Declining Values Continue to Plague Class B and C Office Buildings

Two office buildings located in the Garment District recently traded; and although one was sold at a foreclosure auction and the other a direct sale by the owner, the significant loss in value is a shared similarity between both transactions despite the great difference between the prices fetched. Although appraised at nearly $22 million in October 2024 and more recently in February valued at $19 million by credit-rating agency KBRA, the approximately 70,000-square-foot building located at 22 West 38th Street between 5th and 6th Avenues recently traded for $50,000 through a foreclosure auction. As the sole bidder, California-based Wells Fargo held the $34.75 million loan issued in 2019 to former owners, the Modell family’s Mitchell Modell and the Brodsky family’s BEB Capital upon purchasing the asset for $60.5 million. At the time of the purchase, Knotel occupied about 50% of the building, having secured a 15-year lease in July 2016 at a base rent of $49 per square foot, escalating to $57 per square foot with 8 months concession plus $60 per square foot in tenant improvement (TI) allowance according to a comp by ABS Partners. However, the lease term was cut short upon the co-working space provider filing for bankruptcy in 2023, subsequently leading to a move by Wells Fargo to foreclose on the property after the owners defaulted on the mortgage, having recognized that the market value had lowered to just half of the debt burden – reportedly deeming the potential of turning the situation around a lost cause.

Just a few blocks to the southwest of the 38th Street building, the second transaction is the sale of 333 West 34th Street, a 348,000-square-foot, block-through building located between 8th and 9th Avenues. The latest deal marks the third change of hands since 2013 when New York REIT, formerly American Realty Capital NY Recovery REIT purchased the fully leased building for $220.25 million from SL Green Realty. In 2018, as part of New York REIT’s liquidation of its portfolio, Brookfield Properties purchased the property for $255 million, recently selling it at a $105 million discount reportedly to B&H Photo under the New York-based entity SV333 Realty LLC. As part of the transaction, the $110.619 million debt encumbering the asset was satisfied, the remaining unpaid principal of a $130 million loan provided by Landesbank Baden-Württemberg in 2018. Both transactions reflect the continued challenges of Class B and C office properties, which according to the New York City Comptroller’s office constitute 32% and 13% respectively of the city’s office inventory. The slow pace of recovery for both asset classes at a time when “flight to quality” has put Class A buildings in higher demand is fueling the reported conclusion which is gathering force among owners and lenders that these asset classes “will never generate the sort of cash they churned out before the pandemic.”

Source:    https://www.crainsnewyork.com/real-estate/wells-fargo-acquires-midtown-south-office-building-auction

Source:    https://www.crainsnewyork.com/real-estate/brookfield-sells-garment-district-office-building