Big developer launches $1bn fund to buy distressed New York offices

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One of New York’s biggest property developers is launching a $1bn fund to invest in the city’s distressed office buildings, potentially heralding a new phase in the commercial real estate crisis.

Scott Rechler, the chief executive of RXR, one of New York’s largest office landlords, is teaming up with Ares Management, an alternative investment manager that has $49bn in real estate assets.

The partners are convinced that a prolonged paralysis in an office market frozen by uncertainty about interest rates and the threat of remote working is now breaking, with many players ready to accept losses to unload or restructure assets.

“We have clarity as to where rates are, we have clarity about the future of offices, and which buildings are going to be competitive, and we have a capitulation, I think, to a recognition that values aren’t just bouncing back like they did in ‘08,” said Rechler. “There’s a reset and that this is more permanent.”

Leasing activity for US offices picked up in the fourth quarter of 2023, with several large deals announced, also contributing to expectations that activity was resuming in the market after an extended pause.

RXR and Ares are planning to target a sliver of office buildings around the city that they believe are still appealing but that may need fresh capital to remain competitive or a restructuring of their debts to reflect the new realities of higher interest rates and slower — or non-existent — rent growth.

In what many are now calling a trifurcated market, those buildings rank below the newest and most modern towers, which are still fetching record rents, but above a growing list of older offices that are fast becoming obsolete.

“Where we’re seeing the best opportunity is to buy the upper quartile of that middle, class-A part of the market,” Rechler said, arguing that many of those…