$400 Billion Manhattan Building Prices Drop by $10 Billion... A Sign of Crisis?

Deepening Downturn in US Commercial Real Estate

A commercial office building in New York, USA, once valued at around 400 billion won, was sold at a bargain price of around 10 billion won. This is a result of the commercial real estate market downturn caused by soaring vacancy rates and interest rates following the pandemic (global outbreak).

According to the New York Times (NYT) on the 1st (local time), a 23-story office building located at 135 West 50th Street, Manhattan, New York, was auctioned off on the 31st of last month for $8.5 million (about 11.6 billion won). The building, long owned by real estate investment company UBS Realty Investors, was valued at $332 million (about 450 billion won) in 2006.

[Image source=UPI Yonhap News]

The family of the previous owner who sold the building at its peak in 2006 said, "It certainly wasn’t the largest asset we owned, but it was definitely a solid property," and expressed shock, saying, "We never expected its valuation to hit rock bottom like this."

The NYT pointed out, "In recent years, several large office buildings in Manhattan have been sold at huge discounts, some for less than half of what previous owners paid," adding, "this is the most shocking recent example showing how the pandemic has shaken New York’s commercial building market." Bob Knakal, founder of BK Real Estate Advisors, also noted, "No one expected this to happen in the office market."

The fortunate new owner who purchased the building at about a 97% discount also faces financial risks. The building owner and the landowner are separate entities, and currently only 35% of the office space is occupied, making it difficult to cover the monthly land use fees solely with rental income. This is due to the activation of remote work after the pandemic and the prolonged high interest rates increasing the burden of interest payments.

This is not the first sign of a commercial real estate downturn in the United States. Earlier in June, a historic building at 1740 Broadway near Central Park in Manhattan was sold at a 70% discount from its purchase price for $185 million (about 250 billion won), shocking the market. Recently, there were reports that a Korean asset management company invested in the 1551 Broadway office near Times Square but recovered less than 30% of the principal.

Amid this downturn, as of the second quarter, the scale of real estate asset foreclosures in the U.S. reached $20.55 billion (about 28.4 trillion won), the highest level in nine years. Along with interpretations that the commercial real estate market is approaching bottom, pessimism is emerging that the downturn will continue for a considerable period.