Scott Rechler invested billions of dollars in Manhattan office properties after the 2008 financial crisis, amassing one of the city’s largest portfolios through a series of deals. Now Rechler, the chief executive of real estate developer RXR, is preparing to hand over some of his offices to lenders.
The decision comes after a thorough review of RXR properties and is an acknowledgment that some that have generated consistent, if unspectacular returns, no longer make economic sense in a new era of remote work and rising interest rates.
“With some of those, I don’t think there’s anything we can do with them,” Rechler said. The only alternative, he explained, was to “give the keys back to the bank,” developer language for stopping debt payments and relinquishing control of the asset while trying to work out a solution with the lender. “Give the keys back to the bank. And you have to be disciplined about it.”
Nearly three years after the Covid pandemic shut down New York City and fundamentally changed the way people work, RXR’s plans reflect a growing consensus that the world’s largest office market is headed for a period calamitous. Outdated buildings in drab places will fall into obsolescence unless they can be repurposed for other uses. Meanwhile, developers are betting that the best and most advanced towers, packed with technology and amenities and located near public transportation, will prosper.
The best example of the latter may be SL Green’s One Vanderbilt, which towers over Grand Central Station and has garnered record rents, even amid the pandemic. Rechler expects RXR’s upcoming Park 175, which will be the tallest building in the Western Hemisphere when completed, will eventually surpass it.
“We’ve had more showings for that building in the last, call it, 60 days, then we’ve had for the rest of our portfolio,” he said. Rechler also has high hopes for 5 Times Square, EY’s former home. RXR and its partners are spending about $300 million to renovate the building, adding everything from a new lobby and elevators to a spa.
Those bets may still pay off. But Rechler, who is also a board member of the New York Federal Reserve Bank, expects a rough patch in the coming months. The sharp rise in interest rates from record lows is threatening all kinds of businesses that relied on cheap and readily available capital, he noted. Even technology companies, one of the few remaining sources of office market expansion, are now laying off thousands of employees. The cuts from him, in turn, appear to be reverberating on Wall Street.
“When companies are laying people off, they typically don’t take up more space,” Rechler said, adding, “The number of development projects we’re hearing across the country being halted is mind-boggling.”
Rechler, 55, is the bullet-headed scion of a Long Island real estate fortune built by his grandfather, William, who developed a lightweight folding lawn chair after World War II. William and his siblings invested the resulting proceeds in warehouses, industrial parks, and suburban offices on Long Island.
It was a precocious Scott Rechler, still in his early 20s, who convinced family members to take the company public in 1995, then led a risky foray into the Manhattan office market.
He has shown a knack for timing. In January 2007, as the financial crisis loomed, he sold the company, Reckson Associates Realty Corporation, to SL Green for $6.5 billion.
Sixteen years later, he still shakes his head that some of his investors had to be convinced to support the deal. Rechler launched RXR and then waited until August 2009 to return to the market, spending $4.5 billion over the next two years on heavily discounted office properties.
The first building it purchased was on a 10-year lease with JPMorgan. While that seems like a safe bet now, it wasn’t at the time, Rechler recalled: “We spent six weeks underwriting and thinking: what happens if JPMorgan goes out of business?”
The New York office market rebounded and, flush with foreign money, soon surpassed its previous highs. By 2016, the office market was at its peak, and RXR pivoted again. It shifted its focus to apartments, so-called multi-family developments, in growing cities like Denver and Phoenix, and industrial warehouses.
Both have been darlings of real estate investors in recent years. Even when their finances are under pressure, people will still pay their rent, it is thought. Rents can also increase in periods of inflation. Meanwhile, warehouses have become vital nodes of e-commerce.
But with the pandemic, offices in New York and other cities represent a desperate challenge for RXR and other developers. Rechler has accepted that “the genie is out of the bottle” and that hybrid work is not going away. “We are a real estate company and we still let people work hybrid on Fridays,” he said. “So, it’s here to stay.”
In December, he asked his team to come up with a set of metrics that accounted for the new reality, and then rank RXR office positions accordingly. “I call it Project Kodak,” Rechler said, referring to the once-dominant movie company that was revolutionized by new technology. “Some buildings are movies and some buildings are digital. The ones that are movies, you have to be realistic about it.”
RXR will not invest in these properties unless it can find a way to convert them to another use, or believes they can still thrive as low-rent alternatives. “But even there. . . I’d be worried because they’re becoming obsolete competitively quickly. So milk what you can get out of this, figure out what to do and move on,” Rechler said. “Those who are digital, that’s what you have to focus on.”
He declined to say which or how many of his buildings were earmarked for return to lenders, though he estimated that about 10 percent of RXR’s office portfolio fell into the “film” category.
Some of them may be candidates to become residential, an idea that has excited both developers and New York Mayor Eric Adams, whose city suffers from a chronic housing shortage.
But, as Rechler observed, such projects are fraught with complications. Even if a developer can solve the architectural and zoning challenges, they must first empty the building of tenants. “It’s a long process. I have to move tenants, I have to move a vacant building, why go through that process? It’s not simple,” she explained, arguing that New York state would have to offer tax and regulatory incentives to make such projects feasible.
Still, Rechler sees opportunities in the office turmoil. Like other developers, RXR has created a real estate lending arm to fill the void left by banks after the 2008 crisis.
It expects to get about $2 billion in high-yield loans this year for multi-family and office projects that have run out of cash as other lenders pulled out.
There should be opportunities. Many institutional investors are now desperate to reduce their exposure to the bureau. In some cases, Rechler argued, the projects were still viable, but their debt ratios had skyrocketed because underlying property valuations had been cut.
“What you are seeing is that many institutions simply do not want to invest more money in these buildings. So the sponsors are left in the land of nowhere,” she explained, adding, “This is going to be a difficult time. [But] You can’t paint all office buildings with the same brush.”