Paramount Acquisition Suggests Big Office Property Losses Ahead

September 29, 2025 | As markets open Monday, most managers and investors are concerned about the looming government shutdown this week. Congress is not even coming back into session until October 1st, so a shutdown is pretty much a given. The mortgage industry is preparing for significant disruptions processing government loans, among other worries.

But unlike past episodes of political chicken, this time it is different. The White House team led by OMB head Russ Vought is fully prepared to keep non-essential government functions closed indefinitely. Indeed, ‘47 and his team seem to see a prolonged government shutdown as an ideal way to advance many goals of Project 2025.

“The executive Power shall be vested in a President of the United States of America.” Accordingly, Vought writes in Project 2025, “it is the President’s agenda that should matter to the departments and agencies,” not their own. Seen from the perspective of the White House, the prospect of a shutdown of the government is not a problem but rather an opportunity. 

“President Donald Trump is threatening large-scale firings of federal workers if the federal government shuts down next week,” reports Punchbowl News, “a nuclear tactic to make any funding lapse as painful as possible for Democrats.”  A federal shutdown without salaries would force many remaining government workers to seek other employment. And that is precisely what the Trump Administration wants.

Paramount Group & Aspirational Office Valuations

Meanwhile in New York, the owners of commercial real estate are still reeling from the transaction announced last week. Residential mortgage REIT Rithm Capital (RITM) surprised the industry and announced it would acquire Paramount Group (PGRE) in an all-cash deal valued at $1.6 billion or $6.60 per share. This is less than half of book value and < 25% of the net asset value of the commercial properties owned by the REIT.

As we noted in a Premium Service comment last week, the winning bid suggests that all Class A office space in Manhattan is significantly overvalued. The sale of office landlord Paramount for a 40% discount to its book value is a harsh reality check on commercial real estate valuations in New York City. The deal highlights weaknesses in the market that contradict more optimistic assessments, particularly the tax assessments of the City of New York. 

In the last disclosure from PGRE in July, the REIT claimed to have net assets of $7.2 billion and net operating income (NOI) of ~ $300 million across 17 Class A office properties in New York City and San Francisco. The implied cap rate was a little over 4% or a premium valuation. But the winning bid from RITM suggests a double-digit cap rate for these “premium” properties, meaning that the assets are seriously impaired. But here's the real joke: The City of New York pretends that property values have gone up 7% since 2020 after a 10% dip in 2022. Really?

A double digit cap rate indicates a relatively high-risk commercial real estate investment with the potential for significant returns, suggesting a lower property price relative to its net operating income (NOI). Or in other words, RITM CEO Michael Nierenberg is stealing these admittedly prime office properties at 5x NOI instead of the 25x implied by the Q2 2025 PGRE disclosure.  But are these properties really prime? Really?

Although the PGRE purchase price signals greater risk, it also means the investor may be able to recover their initial investment faster – if the assets continue to generate positive cash flows. But that is the question. Several players in commercial real estate contacted by The IRA last week suggest that the winning RITM bid for PGRE is a shock to New York commercial operators and exposes the inflated book values of commercial properties across New York City.

The table below from the City of New York shows the assessed values of commercial real estate for tax purposes.

The first big loser of the Paramount debacle is New York City. After cutting taxable values 11% in 2022 during COVID, the City of New York has pretended that the value of all office properties have gone up since that time. But is that really true?  The table below shows the increases and decreases in valuation assumed by the City of New York across zip codes.

The second big losers are the owners of New York commercial property and their auditors. Imagine you are the auditor of PGRE or any number of other owners of commercial real estate or a lender on such assets. The very public 75% discount for PGRE vs the previously disclosed NAV for the assets suggests that all such assets should be haircut significantly.

The independent registered public accounting firm for Paramount Group, Deloitte & Touche, could face significant litigation. Did Deloitte do a proper audit by accepting the stated $7.2 billion valuation of PGRE’s assets? The winning $1.6 billion bid from RITM strongly suggests that the valuation was inflated.

You cannot explain the low-ball valuation won by RITM on the well-publicized governance issues inside PGRE. More, there is no public record of Deloitte challenging Paramount's valuation. Deloitte, which is reportedly the most sued of the top audit firms, issued a report on the effectiveness of PGRE’s internal control over financial reporting in PGRE’s February 2025 10-K.

The bigger issue created by the audacious deal struck by RITM is that all of the auditors of all of the publicly traded owners of commercial property now have a problem. The public comp created by the purchase of this commercial mortgage REIT suggests that all of the stated net asset values in the industry should be haircut say 50%, just to be conservative. 

PGRE owns a lot of showcase, Class A properties in New York and San Francisco, so ignoring this comp is going to be impossible for the industry, auditors, bankers and other financial professionals. But the idea of RITM going deeper into commercial real estate as the resi market is preparing to roll over makes us a little queasy.  As we discussed last week, we are not thrilled to see one of the largest issuers of residential mortgage servicing diving into troubled commercial real estate.

Even at 22% of the publicly claimed net asset value, the 17 properties owned by PGRE may not be a great deal for RITM investors. “I remain bearish on RITM, viewing its current valuation as overextended and its acquisition timing as risky amidst structural office market headwinds,” wrote Harrison Schwartz in Seeking Alpha last week. “Office vacancies remain high, and long-term trends favor remote work, challenging the narrative that Class A properties are immune to these pressures.” 

To us, the big headline of the RITM purchase of PGRE is the demise of the fiction that Class A commercial real estate is still a prime asset that deserves low-single digit cap rates. But in the back of our mind, we worry that one of the biggest owners of government residential servicing assets is taking on a high profile gamble on dubious commercial assets in blue cities.

Mayor Eric Adams just dropped out of the New York City mayoral race and a silver spoon sucking Indian socialist from Uganda looks set to become the next Mayor of New York. You cannot make this up. But while a lot of political energy is focused on Zohran Kwame Mamdani's plans for rent stabilized properties, it is commercial real estate that pays the bills in New York City.

“Commercial real estate in New York City accounts for 21.9 percent of all property market values as of fiscal year (FY) 2025,” NYC comptroller’s office. “Because the City’s tax structure relies on higher relative levies on Class IV (commercial properties), they account for 44.1 percent of all billable assessed values on which the property tax levy is based.” 

The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.