Some parts of the American economy have been much more negatively affected by high interest rates than others. And some of those damaged parts are not distant from the Hudson Valley.
Handouts from the swollen federal budgets during the pandemic allowed continued private spending that easily offset the dampening effects of higher interest rates. But the one-two punch of first the pandemic and then the fight against inflation had a devastating effect on other sectors of the economy.
Last Friday evening, an audience of about 25 people at the D&H Canal House Museum in High Falls heard from a leading investment manager of Manhattan office real estate about the high cost of borrowing money for leveraged owners of New York City office space. Savanna co-founder and CEO Nick Bienstock, who has a house on Millbrook, said the crisis brought about by rising interest rates and a lower occupancy rate had proven a disaster for his industry. Lower occupancy rates and rapidly rising interest rates have made refinancing when loans expired difficult.
“The scale of this is enormous,” he said.
Real estate is a notoriously up-and-down market, and commercial real estate is particularly cyclical in nature. Financing arrangements for five years typically involve a quarter to a third in equity and the rest in borrowing – allowing for high returns when all goes well.
The Covid pandemic reduced office occupancy rates in 2021. Counter-inflationary measures in 2022 and 2023 have been a recipe for disaster for Savanna. The large expansion of the work-from-home population has only exacerbated its predicament.
The firm has been struggling to push the maturity dates of its loan obligations as far back as it can. But extensions can go on for only a limited time.
Unsurprisingly, Bienstock is hoping that a bottom will be reached soon.
“We believe that a deep-distress investing opportunity is emerging across many real estate assets, and in New York City office buildings in particular right now,” he was quoted in August by The Real Deal as telling the Commercial Observer in May.
As of mid-November, no bottom has been sighted.
Occupancy rates at the Savanna buildings appear to have stabilized, but at a cost. A number of tenants at one of them received concessions including anywhere from eight to 16 months of free rent.
Conversion of New York City office space for residential use would be expensive. The median age of Manhattan office buildings is 70 years, Bienstock said. They’re not good places to spend a lot of capital to fix for residential use
This bleak picture has a silver lining. Savanna is diversifying geographically, Right now, there are more opportunities to invest in other parts of the country, where building costs, attitudes toward development, and obstacles in its way are less formidable.
Savanna South consists of three connected development sites in West Palm Beach. On the first, called Olara, a two-building, 26-story structure with 315 condo units, 170 rentals, and extensive amenities is being built. Prices start at a million dollars. Most buyers so far have come from the New York City tri-state area, and 60 percent have paid all-cash — very useful cash flow for Savanna..
That change of venue doesn’t mean Bienstock has become less than bullish on the longer-term prospects for New York City, which boasts a diversified economy, a deep well-educated labor force, continuous entrepreneurship, and endless cultural resources. He said his kids’ generation without exception want to live in New York City.
Part of his optimism might be – well, optimistic. He thinks a considerable portion of the remote young workforce will return to the office more. Reminded that they’re not doing so yet, he shared that Savanna is now requiring of its employees four days a week in the office. In case of layoffs, he said, the remote workers would be the first to go. Several studies have suggested that the present labor market for skilled workers is so tight that it’s the employees who have the upper hand.
A recent Regional Plan Association report called “Commuter Dividend: The Economic Value of Commuters for City and Suburbs in the New York-New Jersey-Connecticut Region,” attested to the extraordinary role Manhattan plays in the regional economy. Though its share of regional population has decreased markedly, its share of regional income has not.
Nick Bienstock displayed an impressive level of knowledge about a subject he knew intimately and few in his audience had wrestled with. That probably could be said about many of the offerings at the D&H Canal House Museum, whose effervescent board president, Peter Bienstock, happens to be Nick’s father.
Every month or two, the museum schedules a Friday talk given by an expert on an eclectic variety of subjects. The next one is on December 7 at 7 p.m. Mondell Dubansky, head of book preservation at the Metropolitan Museum of Art, will talk on American decorative arts such as books and wallpaper.
