RXR Realty and Ares Management are partnering on a $1-billion fund to acquire distressed Manhattan office properties, the Financial Times reported. The two companies have seeded the partnership with $500 million and hope to raise an additional $500 million. They’re 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,” RXR CEO Scott Rechler told the Financial Times. “There’s a reset and this is more permanent.”

RXR and Ares plan 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 rent growth.

“Where we’re seeing the best opportunity is to buy the upper quartile of that middle, class-A part of the market,” Rechler said, pointing out that many of those properties have been shunned by lenders and investors desperate to exit the sector altogether. “If you’re able to be almost a stockpicker, you can buy real value at these prices.”

Craig Snyder, an Ares partner, told the Financial Times that “the broad, indiscriminate flight of institutional capital from the office sector has resulted in many high-quality properties trading down to historic lows,” and that the partnership was “hoping to identify long-term winners.”

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