Is this the end of expensive office space in New York??

David Goldsmith

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Paramount Group posts $16M quarterly loss

Office landlord’s buildings are concentrated in Manhattan and San Francisco​

Albert Behler, CEO of Paramount Group and patient father to its Midtown offices, still expects his underperforming kids to turn things around.
“Every child has a different character. So every building has a different character and every lease is different,” Behler said Wednesday, sidestepping an analyst’s question about what price 500,000 vacant square feet at 1301 Sixth Avenue could command.
If children are products of their environments, the office REIT could hardly have picked worse milieus than Manhattan and San Francisco to concentrate its assets before the pandemic. For the second quarter it reported losing $15.9 million, compared with a loss of $6.3 million in the same period last year and a $2.5 million gain two years ago.

Paramount has marketed the Sixth Avenue space, once leased by Barclay’s, for more than a year without landing a tenant — a quest that the Delta variant’s spread will not make any easier.
Still, Behler, on an earnings call Wednesday, expressed optimism about office space. And funds from operations came in at a healthy $47.6 million for the quarter, or 22 cents per share, within shouting distance of the $50.1 million in the same quarter last year and $53.2 million in 2019. The company credited lower operating costs during the pandemic.

Paramount executives said in New York City it leased 247,000 square feet during the second quarter with an average term of 9.6 years and at initial rents averaging about $70 per square foot.

The leases included 81,500 square feet at 31 West 52nd Street between Bracewell and Centerview Partners and 34,500 square feet at 1633 Broadway to the Thespian Theatre for a 15-year term.
Behler cited the theater lease as proof that New York City would return to its former glory. But San Francisco, where Paramount has 30 percent of its asset value, has been even slower to come around.

“San Francisco has certainly rebounded more slowly, probably because of the prolonged lockdowns,” Deutsche Bank analyst Derek Johnston said on the call.
“It’s a different kind of culture that you have in California,” Behler explained. He later said that office attendance by Paramount’s San Francisco tenants is still only 7 percent to 10 percent.

The tech workers who set the tone in the northern California office market are likely to work from home for a while longer. Apple and Google, both based in California, recently delayed the date when it will ask workers to return to the office, and big tech companies are taking advantage of remote work to recruit talent from small-market firms.


David Goldsmith

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Manhattan office rents hit 4-year low as availability remains at record-high​

Growth in leasing volume accompanied by increase in sublease inventory, reversing downward trend​

Manhattan’s office availability rate held steady at 17.1 percent in July, matching the record-high set two months ago, as asking rents dipped to their lowest level in years.

The high availability rate was despite the fact that Manhattan’s office leasing volume in July was up 15 percent compared to June, according to Colliers International’s monthly market snapshot.

David Goldsmith

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Deal flow increasing in suburban office market.

Oak Hill Advisors Leads Group Investing $326.5 Million in Suburban Office Property Company​

The investors are betting that the property type will benefit from shifting work and living patterns accelerated by the pandemic

An investment group led by Oak Hill Advisors’ new real-estate business is making a $326.5 million investment in a suburban office building company on the premise that the property type will benefit from shifting work and living patterns accelerated by the pandemic.

Oak Hill’s real-estate unit is making a debt-and-equity investment in Workspace Property Trust LP, a six-year-old firm that owns 10 million square feet of mostly suburban office space in Tampa, Fla., Phoenix, Minneapolis, Philadelphia and other markets. The deal will help give Workspace the muscle to go on a shopping spree over the next five years, said Tom Rizk, the commercial real-estate veteran who is co-founder and chief executive of Workspace.
“Over a five-year period, we would like to do $5 billion in acquisitions,” he said.

David Goldsmith

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Just like with residential, volume spikes as prices come down.

Midtown Manhattan doubles office leasing in August as rents slide​

Manhattan’s asking rent is at lowest since 2017 at $72.68 per square foot​

Leasing volume in Midtown Manhattan more than doubled in August from the prior month as the island’s average office asking rent slid to $72.68 per square foot, the lowest since 2017.
A total of 1.46 million square feet of office space was leased in Midtown, or about 60 percent of Manhattan’s leasing volume for the month, according to Colliers International’s Manhattan office market snapshot for August. That helped reduce Manhattan’s availability rate to 16.9 percent from a record 17.1 percent in July.

Helping drive that reduction was a 670,000-square-foot reduction in net sublease availability, the largest monthly drop recorded in six years. Still, the amount of available space on the market — more than 90 million square feet — remains 70 percent higher than in March 2020.
August leasings were led by Crédit Agricole’s 167,000-square-foot deal at Paramount Group’s office tower at 1301 Sixth Avenue and DBO USA’s 143,000-square-foot deal at Tishman Speyer’s Metlife Building at 200 Park Avenue, both in Midtown.

Leasing volume in the Midtown South and Downtown submarkets was 508,000 square feet and 473,000 square feet, respectively, both lower than the month before.

David Goldsmith

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Flight to quality in office real estate leaves trophy buildings the only winners

As office markets emerge from pandemic shock, Class B and C properties will suffer the most, analysts say​

Seventeen months into the pandemic, Black Rock — the famed Eero Saarinen-designed skyscraper whose hulking presence has loomed over Manhattan’s Sixth Avenue for nearly 60 years — finally found a buyer.
When the deal closes later this year, the 38-story office tower at 51 West 52nd Street will fetch $760 million, or about $874 per foot, nearly 25 percent less than the $1 billion that owner ViacomCBS sought for its longtime home before the pandemic ravaged the city’s office market.

Just how much Covid-driven uncertainty contributed to the haircut is unknown. None of the parties involved in the negotiations would comment. But sources said that the delayed sale, which came almost two years after ViacomCBS announced its intention to shed the property, shortened its existing lease terms to less than five years.
The fact that the seller is going to lease back about a third of the building’s 870,000 square feet on a short-term basis — meaning the buyer will assume the responsibility of securing new tenants to occupy a large portion of the building in the near future — also likely had an impact.
“I thought it was a very good price that they got, especially in the current environment,” said Scott Rechler, CEO of RXR Realty, which was not involved in the deal. “It’s a classic building. It’s a great location. But it still needs to have a big investment made into it to bring it into the 21st century.”
In the early months of the pandemic, sales contracts for multi-tenant office buildings negotiated pre-Covid often had to be reworked, resulting in 5 to 13 percent price cuts, said Eric Enloe, a Chicago-based executive in JLL’s valuation division. Adjustments were necessary because of the grave uncertainty facing those properties’ rent rolls, he said.
“At that point, there was a question whether office tenants would pay the rent or they would walk away,” Enloe explained. “There was economic risk… and a lot of uncertainty on how long this would last, whether there would be a vaccine, when people would get back into the office.”
The initial shock that froze the office market has been somewhat alleviated thanks to the widespread availability of vaccines, but uncertainties remain over future demand for office space. A majority of employees have yet to return to their workplaces, and even if they do go back in the near future, many of them will not report five days a week.
Some predict that the longer people work from home, the more likely the style will stick. And the more it sticks, the more substantial its impact on the values of office buildings will be.
“We think work from home is going to affect commodity office products more,” said Kevin Shannon, co-head of U.S. capital markets at Newmark. “That habit is going to have minimal impact on Class A, newly built or repositioned products.”
An analysis from Green Street shows that U.S. office property values as of July — the latest available at press time — were about 8 percent lower than March 1, 2020. In fact, offices, along with malls, are the two sectors that have yet to show strong signs of a rebound from their pandemic lows, with the office index staying almost flat for 16 months. Meanwhile, the all-sector index has gone back up above pre-pandemic levels, thanks in part to an industrial real estate boom.

Distress test

To gauge the potential impact of flexible working patterns on office real estate’s cash flows and values, Fitch Ratings’ Steven Marks conducted a stress test, exploring a scenario in which all office employees with the ability to work from home did so 1.5 days a week, on average. According to the analysis, this hybrid setup would lead to nearly 20 percent fewer people in the office on a given day.
But in the flex-working era, an office with 20 percent fewer people wouldn’t necessarily require 20 percent less space. So the team used a 2:1 ratio. An office with 20 percent fewer people would likely require 10 percent less space, with the excess used for breakout rooms, training areas or collaborative space, Marks said.

Historically, when occupancy goes down, average rents go down a bit further, while landlords’ expenses do not see commensurate reductions. The Fitch team concluded that 10 percent less space would lead to a 15 percent decline in net cash flows, and the value of office properties would drop by about 45 percent as a result.
If people work remotely three days a week, the stress test indicated, the value of office properties would tumble 54 percent.
Marks emphasized that Fitch hasn’t used this stress test information for rating purposes, as each property has different fundamentals, including terms of existing leases and major tenants’ creditworthiness, and that the stress test was a way to illustrate the potential magnitude of the impact of continued remote work.
Marks noted that many of the metrics used in the analysis, such as average days spent working remotely and how those working patterns will impact space needs and rents, are very much in flux.
“We do think that the story is yet to be written,” he said.

Long-term cushion

Office landlords and those peddling their buildings say that the true impact of hybrid work patterns on property values could vary greatly depending on the classification and location of each property. In particular, David Heller, of Savills’ capital markets group, disagreed with the notion that a hybrid work model will lead to a reduction in space.
“A lot of companies are recognizing that, yeah, perhaps we need to offer some form of flexibility,” Heller said. “But if everybody’s in the office three days a week, they can’t really shed office space because invariably, they’re going to be in on some of the same days.”
On the capital markets side, investors who recently traded office buildings haven’t taken the impact from flexible working into their acquisition price assumptions, said Mark Godfrey, who leads CBRE’s valuation team.
“They’re looking at stability happening, and a return to more pre-Covid type market conditions as the world recovers,” Godfrey said.
Indeed, the latest cap rates for Class A office properties in Manhattan, for example, are the same as they were in the second half of 2019 — between 4.5 and 4.75 percent for stabilized properties, according to a CBRE survey.
The consistency implies that the investment risk in Manhattan’s Class A office properties has not changed as a result of the pandemic. This is in stark contrast to the borough’s office leasing market, where vacancies are at record highs and the average asking rent hit a four-year low in August, according to Colliers International.
Nationwide, office leasing is showing some signs of recovery, with 29 percent more leases signed in the second quarter than in the first. But leasing volume was still 40 percent below its pre-pandemic quarterly average, and net absorption remained negative, according to JLL.
Office landlords owe their relative financial stability in the pandemic mostly to the long-term nature of office leases. Even when landlords saw cash flows decline due to vacancies, they’ve been able to withstand it because — unlike during the global financial crisis — they weren’t over-leveraged, said Lisa Pendergast, executive director at CRE Finance Council, a trade group for commercial real estate lenders.
“Loans were underwritten at much lower loan-to-value ratios,” she said. “So your leverage was not as high, and so your cash flow doesn’t need to be exceptional in order to make your debt payment.”
Savills’ Heller agreed.
“Even if my cash flow is decreased for a certain period of time, because my debt service is lower, my coverage is still there,” he explained. “So I can still support a fairly healthy financing environment.”
As a result, there have been far fewer distressed office properties on the market, and bargain-hunting investors were mostly left disappointed.

The name on the door

Investors are flocking to office buildings occupied by a major single tenant with a long-term lease, and the value of those properties has risen higher than before the pandemic, said JLL’s Enloe.
“There’s tremendous demand, both domestic capital and foreign capital, chasing those transactions,” Enloe said.
In July, South Korean real estate investor JR Asset Management Company paid $282.6 million to acquire a Google-leased 222,000- square-foot office building in the Silicon Valley city of Mountain View, according to real estate publication The Registry. The sale price works out to about $1,273 per foot.
And in May, Brookfield Asset Management bought a Facebook-leased 198,000-square-foot office building in Bellevue, Washington, for $200 million, or $1,010 a foot. It was Brookfield’s second purchase in the neighborhood, following a $365 million acquisition in October of a 338,000-square-foot office building ($1,080 per foot), also fully occupied by Facebook, according to local media reports.
(It’s notable that both Google and Facebook have delayed their return-to-work plans to at least January 2022 and have said they will allow certain employees to work from home permanently.)
Newmark’s Shannon, who is based in Los Angeles, maintained that while most office markets on the West Coast are still struggling because of the pandemic, certain cities are doing exceptionally well, and Bellevue is one of them, thanks to such tech giants as Amazon, Microsoft and Apple, in addition to Facebook, that are all gobbling up office space.
Another hot market is Burbank, California, which has become a battlefield in the streaming wars with Netflix, Disney and Comcast each taking up office space in the city, and San Diego, where office supply is shrinking because of ongoing office-to-lab conversions to accommodate a thriving life sciences industry.
“They are having bidding wars in those markets because the fundamentals are clear,” Shannon said. “In most markets, though, there’s not as much transparency on the fundamentals, and you’re waiting for data points on what rents are going to be post-Covid, and what absorption is going to be.”
The trend isn’t confined to the West Coast. Citing marketing materials, Bloomberg reported on Aug. 31 that Kevin Hoo’s Cove Property Group is looking to sell Hudson Commons, its 25-story, 700,000-square-foot office building on west side near Hudson Yards, for more than $1 billion.
Nearly half the building’s space serves as the corporate headquarters of Peloton, whose $92 per-square-foot lease runs through 2035. A further 100,000 square feet is leased by Lyft through 2029.

Structural impairments

Still, industry players all agreed that this flight to quality — in which tenants seek more updated office products to attract talent — is real, and values of outdated office buildings are likely to suffer.
“There’s a structural shift in the market, where the Class B buildings are going to be structurally impaired,” said RXR’s Rechler. “Even as the economic cycle recovers, I don’t think those values are going to recover.”
The trend is affecting not only Class B and C buildings, but some Class A properties, too, leaving so-called “trophy” buildings as the only winners.
According to Avison Young’s Craig Leibowitz, average net effective rent — base rent minus tenant improvement allowance and free rent — for Class A, B, and C buildings has dropped by more than 10 percent in the pandemic, while average net effective rent for trophy buildings — defined as the top 10 percent of the market — has stayed the same.
One trophy building is SL Green Realty’s newly constructed Midtown Manhattan skyscraper One Vanderbilt, which, according to documents viewed by The Real Deal, is currently asking rents ranging from $130 per square foot all the way up to an eye-popping $322 per square foot. SL Green closed on the $3 billion refinancing of the tower in June, a major endorsement from Wall Street that top buildings will hold their value.
Greg Kraut, co-founder and CEO of KPG Funds, which specializes in modernizing mid-market office buildings, said he hasn’t seen prospective tenants looking to shrink footprints. Instead, tenants have requested more thoughtful, healthy, efficient use of space, including more common areas, amenities, collaborative meeting spaces and breakout rooms, to welcome back their employees and attract top talent.
Kraut added that he’s seen more buying opportunities in the past nine months or so, as values of not-so-attractive buildings have come down.
“What we look at is the unrenovated, untenanted buildings in high-demand areas,” Kraut said. “There’s a significant discount to what it was before the pandemic.”
Kraut’s vision may be shared by Black Rock buyer Harbor Group International. The firm, led by Jordan Slone, already announced plans to make “significant upgrades” to the skyscraper’s interiors and amenities prior to closing the deal.
“This is the opportunity of a lifetime,” Kraut added.

David Goldsmith

All Powerful Moderator
Staff member

Delta force: Surging Covid variant spoils return-to-office plans​

Dashed hopes for a widespread revival of in-person work after Labor Day leave office markets in limbo​

As recently as July, visions of reoccupied desks and packed commuter lines danced in the heads of employers and office landlords, who clung to hopes that a widespread return to the workplace after Labor Day might still be in the cards.
But an explosion of Covid cases driven by the highly contagious Delta variant has forced a growing number of firms to reconsider their plans.

With infection and hospitalization rates rising across the U.S. — and persistent vaccine hesitancy rendering herd immunity unlikely — many companies are now putting off previously announced deadlines for employees to start reporting to the office.
Delta’s rise has muted cautious optimism for a speedy economic recovery in general, and for the office market in particular. The vacancy rate in Manhattan, the country’s largest office market, stood at 16.9 percent in August, a hair below the record 17.1 percent set in May and matched in July.

Despite a slight uptick since the start of the year, office use in major markets remains just a fraction of pre-pandemic averages from the first quarter of 2020 — 38 percent in New York, 49 percent in Chicago and 62 percent in Los Angeles, according to anonymized data from Brivo, a firm that supplies card-swipe and other access-control systems for offices.
In each of the first three weeks of August, office occupancy actually declined in New York, Los Angeles and San Francisco as delta continued to generate headlines, according to card-swipe data from Kastle Systems.
“The delta variant is a meaningful threat to [New York City’s] recovery,” Mark Zandi, chief economist at Moody’s Analytics, told the New York Times in mid-August.

Delayed response

Firms in the tech sector — among the first to go remote at the start of the pandemic — are now leading the retreat from the Labor Day consensus. Google and Apple both announced in late July that they were pushing their office reopenings to October. But a month later, both firms decided to put it off until January, as did Amazon and Facebook. Twitter, which last year announced that employees could work from home indefinitely, has closed offices that it had recently reopened in New York and San Francisco.
Financial firms including BlackRock, Wells Fargo, Credit Suisse, PIMCO, T. Rowe Price and Liberty Mutual have all pushed back plans to return to their offices until at least October. Boston-based asset manager State Street announced in August that it would abandon and sublease its two Manhattan office buildings entirely in a more permanent embrace of hybrid remote and in-person work.

JPMorgan — whose CEO, Jamie Dimon, fired the starting gun in April for Wall Street’s return when he announced July as the banking giant’s target date — is still sticking by its revised September reopening plan, at least for now, as is Goldman Sachs.
But the list of major firms postponing their office reopenings keeps growing across numerous sectors — from ViacomCBS and Sony Pictures to Ford and Coca-Cola.
An August survey by the Partnership for New York City found that 44 percent of employers in the city have delayed their return-to-office plans because of the delta variant surge. Employers estimated that 41 percent of their office workers would be back at their desks by Sept. 30 — down from their previous prediction of 62 percent three months ago — and they expect nearly a quarter of employees to be working remotely even by the end of January 2022.

Boston Properties, which owns approximately 12 million square feet of office space in the New York metro area, has seen a decline in occupancy of about 10 percent in August, according to the New York Times, but CEO Owen Thomas remains optimistic.
“I think the return to the office is a ‘when’ question, not an ‘if’ question,” he said. “Delta is affecting the when.”

David Goldsmith

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Staff member
I guess multi-billion dollar tax breaks aren't necessary to attract Big Tech to NYC after all.

Google Plans $2.1 Billion Purchase Of St. John's Terminal On Manhattan's West Side​

Google announced Tuesday it plans to buy the St. John’s Terminal on the west side of Manhattan for $2.1 billion, in reportedly the largest commercial real estate purchase in America since the pandemic began.

The tech giant has been leasing the 12-story two-block parcel adjacent to the West Side Highway by West Street since 2018 and building out its offices there. The 1.3 million-square foot St. John’s Terminal building will anchor its new Hudson Square campus which also includes the buildings at 315 Hudson Street and 345 Hudson Street. The company already owns 111 Eighth Avenue and bought the Chelsea Market building for $2.4 billion in 2018.

Google said in a press release the purchase will close by the first quarter of 2022 and the site is expected to open by mid-2023 “as the new NYC headquarters for Google’s Global Business Organization.”

“New York’s energy, creativity and world-class talent are what keep us rooted here and why we’re deepening our commitment with plans to purchase St. John’s Terminal,” said Ruth Porat, Alphabet and Google Chief Financial Officer, in the release. “We look forward to continuing to grow along with this remarkable, diverse city.”

“What a vote of confidence in New York City. What a statement about the future of our economy and jobs for New Yorkers -- good paying jobs,” said Mayor Bill de Blasio at his press briefing Tuesday. “Google is leading the way here in our economic comeback but also further asserting what we know more and more: New York City is now one of the great tech capitals of the world.”

Google’s presence in New York City began more than 20 years ago with a single employee working out of a Starbucks in Manhattan, noted the company’s Vice President for Global Client and Agency solutions Torrence Boone at the mayor’s press briefing.

The company has about 12,000 employees in the city now, with plans to add another 2,000 employees.

One outside analyst said Google's acquisition of so much real estate could signal New York City's enduring value to companies.

"I think this shows that they still think that New York is a place where it makes sense for them as a business, despite the costs of operating in a high rent, high tax regime area," said Blair Coulson, Vice President & Senior Credit Officer at Moody's Investors Service. "It makes sense for them to be located there because they know that there are synergies that come from that, there's the capability to attract talent that comes from that."

Boone said the company is still committed to a hybrid work model for the time being. In August, Google and Alphabet CEO Sundar Pichai said they were extending their voluntary return-to-office plan until January 10, 2022 "to give more Googlers flexibility and choice as they ramp back."

The site plans also call for renovations at Pier 57 to be completed next year with more office space for Google, a public food hall, community space, galleries, and what the company says will be “the city’s largest public rooftop space and educational and environmental programs run by the Hudson River Park Trust.”

The news was not universally celebrated Tuesday. Andrew Berman, the Executive Director of The Greenwich Village Society for Historic Preservation, said so much of the area's housing stock -- including affordable housing -- has already been eliminated as commercial buildings rise. The neighborhood, west of Soho, will also be home to Disney's new 1 million square foot complex a few blocks away.

"We're seeing housing, including rent-regulated housing, being destroyed to make way for tech-related office buildings. We're seeing historic buildings being destroyed to make way for tech-related office buildings," Berman said.

"I have no particular beef with Google per se," he added. "But I think that the city is not doing its job in terms of directing development, certainly in this part of New York, in an appropriate way to maintain a balance between welcoming new development and new businesses and the tech industry, but also protecting neighborhood character, protecting existing housing, protecting historic buildings."