In a move signalling a potential turning point in the commercial real estate crisis, Scott Rechler, the CEO of RXR, one of New York's major property developers, is spearheading a $1 billion fund in collaboration with Ares Management. The fund aims to invest in distressed office buildings across the city, reflecting a recognition that the prolonged uncertainty about interest rates and the impact of remote work has created a unique market dynamic.
Rechler, known for his foresight during the 2008 financial crisis, sees a distinct difference this time around. It's not a systemic financial issue, but rather a fundamental shift in the demand for office space due to the prevalence of remote work. The rise in interest rates since 2022 has further complicated matters, especially for property owners seeking to refinance loans acquired at historically low rates.
The partnership between RXR and Ares Management focuses on a specific segment of the market – the upper quartile of the middle-class part of the office space landscape. This category represents properties that, while not the newest and most modern towers, still hold appeal but may require fresh capital or debt restructuring to adapt to the changing market conditions.
The current market scenario is often described as trifurcated, with the top-tier modern towers still fetching record rents, while older offices face obsolescence. RXR and Ares are strategically positioning themselves as "stockpickers" in this market, seeking value at prices that have been overlooked by lenders and investors looking to exit the sector.
Craig Snyder, a partner at Ares, notes that the flight of institutional capital from the office sector has resulted in high-quality properties trading down to historic lows. The partnership aims to identify long-term winners among these distressed assets.
The timing of this move aligns with signs of a revival in leasing activity for US offices in the fourth quarter of 2023. Large deals were announced, contributing to the belief that the market is gradually emerging from its extended pause. However, the challenge lies in distinguishing promising buildings from the less viable ones.
Proximity to public transit is considered essential, but RXR and Ares are also incorporating unconventional metrics such as mobile phone data and retail activity to assess the potential of office buildings. In a market flooded with distressed properties, this discerning approach becomes crucial to identifying opportunities with long-term potential.
The broader landscape reveals significant challenges, with $117 billion in commercial mortgages tied to US offices set to mature this year.