within that class A,” Rechler said, “there’s different gradations in quality.”

Take 5 Times Square, which Rechler purchased with partners for $1.5 billion in 2014. After its original anchor tenant, an accounting firm, announced it was leaving for Hudson Yards, Rechler spent $300 million to upgrade the building with new amenities, including common areas designed by David Rockwell. Rechler said the costly renovations make 5 Times Square a digital building, and last year, a digital tenant, the streaming-video company Roku, agreed to lease 240,000 square feet at a reported rate of around $90 a foot. “That was a big indicator of tenant demand, which played into our view,” Rechler said. In April, however, Roku sought to sublease some of the space, having reported losses and laid off employees. Aside from the sublet space, 5 Times Square currently has 23 of 33 of its office floors empty and available for lease.

Around 800,000 square feet are listed as available at the Starrett-Lehigh Building in Chelsea, including some space that Rechler said he plans to redeploy for amenities as he tries to create a “vertical campus” for tech and creative tenants. RXR purchased the full-block former freight terminal building for $920 million in 2011, a huge sum for the area at the time, a bet vindicated when Google and other tech companies moved into the neighborhood. In the hot market of 2015, Rechler sold a 49 percent interest in the Starrett-Lehigh and five other buildings to Blackstone, earning a handsome return. Big-tech companies may be cutting back their real estate now (see sidebar, p.28), but at some point, they will presumably grow again, and Starrett-Lehigh will be waiting with proximity to Hudson Yards. “The building started at $30, and now we’re doing $70 a foot,” Rechler said.

It’s important to remember, however, that these rent figures are not hard numbers. It always costs something to entice a tenant to sign a new lease. Concessions like build-out costs and months of free rent eat into the landlord’s income. “What they call the net-effective rent has gone down,” Rechler said. “If it was $100 and the net effective used to be $80, it’s now $100 and the net-effective rent is $60.”

As you proceed down the list of buildings in RXR’s portfolio, the considerations get heavier. What do you do about an older building with significant vacancy, or one with a big tenant whose lease is coming up for renegotiation? Rechler told me he is in the midst of refinancing $2 billion in debt on four of his buildings, which will require a commitment of more than $700 million in new capital, part of which will go to renovations like the ones at 5 Times Square. One of the buildings he is recommitting to is 450 Lexington Avenue, near Grand Central. “It has all the bones,” he said, which he thinks makes it capable of competing with some improvements. “It’s not One Vanderbilt. But you can price it at half of what One Vanderbilt does and still do well.”

By contrast, the quandary facing One Worldwide Plaza, the 2 million-square-foot Hell’s Kitchen office tower, is more challenging. Built by the Zeckendorf family on a former site of Madison Square Garden, the complex was originally a wager that corporate midtown could expand west of Eighth Avenue. It suffered through high vacancy and a prior owner’s default during the financial crisis, after which RXR and two other firms acquired the building. It was near full until recently, when one of its original tenants, the law firm Cravath, Swaine & Moore, signed a lease for a smaller, newer space in Hudson Yards. Another big tenant, the Japanese bank Nomura, reportedly has an option to escape its long-term lease in 2027 and has hired brokers to help it look at its options to downsize or potentially upgrade elsewhere. Citing uncertainty about the stability of the building’s tenancy, the S&P Global recently downgraded a portion of the publicly traded debt on the building, a fixed-rate mortgage that will have to be refinanced in the next few years. The building has 791,000 square feet available.

“It’s going to need a significant capital plan to make it competitive,” acknowledged Rechler, whose company owns 25 percent of the building. He otherwise declined to discuss his analysis, but another real-estate investor sized it up for me. “Worldwide Plaza is about to be vacant again,” the investor said. “It’s on Eighth Avenue, in a bad location, and he has a bad loan coming due — Kodak.”

Beneath class A, there’s the commodity space: the buildings categorized as class B and class C. Rechler believes they are hopeless. “That’s the stuff that’s competitively obsolete,” he said. “Side-street buildings. Dark buildings. It’s not close to public transportation, doesn’t have the infrastructure. Ultimately, that’s a subset of the market that will need to be redeveloped, repurposed, or torn down.”

With that, he condemned around 70 percent of New York City’s 1,381 office buildings. That was easy for Rechler to say — he doesn’t own much of the lower-rated stock — but his view is widely held. At a recent event sponsored by the publication The Real Deal, Jeff Blau, the chief executive of the Related Companies, advised owners of such buildings to “take what you can and run.” Jeffrey Gural, a real-estate investor who owns a lot in the supposedly obsolete tier, says the coming shakeout is “going to separate the men from the boys.” Some buildings might live on if they can be converted to other uses, like housing, but a significant number — not just the decrepit and old but ones that were considered Class A until recently — will probably be torn down.

“If you have a building that is half-empty and a loan coming due,” says Gural, who adds that he’s not in this position himself, “odds are you’re going to give the keys back to the bank.”

For an office landlord, abandoning a building can be the best of bad options. Commercial mortgages on offices are usually structured as “nonrecourse” loans, which means that only the building is forfeited in a default. The bank may end up the biggest loser, taking over a property that is worth much less than its mortgage. It is becoming increasingly common to see office landlords — even the ones with billions in assets — walk away. Blackstone did it last year with an empty office building on Broadway in midtown. Brookfield gave up two entire portfolios of buildings in Washington and Los Angeles.

Owners who purchased four or six or eight years ago will soon face such choices, needing to refinance their buildings with much more expensive loans. Rechler explained the math in a hypothetical scenario. Let’s say you bought a million-square-foot office for $1 billion in 2015. You took on $600 million in debt at a low fixed rate, and now your loan term is up and you have to refinance. The present value of your building is in the eye of your lender. In 2023, it does an appraisal and decides it is now worth only $700 million. But commercial mortgages are usually interest-only loans, so you still owe that $600 million you borrowed. The decline in value comes out of your equity. You’ve just lost $300 million. And because your bank needs to maintain its loan-to-value ratio, when you refinance, you will get a smaller loan, at a higher rate, and you will have to sink more money into the building to shore up your equity if you decide to keep it.

Now, let’s take a non-hypothetical scenario: an RXR-owned office building at 61 Broadway. When Rechler ran his Project Kodak exercise, it looked like an obvious candidate to cut loose. An early-20th-century building way down in the Financial District, it was filled before the pandemic with law and architecture firms, tech companies, and a now-bankrupt co-working start-up. “We ran the numbers: Where do we think rents would need to be to make this work?” Rechler said. He went to his leasing agents, who assured him there were “five or six deals” to be done with tenants in the required range. Rechler told them to lower the asking rent by 10 percent and come back if they signed one lease.

“They went out, and none of those deals bit,” Rechler said. “So you say to yourself, ‘I think the market has told us this is a film building.’”

For Rechler, choosing default made strategic sense. He said he had already recovered his original investment in 61 Broadway by selling a 49 percent stake in the building to a Chinese bank in 2016. Refinancing would have meant putting in additional money to recapitalize and renovate it. Rechler said he pitched the lender, a syndicate led by Aareal Bank, on the idea of converting the building for residential use. In order to make the numbers work, though, the bank would have had to be willing to take a loss, writing down the value of the loan. “It has to be a lot cheaper,” Rechler said. “But no one wants to hear that.”

So Rechler told the lender that he intended to give 61 Broadway back. This is where the real-estate industry’s distress could start to spread to the financial system. An estimated $1.5 trillion in commercial-real-estate debt is scheduled to mature between now and 2025. Banks have taken note, making it much harder to persuade bankers to offer new loans, even on healthy buildings.

“Right now, it’s doomsday,” says the real-estate investor who sized up Worldwide Plaza. “There’s no lenders; there’s little tenant demand.” He says he thinks the market will still muddle through. Banks don’t want to end up owning a distressed property, so both parties are incentivized to string loans along in the hope of a market rebound, a strategy known in the industry as “extend and pretend.” They cannot keep up the charade in every case, though, which means that a lot of previously profitable buildings will likely end up being disposed of in distress sales.

How will all of that financial misery make itself felt in the city? The last time anything comparable to this happened, in the early 1990s, many developers went bust, speculatively built glass towers stood vacant for years, and the assessed values of office buildings citywide fell by 13 percent, according to the city comptroller’s office. There was a glut of supply, created in that case by lax lending standards and overbuilding, and high interest rates, which made it difficult for property owners to refinance. The ensuing period of budget shortfalls, service cuts, and unrest contributed to the election of Mayor Rudy Giuliani.

The early 1990s downturn lasted around five years, after which office property values increased for the next two decades, even through the dot-com crash, 9/11, and the Great Recession. Then came the pandemic. Although the city has recovered nearly all the jobs it lost in 2020, the office-vacancy rate has continued to move in the opposite direction. “This time,” says Mary Ann Tighe, a veteran commercial broker who is chief executive of the New York region for the firm CBRE, “I think we are looking at a fundamental reordering of, certainly, Manhattan.” She says every tenant she works with is asking whether remote work can allow for compressed footprints. Steven Roth, the chairman of the publicly traded company Vornado, recently told his investors that Fridays are “dead forever” and “Monday is touch and go.” Vornado’s stock has lost almost 75 percent of its value since the pandemic.

Last year, a team of academics from Columbia University and NYU published a paper with the eye-catching title “Work From Home and the Office Real Estate Apocalypse.” In it, they estimated that New York office buildings had lost 39 percent of their long-term value. A couple of months ago, they revised their projections based on newer data and came up with an even steeper decline — 44 percent on the average path.

“If anything, I feel like as time has progressed, this has started to look more and more right,” said one of the paper’s co-authors, Columbia finance professor Stijn Van Nieuwerburgh, when I went to see him in June. The Belgian academic’s own office, in one of the new buildings at Columbia’s campus extension in Harlem, is pleasant and private and has a view of the Hudson River. A large whiteboard was filled with stochastic equations: the predictive formulas that have rattled the real-estate industry. After the first paper was published, the professor said, one of the city’s large office landlords summoned him for a grim briefing. “I knew we were on to something here,” Van Nieuwerburgh said, “because the folks who breathe this day in and day out for a living, they are scared.”

In separate research, Van Nieuwerburgh has extrapolated the economic consequences of this collapse in value for the health of cities, forecasting that a decline in property-tax revenue would create budget deficits for municipal governments that would lead to cuts in services like policing and trash collection, causing a deterioration in the quality of life. He calls this dynamic an “urban doom loop,” a phrase that has caught on. Van Nieuwerburgh told me that the city comptroller’s office had recently cited his analysis as a “doomsday” scenario. But even in the case of a 40 percent decline in values, the comptroller’s report found, the revenue decline would be modest in the short term — only around $1 billion by 2027. With a hint of amusement, Van Nieuwerburgh questioned that conclusion. “They call it sort of the worst-case scenario,” he said, “which I think is a misinterpretation of our paper. Our paper is not a worst-case scenario; it’s the median scenario.” If remote work persists at the current rate, he has projected a much larger tax hit to the city: around $6 billion a year.

By Kim Velsey

Everyone’s trying to downsize their office space at the same time, which means there’s a giant amount of it on the market. (Congrats to fancy new builds in Hudson Yards; good luck to the old clunkers in the 30s.) From Fidi to midtown, these are the Manhattan towers with the most available square footage (including space for sublease), according to data provided by CoStar.

(1) 60 Wall St., 1,571,781 total sq. ft. available space: Known for its much-mocked, now-beloved postmodern atrium, all 1.57 million square feet of its office space is vacant. It’s undergoing a renovation but has yet to lock down any new tenants. (2) 1 Liberty Plz., 867,250 total sq. ft. available space: Brookfield, the majority owner of this 1970s tower, bought a 49 percent stake back from Blackstone for $1 billion in March, $500 million less than Blackstone had paid several years earlier. (3) 55 Water St., 821,142 total sq. ft. available space: Manhattan’s largest office tower, with nearly 4 million square feet and massive floor plates, 55 Water has about 20 percent of its space available, which puts it on par with the Manhattan average. (4) 80 Pine St., 748,630 total sq. ft. available space: In 2020, when a slew of leases ended, 800,000 of the tower’s 1.2 million square feet were suddenly vacant. So Rudin Management decided to sink $100 million into this ’60s office building. Post-renovation, some space has been leased, but it still has a ton of square feet available.

(5) 601 W. 26th St., 850,235 total sq. ft. available space: RXR paid $900 million in 2011 for the Starrett-Lehigh Building, a block-long landmark, and is trying to reposition it as a vertical campus for tech and creative tenants. (6) 66 Hudson Blvd., 929,171 total sq. ft. available space: Developed by Tishman Speyer and designed by Bjarke Ingels Group, the “Spiral” is the type of new building that doesn’t have trouble attracting tenants. Pfizer, Debevoise & Plimpton, and HSBC have all signed leases. (7) 2 Penn Plz., 1,382,093 total sq. ft. available space: Vornado Realty Trust recently renovated this mid-century office tower to include loggia-style patios and a rooftop picnic area. Earlier this year, the company pulled back from plans to build several supertall office towers nearby. (8) 5 Times Sq., 918,591 total sq. ft. available space: Floors six to 29 are available, but RXR is counting on a $300 million upgrade that includes David Rockwell–designed common areas to reel in tenants. (9) 825 Eighth Ave., 850,012 total sq. ft. available space: One Worldwide Plaza is more than three decades old — and looks it. One of its largest tenants, a law firm, is downsizing to a newer building in Hudson Yards. (10) 660 Fifth Ave., 844,241 total sq. ft. available space: You may recall when Jared Kushner panic-sold this building, formerly 666 Fifth, to Brookfield in 2018. (Kushner still owns the land.) This mid-century tower is now nearing the end of an extensive renovation and is 33 percent leased. (11) 350 Fifth Ave., 721,246 total sq. ft. available space: The Empire State Building finished a $165 million renovation in 2019. It’s a huge office tower — 2.7 million square feet — but more than 25 percent is available. (12) 1290 Sixth Ave., 715,015 total sq. ft. available space: AXA Equitable Life Insurance, the largest tenant in this Vornado building, and Venable, a law firm, recently announced that they’re leaving.

Even so, to many New Yorkers, office doom sounds tantalizing. Who cares if a few extraordinarily wealthy real-estate companies end up with a marginally shorter stack of Monopoly money? What’s a few billion here or there in a $100 billion municipal budget? The distress of the office market creates a rare opportunity to create the one real-estate commodity everyone agrees the city needs: housing. The civic logic is compelling. “New York City is facing an existential crisis,” Rechler said. “We have a shortage of housing, and we have an excess of old office space.” As he well knows from his experience with 61 Broadway, the problem is solving the math. Before the pandemic, office buildings were trading at prices of around $1,000 a square foot. Buildings slated for conversion go for around $300 a square foot, very roughly. So to make the housing strategy feasible, banks and landlords have to accept that once-profitable properties are worth a fraction of what they once were. Van Nieuwerburgh and his co-authors recently published new research that found that some Manhattan buildings have fallen close to the required threshold. “If the 40 percent equity gets wiped out,” Van Nieuwerburgh said, “and then half of the 60 percent debt, that’s another 30 percent. That’s 70 percent value destruction. We’re not that far from that number for class B and class C.”

The conversion proposition is appealing to policy-makers, including the mayor and the governor. Last year, their “New” New York Panel recommended revising building regulations and zoning to make it easier to turn offices into apartments. “That was the most low-hanging of low-hanging fruit,” says Andrew Kimball, the head of the city’s Economic Development Corporation. “That did not happen.” Governor Hochul incorporated the panel’s recommendations into her housing plan, which died in the State Assembly partly because some Democrats wanted concessions on eviction laws that were radioactive to the real-estate industry.

Some progressives have argued that conversion programs should mandate the inclusion of affordable housing. But Van Nieuwerburgh says that is impossible without large government subsidies. Even setting numbers aside, he estimates that only around 30 percent of Manhattan buildings have “hope for convertibility.” The huge buildings with column-free trading floors for financial firms, which were so lucrative to build in the 1980s and ’90s, are now extremely complicated to convert into apartments because they have so much interior space without windows. If a landlord has office tenants, time-consuming negotiations with holdouts may be required. (At the Real Deal event in June, Blau, the Related CEO, estimated that 30 percent of tenants “will never fucking leave.”)

Even when a building does pencil out on paper, every step in the process is a challenge. One sunny day in May, I walked over to the Centre Street courthouse to watch the auction of the landmarked and vacant Flatiron Building. The sale had been ordered by a judge to settle a dispute between its majority owners, a group led by Jeffrey Gural, and an embittered partner. An initial auction in March had descended into chaos when a mysterious investor named Jacob Garlick bid $190 million, too rich for Gural’s taste, then failed to fork over a 10 percent deposit. “I would think he’s a fraudster,” Gural, an avuncular 81-year-old, told reporters. (He has since sued Garlick, who did not return my phone calls.) On his second try, Gural won the building by bidding $161 million and told reporters that his preferred solution was to turn the Flatiron into condominiums.

“It’s a perfect candidate,” he later told me on the phone. A few weeks after the auction, the landlord’s sister, Jane Gural-Senders, showed me around the property. The Gurals had ripped out the interior in anticipation of renovating it into … something. “We’re not sold on residential,” Jane said as we walked through the dusty, triangular 20th-floor suite once occupied by the chief executive of the building’s last tenant, the Macmillan publishing company. Her brother acknowledged conversion would be “tricky.”

“You need a special permit,” Jeffrey said. “There are tax considerations.”

The conversions that are already underway are mainly concentrated in the Financial District, which has many older buildings with smaller floor plates and favorable zoning rules. The Gural family’s company is in the middle of one of the largest residential conversions on record at 25 Water Street, a 1.1 million-square-foot building that was once JPMorgan’s headquarters. The project involves carving out two interior courtyards to let in light. “Essentially, any building, provided it’s in the right area with the right zoning, can be converted,” says Nathan Berman, a residential-redevelopment specialist who is Gural’s partner in the venture. Berman says that one “strong suit” of his company is carrying out “mixed conversions,” in which renovations are done while office tenants are still in place. Office buildings have centralized bathrooms, so in order to put in apartments, you have to drill through the floor and run water and sewer pipes to the ground. Other than that, Berman says, “the inconvenience to the tenant is really minimal.”

Gural says he thinks this crisis will work out as these things always do, to the benefit of the same people as usual. “What you’re going to see is a huge opportunity for these distressed real-estate funds,” he says. “Goldman Sachs and others, they’re going to make a fortune.” Van Nieuwerburgh says he has lately been hearing from hopeful vultures. Even as Rechler is considering cutting some properties loose, he is looking to invest in what he called “good-news money” in distressed assets. Going back to his hypothetical 1 million-square-foot office building, he envisions a possible scenario in which he would put up $175 million to stabilize the debt and another $100 million for upgrades and leasing in return for “preferred equity.” He would get a guaranteed 15 percent return and then the existing owner would get half of any income above that. “If it does well, you’ll be able to recover some of your money,” Rechler said. He added that he is already deep in the process of evaluating some of these deals.

One component of Project Kodak involves analyzing the feasibility of mixed conversions, looking at whether it might be possible, for example, to make the skinnier upper parts of some of his buildings into apartments or hotels. It is not a totally fresh idea: He proposed turning the top ten floors of 75 Rockefeller Plaza into a hotel run by Airbnb before the pandemic scuttled the project. “We have five or six buildings that I would put into that category that we’re working on right now, where they have the right floor plates, they’re zoned for it today, they have the right access locations,” he said. “We’re going through the math.”

And if the math doesn’t add up? At a recent panel discussion, Van Nieuwerburgh went through other alternative uses, such as medicine. The Memorial Sloan Kettering Cancer Center bought more than half of the Lipstick Building on Third Avenue last year (see sidebar, opposite). He mentioned that he had heard proposals both “crazy” (urban farms) and “even crazier” (shelters for asylum seekers). “There’s schools, pet care, mixed use,” he said.

“Wait a second,” interrupted a commercial-real-estate broker on the panel. “Pet care? We’re going to put dogs and cats in office space?”

Not all office buildings will go to the dogs. Brokers express the hope that demand will soon stabilize as some workers come back and as hybrid workplaces discover how crowded it gets on those Wednesdays when everyone shows up. Thus the desperate industry’s latest hope: If offices are now optional, maybe they can be marketed as luxuries.

“It’s just beauty and simple power,” Erik Horvat, managing director of Olayan America, said one recent afternoon as we stood with our necks craned back to look up at a 48,000-pound stone hanging 12 feet above the floor of the vaulted lobby of 550 Madison Avenue. The titanic blue marble — a sculpture called Solid Sky — was one of many expensive flourishes that Horvat’s company, a subsidiary of a Saudi financial conglomerate, had added to its redevelopment of the 1980s-vintage skyscraper. Olayan purchased 550 Madison for $1.4 billion in 2016 and had spent another $300 million on renovations carried out in cooperation with Rechler and RXR. Horvat swiped his hand under a biometric scanner, opening a security gate and summoning an elevator to take us upstairs.

“It’s about lifestyle,” he said. “How do you get people to come back to work?”

On the seventh floor, the “club level,” there was a library curated by Assouline and a lounge with a glassed-in gas fireplace. Since 2021, an insurance company has leased about a quarter of the building as an anchor tenant with other spaces going to financial firms and the fashion brand Hermès. According to the analysis firm CompStak, the building has been leasing for around $150 a square foot, twice the midtown average. Horvat took me up to a space that’s still available: the penthouse that once housed the executive offices of AT&T. When 550 Madison was commissioned, in 1978, the monopolist telecommunications company asked its architect, Philip Johnson, to make it a monument; the cover of this magazine later dubbed the building the “Tower of Power.” Through the floor-to-ceiling windows to the east stood 425 Park Avenue, a new skyscraper anchored by the hedge fund Citadel, which is paying a stratospheric $300 per square foot for the top of the building. It is a transparent box and near enough that I could spy on the neighbors. Eight of its upper floors appeared to be totally unoccupied.

Although the top end is the strongest segment of the market, you have to wonder how deep the demand is for these new towers of power. And the success of a lucky few buildings does not address — and in some ways may exacerbate — the systemic problem of oversupply. After all, the tenants moving into these properties were usually vacating space somewhere else. More leases were expiring, meaning more supply was coming, bringing more distress. Beyond the new Park Avenue tower, I could glimpse the skyline of Lexington Avenue, where the market is soft, and Third Avenue, where there’s carnage. To the south, there was 660 Fifth Avenue, a midcentury building that Brookfield spent $400 million to renovate as a trophy.

Brookfield paid Jared Kushner’s family to take control of the debt-burdened skyscraper — formerly known as 666 Fifth — in 2018 and repositioned it with the reported backing of sovereign wealth funds from the Middle East. Its former aluminum façade was replaced with sleek glass. 660 Fifth recently signed an anchor tenant, a financial firm that allows remote work for “any reason or no reason at all.” Around two-thirds of its space remains available, and leasing lately appears slow. Not a single new deal has been reported so far this year, according to CompStak. Brookfield executive Ben Brown, who oversees the company’s U.S. office portfolio, assures me that the company is “trading papers” with many prospective tenants. “A lot of stuff is not at a point where we’ve disclosed it,” he says. “One of our next leases will take us to 50 percent.”

Tenants have yet to move into the renovated building. From the penthouse window, I could make out a tiny human figure walking across one of the vast open floors of 660 Fifth. Then the person vanished around a corner, leaving the vacant skyscraper looking empty to the core.

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