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

David Goldsmith

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18 Percent of Employees Would Quit Instead of Heading to the Office Full Time: Survey​

Nearly 1 in 5 employees said they would quit their jobs if they were forced to go back into the office full time, according to a new survey from human resources provider Traliant.

Roughly 18 percent of the 2,000 workers surveyed said they would “look for a new job if their employer required them to return to on-site work,” and another 36 percent said they would try to negotiate flexible work arrangements, according to Traliant. The vast majority, 82 percent, said that hybrid and remote work options had improved their work-life balance.

The data, which was collected by analytics firm Propeller, includes responses from employees across the U.S. working on-site or away from the office. It comes after plenty of firms have cut down on their office space. Facebook and Instagram owner Meta said it planned to spend $3 billion to shrink its office footprint worldwide, and Manhattan office leasing dropped 40 percent month-over-month from September to October. Despite workers’ preference for home offices, the amount of fully remote jobs has shrunk in recent months.
But returning to the office isn’t the only corporate policy that employees have strong feelings about. More than half — 54 percent — of those surveyed said they wanted to leave their current company for one more aligned with their views on environmental, social and governance (ESG) issues, Traliant found. And 48 percent said they’d like to be more involved in opportunities to make real change, particularly when it came to their employer’s ESG commitments.

One-third of employees said they wanted their companies to be more vocal about social, political or environmental issues.
Forty-six percent of workers ages 25 to 34 said a company’s commitment to ESG issues was very important to them, and 57 percent of employees ages 35 to 44 agreed.
In terms of social issues, 40 percent of employees said their companies had “actively addressed” diversity, equity and inclusion issues in the past year, while about a third of respondents said their companies had made ESG commitments to address human rights issues. Roughly a quarter of people surveyed said their bosses had made commitments related to sustainability, labor standards and energy efficiency.
“One of the takeaways of the survey is now that HR leaders have a seat at the senior leadership table, they should lead the charge by asking employees what they need to be successful, and then craft an action plan that works for employees and the business,” said Maggie Smith, vice president of human resources at Traliant, in a statement. “If you’re not listening to employees and willing to adapt, good talent will go somewhere else. Employees want to be involved and it’s critical to keep them informed.”

David Goldsmith

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Developers punt on new office projects​

“There’s increasing uncertainty in the world, and tenants are acting accordingly”​

Top developers are punting on new office projects as workplaces face uncertain futures.
High vacancy rates and dwindling leasing demand have pushed developers to delay significant office projects either in the planning stages or already underway, the Wall Street Journal reported. People familiar with the matter told the outlet firms including Vornado Realty Trust, Brookfield Asset Management, Hines and Kilroy Realty are backing off of the sector.

Low demand and economic uncertainty occasionally leads developers to go full-throttle on office development, anticipating the ebbs and flows of the market; major projects could take years to complete. But interest rates are high and the future of office work has never been less clear.
In the country’s 54 largest markets, there is 156 million square feet of office space construction underway, according to CoStar, down from 186 million square feet in the first quarter of 2020. Meanwhile, the national office vacancy rate is 12.5 percent, the highest since 2011.

“There’s increasing uncertainty in the world, and tenants are acting accordingly,” Vornado Realty Trust president Michael Franco said last week in the real estate investment trust’s third-quarter earnings call.
CEO Steven Roth in the call cast doubt on the Hotel Pennsylvania site, where demolition is on track to be completed by the end of next year.

“I must say, the headwinds and the current environment are not at all conducive to ground-up development,” Roth said, demurring when asked if Vornado is considering non-office uses for Penn 15.

Nearly a record amount of space under construction is not pre-leased, another worrying sign for developers. Approximately 37 percent of space under development is available, according to CoStar, more than doubling the rate from 2019 and approaching the 39 percent record set in 2008.

Flailing demand for office space is exemplified by subletting trends as companies declare they no longer need the amount of space they did prior to the pandemic. CoStar data show 212 million square feet are available to sublease in the country, the highest amount since the firm started tracking the metric in 2005.

David Goldsmith

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Office lenders looking for an off-ramp​

JPMorgan Chase, Deutsche Bank, Barclays exploring debt sales​

Is the other shoe about to drop on commercial real estate?
Just in case it is, prominent lenders for commercial properties, especially offices, are exploring sales of their loans in cities with low demand, including New York, Bloomberg reported. JPMorgan Chase, Deutsche Bank and Barclays are among them.

In a sign of how motivated lenders are to offload debt, some are offering discounts ranging from 3 percent to 25 percent. Many of the talks around selling debt have been held behind closed doors, and debt deals are largely being kept out of the public eye.
The risks lenders face include that the properties secured by their loans will not generate enough revenue for their owners to pay the debt service, and the assets’ value will fall below the loan balance.
“Office in particular is a dirty word for lenders,” Jeff Kaplan of Meadow Partners told the publication.

Selling loans is a normal course of business for banks. What’s not, however, is the struggle they are having finding buyers. Hence the discounts.
Lenders issued $316 billion in commercial loans across the country in the first half the year, according to the Federal Reserve. But rising interest rates and distress for certain commercial property types has lenders reversing course.
Many have become hesitant to originate debt, fearing rising rates and inflation will reduce the value of those loans in the future. Some commercial real estate players are taking out variable-rate loans rather than lock in fixed-rate loans at high interest rates.
Commercial lenders are responding to declining property prices across the sector. Commercial prices are down 13 percent from a May peak, according to the Green Street Commercial Property Price Index. Shopping malls have taken the biggest hit with a 23 percent drop, but even industrial prices are down 17 percent since May.
In the long term, office landlords may have it the worst. A study by NYU’s Arpit Gupta and Columbia University’s Vrinda Mittal and Stijn Van Nieuwerburgh estimated that by 2029, New York City’s office stock will fall in value by 28 percent, or $49 billion.

David Goldsmith

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Companies still have way too much office space, and they can't sell it
The amount of commercial real estate available for sub-lease is roughly equal to eight Amazon HQ2 towers.
Other than high-use leases such as medical offices and laboratories, few lease holders can find buyers or tenants for unused office space.
Companies that own their own campuses will likely wait out the current market, even knowing prices may further deteriorate.
Collin Madden, founding partner of GEM Real Estate Partners, walks through empty office space in a building they own that is up for sale in the South Lake Union neighborhood in Seattle, Washington, May 14, 2021.
Collin Madden, founding partner of GEM Real Estate Partners, walks through empty office space in a building they own that is up for sale in the South Lake Union neighborhood in Seattle, Washington, May 14, 2021.
Karen Ducey | Reuters
A few things we know about corporate real estate: it's a focus of cost-cutting for companies, but it's also probably the last asset you want to sell now in a soft market.

How soft? According to Elizabeth Ptacek, senior director of market analytics at commercial real estate information and analytics company CoStar, there is currently 232 million square feet of surplus commercial real estate up for sub-leasing. To put those numbers into perspective, Amazon's HQ2 is 8 million square feet. Even more telling, the 232 million square feet is twice the level of surplus from before the pandemic.

CFOs have told us that as their companies go to hybrid work and corporate hub models that make less use, if any use, of satellite offices, there is real estate to be sold. And they aren't selling it now. Ptacek says that's the right decision.

The only property owners selling today are either desperate for cash or they are sitting on trophy assets. And those trophy assets are few and far between. Well-leased medical offices and laboratories with high credit score tenants and secure income streams are still attracting plenty of attention from investors, according to CoStar, but that's about it. Any corporation that has abandoned a satellite office that used to be key for its in-office staff, is sitting on a property that Ptacek says, "no one will buy for anything less than a substantial discount."

Between the shock to commercial real estate from the remote work trend, followed by the higher interest rates and the prospect of another recession, now is no time to sell even if Ptacek says commercial real estate owners should expect it will get worse yet. CoStar projects that the sub-leasing surplus will persist as companies worry about needing to lay off workers and make other cuts ahead of a recession, and it goes further: the subleasing square footage will never return to the pre-pandemic level, she said.

The slowdown in investment activity that Ptacek described as a gradual slowdown so far, will become a "dramatic slowdown" after the pipeline of deals signed in Q2 and Q3 before rates started to rise are closed. "The bigger impact is ahead of us, and absolutely the higher borrowing cost will have an impact, and in many cases, eliminate the levered investors," she said.

It's a bad situation, but she said that for owners of corporate real estate, if the cost of real estate debt is cheap and the balance sheet is solid, sit on the real estate.

With companies still in the early days of their hybrid work experiments, it's not just economic uncertainty but uncertainty about how in-office occupancy trends over time which should make companies want to hold off pulling the trigger on asset sales. Leases that were up for renewal were an easy call to make (end it), and firms can always sign new leases (likely at even better rates) if and when they need to make that call.

"It's all still shaking out and you see it, you see the big companies one day fully remote and the next day signing huge leases and telling everyone, 'Back in the office,' and then the minute they do employees express consternation and they say, 'Never mind.' It's all very much in flux," Ptacek said.

Uncertainty is the ultimate deal killer, she said. No one wants to buy assets with the risk of no demand barring rent cuts of 50%. It's difficult right now, she said, for either buyer or seller to reach what would be defined as a "reasonable price."

Companies should expect the situation may be even worse a year from now.

"It's probably a fair assumption that this is not going to be a lot better in a year, in terms of demand," she said. "There could be another leg down in transactions."

The wave of distressed sales that usually occur in downturns have not occurred yet, and that is right on schedule, as they tend to lag the start of downturns by a few years. Ptacek noted that after 2008, the peak in the distressed asset sales wave didn't occur until 2010/2011.

"As loans come due and they have difficulty, it's refinance or sell," she said. And more borrowers won't be able to refinance, and the wave of distressed sales will ensue. "There will likely be some level of distress which will weigh on pricing, so you could as an owner find yourself in a position in a few years where the environment is even less favorable. But it's not like it's a good environment today," she said.

David Goldsmith

All Powerful Moderator
Staff member

Why Office Buildings Are Still in Trouble​

Hybrid work, layoffs and higher interest rates are leaving lots of office space vacant and hurting the commercial real estate business.

With the pandemic receding, children back in school and businesses telling employees to return to the office, the companies that own big office buildings were hoping to move on this fall from a nightmarish two years.
Instead, things got worse.
More office workers are back at their desks than a year ago, but attendance at office buildings in New York, Boston, Atlanta, San Francisco and other cities is languishing well below prepandemic levels. As leases come up for renewal, companies are often opting for smaller offices, saddling landlords with millions of square feet in vacant space. And more space is expected to hit the market in the coming months as companies like Meta, Salesforce and Lyft lay off workers. More than 100,000 technology workers have lost their jobs this year, according to, a site that tracks job cuts.
Higher interest rates are also weighing on the industry. Many landlords are no longer willing or able to acquire and spruce up older buildings or build new ones. Seeing little upside in holding on to sparsely occupied buildings and paying interest on mortgages, some landlords are handing over properties to lenders. Others are seeking to convert office buildings into residential complexes, though that can be expensive and take years.
Wall Street investors appear to think the office space sector is in for a deep slump. The shares of large landlords and developers are trading close to or below their pandemic lows, underperforming the broader stock market by a huge margin. Some bonds backed by office loans are showing signs of stress.

The value of U.S. office buildings could plunge 39 percent, or $454 billion, in the coming years, according to a recent study by business professors at Columbia and New York University.
“We see lots of tenants not renewing their leases, going either fully remote, or renewing their leases but signing up for less space,” said Stijn Van Nieuwerburgh, one of the authors of the paper, and a professor specializing in real estate at Columbia Business School. “It all adds up.”

A sickly office sector can hamper the recovery of cities that depend on the jobs and tax revenue that commercial buildings provide. For example, New York City collected about $6.8 billion in property tax revenue from office towers in the fiscal year that ended in June, or around 9 percent of its total tax revenue, down from $7.5 billion in the previous fiscal year. The market value of office buildings in the city fell $28.6 billion last year, the first such decline since at least 2000, the Office of the State Comptroller estimated.

In a sign of how fast the market has turned down in some places, companies are giving up space that they leased only months earlier. Meta, the parent of Facebook, recently decided to sublet all the space that it signed up for about 10 months earlier in an Austin, Texas, tower called Sixth and Guadalupe. Meta must still pay the rent on 589,000 square feet, but its decision to find somebody else to occupy the space could push rents down across Austin, which until recently was seen as a thriving and growing technology hub.

The struggle to fill empty offices is a national phenomenon.
The amount of office space leased in the United States in the three months that ended in September was nearly a third below the quarterly average for 2018 and 2019, according to Avison Young, a commercial real estate services firm.
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Office vacancy rates across the country stand at a record 19.1 percent, with Chicago, Houston and San Francisco running above 20 percent, according to Jones Lang LaSalle, a commercial real estate services company. That includes the record 185 million square feet, or 3.85 percent of total office space in the country, that is available for sublet. Another 104 million square feet will come onto the market through 2024 as new office buildings are completed, according to Jones Lang LaSalle.

In some ways, New York, the largest office market in the country, with 540 million square feet of space, is particularly vulnerable. Older office buildings in the city are losing their best tenants to new well-equipped buildings in neighborhoods like Hudson Yards on Manhattan’s Far West Side, leaving lots of empty office space in Midtown and downtown.

“The availability downtown is at a record high of 20.2 percent,” said Franklin Wallach, an executive managing director at the brokerage firm Colliers. “These are older buildings in the canyons of Wall Street, and we’re seeing large vacancies, not because of one single tenant but tenant migrations that are all hitting at once.”
Office landlords made it through the pandemic in reasonable health because corporate tenants with long leases kept paying rent even if their employees weren’t coming into the office.
But the landlords, who typically flash sunny optimism even in dark days, are now sounding more cautious. They acknowledge that many corporate tenants are sticking with some form of work-from-home policy, and their bullishness is mostly focused on new buildings.

Still, they believe demand will eventually come back. William C. Rudin, the chief executive of Rudin Management, a New York developer and landlord, said that companies often give back space in downturns. But when the economy improves, corporate executives change their minds and say: “Oh, my God, we don’t have enough space. We’ve got to take more space.”
The work-from-home revolution is not confined to the coasts. Even in Texas, office attendance has not fully recovered — it is 53 percent of prepandemic levels in Dallas, 57 percent in Houston and 62 percent in Austin, according to Kastle Systems, a security card swipe company.
Many landlords say Kastle’s data does not reflect attendance in their buildings. Kastle reports the New York metropolitan area weekly attendance at a little less than 50 percent of prepandemic levels, but Mr. Rudin said his towers were on average roughly 65 percent full over the course of a week. He added that occupancy was much higher at buildings occupied by financial companies, many of which have required employees to come back.

Office landlords borrow money to acquire and construct buildings. So far, most of them are making debt payments, according to data from Trepp. But signs of stress are appearing in commercial mortgage-backed securities, which are backed by payments on office loans and then sliced into layers, where the top layer is more protected against defaults than those at the bottom.
“I think there is more difficulty to come,” said Gunter Seeger, a portfolio manager at Pinebridge Investments, which invests in the debt used to finance office buildings. “It happens in slow motion — you see it coming, but it doesn’t unfold quickly. We’re limping along.”
Investors, for instance, are nervously eyeing bonds backed in part by lease payments from tenants of 300 North LaSalle, a Chicago building owned by the Irvine Company. Boston Consulting Group and Kirkland & Ellis, a law firm, occupy just over 60 percent of the building, and both are set to leave in a couple of years. The price of one of the bonds, which carries a middling rating has slumped 22 percent this year, implying a yield of around 17 percent.

Representatives for the Irvine Company and Kirkland & Ellis declined to comment. Boston Consulting Group did not respond to requests for comment.

Williams & Connolly, a law firm, moved from a building in downtown Washington to a new development at the Wharf. Hines, the owner of the older building, which had a 10-year, $135 million loan against it, agreed this fall with its lender, Allianz Real Estate, to sell the building.
A spokeswoman for Allianz declined to comment.
An executive at Hines, a privately held real estate investment firm, said that the building, which it has owned for more than 30 years, had been a profitable investment. “We continue to operate the building and are working with the lender to sell the property to a third party,” Chuck Watters, senior managing director at Hines, said in a statement.

Landlords are also finding that some tenants are making do with much less space.
In August, KPMG signed a 20-year agreement to move to Two Manhattan West, a skyscraper expected to open next year on the edge of Hudson Yards. KPMG, which has adopted a hybrid work model, is leaving three older buildings and reducing its lease space by 40 percent.

“For our business, we believe a hybrid future — a blend of fully remote, hybrid and on-site teams — will deepen connections among current and potential employees and leaders, delivering us a competitive edge in the marketplace,” said W. Scott Horne, a KPMG spokesman.
Mr. Rudin, whose company owns two of the buildings from which KPMG is moving, said it had a “very good retention rate” but acknowledges that tenants needs change, adding that his firm was improving older buildings and having success leasing them.

Companies may struggle to shrink their office space if most employees are expected to come in, say, three days a week. But, over time, managers will become more adept at minimizing space. And cutting costs could become a priority if the economy slows sharply or slides into a recession.
Mr. Van Nieuwerburgh, the Columbia professor, calculates that New York office space on average costs about $16,000 a year per employee. “That’s real money,” he said, “and companies will try to save that.”

David Goldsmith

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KKR dumps Manhattan office plans​

Private equity giant eyed 300K sf at Tishman Speyer tower​

KKR is the latest firm to bail on office plans as the sector continues to be shaped by remote work.
The private equity giant was looking at 300,000 square feet at Tishman Speyer’s 341 Ninth Avenue in West Chelsea Insider reported. The firm was considering the space near its Hudson Yards headquarters for possible consolidation of its other Manhattan office spaces, but has since scrapped its plans.
“Fair to say we have paused our review of that space and are not moving forward at this point,” a person at KKR told the outlet.
KKR occupies several offices in the city, leasing space at 10 Hudson Yards and 4 World Trade Center. The company also occupies space at 30 Hudson Yards, the New York headquarters for the firm.
Despite being initially in favor of enforcing employees’ return to the office, the company has joined the ranks of large firms to reconsider their office footprints.
In addition to lasting remote work policies, downsizing spurred by economic uncertainty has pushed major companies to sublet spaces or pause new developments. Tech firms are aiming to sublet a whopping 30 million square feet across the country, according to recent CBRE data, an increase from 9.5 million square feet in the fourth quarter of 2019.

Rideshare company Lyft started looking to cut its office space in half over the summer, subletting 615,000 square feet across four markets. Social media giant Meta recently bailed on plans to occupy 589,000 square feet in Austin. Meta and Amazon have also recently pulled back on expansion plans in New York City.
CoStar put the amount of sublease space available across the country at a record 212 million square feet.
The phenomenon can be seen in deals across Manhattan. Tishman Speyer agreed to acquire the leasehold of the upper floors at 341 Ninth Avenue, occupied by one of the largest U.S. Postal Service processing centers in the nation. The developer set out to convert 600,000 square feet across six floors into office space.
In the fourth quarter of 2020, Tokyo-based public relations and advertising company Dentsu made the biggest dent in the sublease market for the period, seeking to sublease all 324,000 square feet it occupied at 341 Ninth Avenue.
Tishman Speyer did not immediately return The Real Deal’s request for comment.

David Goldsmith

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Meta Scales Back on New York Office Space Amid Belt-Tightening​

It reportedly won't renew a lease on some office space in Manhattan's Hudson Yards.

Meta is scaling back its office space in New York City, Bloomberg reported Wednesday, saying the company has decided not to renew its lease on office space in two towers in Manhattan's Hudson Yards. The news comes as Meta continues cost-reduction efforts -- earlier this month, it cut 11,000 jobs, or 13% of its workforce, and it's also initiated a hiring freeze.
In 2019, Meta agreed to rent more than 1.5 million square feet of space across three Hudson Yards towers: 30, 50 and 55 Hudson Yards, Bloomberg reported. The company has opted not to renew its lease on office space at the 30 and 55 addresses, the news service said, citing unnamed sources and adding that the lease involves over 250,000 square feet and expires in 2024. In July, Meta halted further build-out of offices at 50 Hudson Yards as it reconsidered its New York real estate, and it's now subleasing a small amount of space in that tower, Bloomberg said.
After the COVID pandemic prompted a move to remote work, businesses have had to switch gears and reconsider the role of the office. Meta spokesperson Tracy Clayton confirmed that the company is subleasing a portion of 50 Hudson Yards and said Meta is working on creating "the workplace of the future."
"The past few years have brought new possibilities around the role of the office, and we are prioritizing making focused, balanced investments to support our most strategic long-term priorities," she said in a statement. "We remain firmly committed to New York City as evidenced by the recent opening of the Farley building, and 50 Hudson Yards, which is estimated to open next year, further anchoring our local footprint." Meta's New York space includes about 730,000 square feet at the redeveloped Farley Building, Bloomberg noted.
Meta didn't immediately respond to a request for comment on the lease renewal regarding 30 and 55 Hudson Yards.
The company expects to lose about $2 billion on office consolidation, according to Bloomberg, which cited Meta's third-quarter earnings call.
In early November, Meta laid off more than 11,000 employees, or about 13 percent of its workforce. This follows weekend reports that Facebook's parent company was preparing for mass layoffs.
The social networking giant currently employs about 87,000 people, and Wednesday's layoffs represent the first large-scale workforce reduction in the company's 18-year history. Social media rival Twitter was hit with layoffs last week under new owner Elon Musk, with around half of its 7,500 workers losing their jobs.
In a letter to employees, CEO Mark Zuckerberg said the company is reducing its budget, cutting back on real estate and extending its hiring freeze until March.
He blamed the cuts on the company's rapid growth during the pandemic, when increased online commerce resulted in revenue growth. He had believed this would continue and increased the company's spending.
"Unfortunately, this did not play out the way I expected," he wrote. "Not only has online commerce returned to prior trends, but the macroeconomic downturn, increased competition, and ads signal loss have caused our revenue to be much lower than I'd expected."
In July, Meta reported its first-ever revenue drop and revealed disappointing third-quarter results last month as ad sales shrank. Meta's traditional social media business has faced fierce competition in the form of short-form video app TikTok.
The company's financial problems also follow Zuckerberg's attempt to shift toward a new business: building the metaverse, a virtual world where Zuckerberg believes people will connect with others. In October 2021, the Facebook renamed itself Meta to reflect this.

David Goldsmith

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New York’s ‘zombie’ office towers teeter as interest rates rise​

During a prolonged bull market fuelled by historically low interest rates and nearly free money Doug Harmon and his team presided over record-breaking sales for many of Manhattan’s trophy office buildings.
No longer. These days, Harmon, the chair of capital markets at Cushman & Wakefield, the real estate services firm, spends much of his time performing “triage”, as he puts it.
The world’s largest office market has of late endured the departure of big-spending Chinese investors, the rise of Covid-era remote working and the economic fallout from the Ukraine war. Now there is mounting concern that the dramatic rise in interest rates will be too much for many owners to sustain and that a long-awaited reckoning is drawing near.
“There’s a consensus feeling that capitulation is coming,” said Harmon, who likened rising rates to petrol igniting an office firestorm. “Everywhere I go, anywhere around the world now, anyone who owns office says: ‘I’d like to lighten my load.’”
The industry is rife with talk of partnerships breaking up under duress, office buildings being converted for other uses and speculation about which developers may not make it to the other side. Meanwhile, opportunists are preparing for what they believe will be a bevy of distressed sales at knockdown prices, perhaps in the first quarter of the next year.
“We’re going to see distress,” said Adelaide Polsinelli, a veteran broker at Compass. “We’re seeing it already.”
Since January, shares of SL Green and Vornado, two publicly traded REITs that are among New York’s biggest office owners, have fallen by half.
Fresh signs of strain came this week. Blackstone, the private equity firm, told investors it would restrict redemptions in a $125bn commercial real estate fund.
It also emerged that Meta, the parent company of Facebook, would be vacating about 250,000 square feet of space at the new Hudson Yards development to cut costs. It and other tech companies had been among the last sources of expansion in Manhattan’s pandemic-era office market.
The small collection of offices like Hudson Yards — with new construction and the finest amenities and locations — are still in high demand, according to Ruth Colp-Haber, who, as head of Wharton Properties, consults companies on leasing.
Meta has announced it will vacate about 250,000 square feet of space at the new Hudson Yards development as it cuts costs. © AFP via Getty Images
But, she warned, the real “danger lurks downstairs in the class B and C buildings that are losing tenants at an alarming rate without replacements.” All told, Colp-Haber estimated that roughly 40 per cent of the city’s office buildings “are now facing a big decision” about their future.
Prognosticators have been forecasting doom for the office sector since the onset of the Covid pandemic, which has accelerated a trend toward remote working and so decreased demand for space. According to Kastle Systems, the office security company, average weekday occupancy in New York City offices remains below 50 per cent. A particularly dire and oft-cited analysis by professors at Columbia and New York University estimated that the collective value of US office buildings could shrink by some $500bn — more than a quarter — by 2029.
The sector has so far defied such predictions. Leases generally run for seven to 10 years and so tenants have still been paying rent even if few of their workers were coming to the office. In the depths of the pandemic, lenders were also willing to show leniency or, as some put it, to “extend and pretend.”
But the sharp rise in interest rates may, at last, force the issue. Financing has suddenly become more expensive for owners and developers — if it is available at all. “If you have debt coming due, all of a sudden your rates are doubled and the bank is going to make you put money into the asset,” one developer said.
Lower quality buildings may be the most vulnerable. As leases expire, many tenants are bolting or demanding rent reductions. Even as their revenues dwindle, owners must still pay taxes and operating expenses.
Bob Knakal, chair of investment sales at JLL, sees a growing horde of “zombie” office buildings in Manhattan that are still alive but have no obvious future. The typical zombie may have been purchased generations ago and supplied monthly cheques to an ever-expanding roster of beneficiaries.
“Now the building is not competitive from a leasing perspective because it needs a new lobby, and new elevators and windows and bathrooms. And if you went to those 37 people and said: ‘You know what? You have to write a cheque for $750,000 so we can fix the building up.’ These people would have a heart attack,’” said Knakal.
If there is debt to roll over, lenders will require the owners to contribute more equity to make up for the building’s declining value. “There’s a reckoning that’s going to come,” said Knakal, “and I think it’s going to be challenging for a lot of these folks to refinance.”
That appears to be spurring a flurry of backroom discussions between borrowers, banks, private lenders and others.
Manus Clancy, an analyst at Trepp, which monitors commercial mortgage-backed securities, likened the situation to that facing brick-and-mortar shopping malls five years ago as their prospects deteriorated. Many ultimately fell into foreclosure. Whether an office loan could be refinanced, he predicted, would depend on the newness of the building, its occupancy levels and the length of the leases. “There isn’t a lot of distress, per se, there’s a lot of concern,” he said.
Some obsolete office buildings may be converted to residential, which, in theory, would help to ease New York City’s chronic shortage of housing. But that is easier said than done, say many experts. It would require zoning changes. Even then, many office buildings may not be suitable candidates for residential conversions — either because their floor plates are too large, their elevators are wrongly situated, their windows do not open or their neighbourhoods are unappealing. To make such projects worthwhile, owners would have to sell at deep discounts.
That has not happened — at least not publicly. “Nobody wants to be the first one to dip their toe in this because nobody wants to set a new low unnecessarily,” David Stern, founder of Townhouse Partners, a consultancy that performs due diligence for commercial real estate underwriters, said. “That’s what everyone is waiting for: this incredible revaluation.” In more colloquial terms, a developer quipped that some owners, accustomed to holding properties for years, had not yet “seen Jesus” — but they would.
In the meantime, some recent transactions have hinted at the market’s shift. In July, RXR and Blackstone sold 1330 Sixth Avenue for $325mn, down from the $400mn RXR paid in 2010. In 2014, Oxford Properties, a Canadian investment firm, paid $575mn to win a bidding war for 450 Park Avenue, a 33-story tower. It was sold by a subsequent owner in April for $440mn.
“What is it worth today?” one broker asked. “Less than $440mn.”

David Goldsmith

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The 'office apocalypse' is upon us​

Deserted downtowns have been haunting US cities since the beginning of the pandemic.
Before the pandemic, 95% of offices were occupied. Today that number is closer to 47%. Employees' not returning to downtown offices has had a domino effect: Less foot traffic, less public-transit use, and more shuttered businesses have caused many downtowns to feel more like ghost towns. Even 2 1/2 years later, most city downtowns aren't back to where they were prepandemic.
Not unlike how deindustrialization led to abandoned factories and warehouses, the pandemic has led downtowns into a new period of transition. In the 1920s factories were replaced by gleaming commercial high-rises occupied by white-collar workers, but it's not clear yet what today's empty skyscrapers will become. What is clear is that an office-centric downtown is soon to be a thing of the past. With demand for housing in cities skyrocketing, the most obvious next step would be to turn empty offices into apartments and condos. But the push to convert underutilized office space into housing has been sluggish.

Without more-robust policies to address failing downtowns, cities are going to start hurting. Even small declines in foot traffic and real-estate use compounding over time will lead to reduced tax revenue and sales receipts for small businesses, ultimately affecting city budgets. And while city planners are reimagining downtowns, the impact on cities' bottom lines has been devastating; in New York, for instance, the value of commercial real estate declined by 45% in 2020, and research suggests it will remain 39% below prepandemic levels.
Less economic activity in urban cores and a lower tax base could mean fewer jobs and reduced government services, perpetuating a vicious cycle that further reduces foot traffic in downtowns, leading to more decline, more crime, and a lower quality of life. For residents of many downtowns, ghost downtowns will be a visible infliction, and throngs of people crowding into a bus on a Monday morning will be apparitions of a recent past.

The death of great American downtowns

The devastation of downtown commercial districts has been an unmistakable shift in America's largest cities. In San Francisco, the landmark Salesforce tower and other buildings have remained mostly unoccupied as the tech industry has embraced remote and hybrid work. In New York, Meta recently terminated its lease agreement for three offices totaling 450,000 square feet in Hudson Yards and on Park Avenue, taking a significant financial hit. This tracks with trends: San Francisco has faced office-vacancy rates of 34% to 40% in some parts of the city, while in New York about 50% of workers are back in the office.
Even in cities where more workers have returned, like Austin or Dallas, occupancy rates are still only 60% of what they were prepandemic. These shifts follow the unassailable stickiness of remote work; researchers for the National Bureau of Economic Research predicted that 30% of workdays would be worked from home by the end of this year, a huge jump from before the pandemic.
The increased cancellations of office leases have cratered the office real-estate market. A study led by Arpit Gupta, a professor of finance at New York University's Stern School of Business, characterized the value wipeout as an "apocalypse." It estimated that $453 billion in real-estate value would be lost across US cities, with a 17-percentage-point decline in lease revenue from January 2020 to May 2022. The shock to real-estate valuations has been sharp: One building in San Francisco's Mission District that sold for $397 million in 2019 is on the market for about $155 million, a 60% decline.
Other key indicators that economists use to measure the economic vitality of downtowns include office vacancy rates, public-transportation ridership, and local business spending. Across the country, public-transportation ridership remains stuck at about 70% of prepandemic levels. If only 56% of employees of financial firms in New York are in the office on a given day, the health of a city's urban core is negatively affected.

The second-order effects of remote work and a real-estate apocalypse are still playing out, but it isn't looking good. Declines in real-estate valuations lead to lower property taxes, which affects the revenue collected to foot the bill of city budgets. Declines in foot traffic have deteriorated business corridors; a recent survey by the National League of Cities suggested cities expect at least a 2.5% decline in sales-tax receipts and a 4% decline in revenue for fiscal 2022. Last year, Atlanta's tax revenue was projected to decline by 5.7%. Finding and retaining government employees has been a problem in New York, where public-sector salaries haven't kept up with inflation. Day-to-day operations and essential government services such as public transportation, trash collection, and street cleaning would undoubtedly take a hit from hamstrung city budgets.

It comes as no surprise, then, that in recent months the combination of a stagnant flow of tax receipts and hollowed-out downtowns has spooked city leaders. At a recent conference, the mayor of Seattle, Bruce Harrell, expressed concern about tax revenue. "The fact of the matter is there will never be the good ol' days where everyone's downtown working," he said. London Breed, San Francisco's mayor, told Bloomberg that "life as we knew it before the pandemic is not going to go back." In the National League of Cities' 2022 survey, almost a third of cities said they'd be in a difficult financial situation in 2023 once federal funds dissipate. In the event of a recession, things could look much worse.

It's about new housing, stupid

While there's been a lack of demand for commercial real estate, the residential market has gone into overdrive. A recent NBER paper suggests the new space requirements of remote workers — space for a desk or office, or to accommodate the extra time spent at home — have helped cause housing costs to skyrocket.
The solution to the office-housing conundrum seems obvious: Turn commercial spaces like offices into housing. Empty offices can become apartments to ease housing pressure while also bringing more people back to downtown areas. But after two years, few buildings have been converted. Jessica Morin, the head of US office research at the commercial real-estate firm CBRE Group Inc., said there hasn't been a "noticeable increase" in conversions. Since 2016, only 112 commercial office spaces in the US have been converted, while 85 projects are underway or have been announced, according to CBRE's data. Despite the promise of new housing — one recent study in Los Angeles estimated that 72,000 new homes could be built in the city by converting offices and hotels — progress has been slow.

So what's going on? Simply: The costs to convert are often hard for developers to justify. Construction costs are assessed on a building-by-building basis and need to take into account structural issues such as floor layouts, plumbing, and window access. Residential buildings also have to accommodate shared spaces like hallways, meaning they generally have less rentable space than an office building. Rising costs of labor and increasing interest rates may dampen efforts to convert offices to homes and inject more risk for developers. "The cost of construction is just so high, and even if you set aside the specific issues related to conversions and just think about the economics of building anything, it's just gotten very difficult," Gupta told me.
Another barrier for office-to-residential conversions is local housing rules. To turn commercial buildings into housing, they would have to be rezoned — which requires input from community members and local officials — to meet specific requirements. Codes for everything from lighting to sustainability vary by city, presenting irregular hurdles in project costs and timelines. Housing developers may not want to put themselves in precarious political situations or go through resource-draining approval processes for a high-risk project with potentially significant financial downside.

Gupta's study suggested, however, that continually falling office values may kick off more interest from developers in adaptive-reuse projects. Despite their cost and complexity, they may be better than letting a building sit empty.

The birth of the central social district

To avoid a commercial real-estate apocalypse, cities will need to streamline conversions. There are several ways to do this. California has set aside $400 million for adaptive-reuse-incentive grants. New York state approved a $100 million fund for hotel conversions, but the stringent requirements led to only a single developer applicant.
Most impactful on the city level would be land-use planning processes that could help speed up conversions. Laws like the Adaptive Reuse Ordinance that Los Angeles passed in 1999 could help dispense with some of the more onerous city-code hurdles, like parking requirements. Gupta suggested that cities could also adapt their tax codes to make conversions more economically feasible by moving to a land-value tax or something similar. Federal initiatives could provide tax credits to developers to ensure buildings are readapted and could provide support for city planners to assist with redevelopment projects.
Overall, combating the death of downtowns requires a reworking of how we think about cities and the value they provide. The urban author Jane Jacobs proclaimed in her famous 1958 article for Fortune magazine, "Downtown Is for People," that "there is no logic that can be superimposed on the city; people make it, and it is to them, not buildings, that we must fit our plans."

While the central business district characterized downtowns in the 20th century, the latest revitalization of cities will hinge on social value. Remote work has isolated people, and central social districts can be the new lure for cities. Restaurants, coffee shops, and coworking spaces are becoming just as important as industry hubs for a city's economy. The urbanist Richard Florida argued in an article for Bloomberg in August that for cities to survive postpandemic, they must transform into places for robust social connectivity. Dense downtowns in Austin and New York have seen steep increases in rental demand, a sign that people continue to be willing to pay a premium to live in a social district.
The transformation is likely to mean mixed-use 24-hour neighborhoods and downtowns where nearly all daily necessities are within walking or cycling distance of where people live. In Montréal and New York, some open-street programs developed during the pandemic became permanent, allowing people and events to replace moving vehicles year-round or during the summer months. The repurposing of rail yards in Sante Fe, New Mexico, and of elevated train lines in New York into parks shows that adaptive reuse can be applied to park infrastructure as well.
The corporatization of work led to urbanization, but the trend today is a decorporatization of downtowns. Out of previous financial districts, new vibrant neighborhoods could form and reestablish local consumption. It would require infrastructure upgrades and the adaptation of public spaces and streets, but, as Gupta noted, office buildings are already ideally situated "smack-dab in the center of the transit network." Meanwhile, research has linked mixed-use areas with lower crime rates than commercial districts.
The economic health of cities is intrinsically linked to how space is used or unused, and right now downtowns are undergoing a massive shift. Despite the sluggish movement, it's in cities' best interest to figure out how to quickly convert office-centric downtowns into something more suitable for everyone.


David Goldsmith

All Powerful Moderator
Staff member
There has been lots of talk about how office to residential conversions are possible. My reply has been that they are at the right price. Here's one which is moving forward. I hope they do better than 1 Wall Street appears to be doing.

MSD, Apollo Close $536M Loan for 25 Water Street’s Office-to-Resi Conversion​

Led by GFP, Metro Loft and Rockwood, the conversion is the largest ever in the U.S.​

GFP Real Estate, Metro Loft Management and Rockwood Capital have landed a $535.8 million loan for the acquisition and redevelopment of 25 Water Street, with the plan to turn the Financial District office building into a residential tower, Commercial Observer can first report.

MSD Partners and Apollo provided the loan, and the deal closed Thursday morning.

Newmark’s Dustin Stolly and Jordan Roeschlaub, vice chairmen and co-heads of the brokerage’s debt and structured finance team, arranged the financing along with Chris Kramer, a senior managing director at the firm.
The deal — which will see the 22-story, 1.1 million-square-foot office building transformed into a 1,300-unit residential tower — represents the largest ever transaction of its kind in the U.S., according to Real Capital Analytics data cited by Newmark. Closing at a time when big loans, especially construction loans, are hard to come by, it’s also one of the biggest debt deals to close this quarter.

“We are pleased to join with Apollo in providing a $535.8 million loan to GFP Real Estate, Metro Loft Management and Rockwood Capital, the sponsors of 25 Water Street, for the acquisition and redevelopment of this special property,” Jason Kollander, MSD Partners’ co-head of real estate credit, said.
“The conversion of 25 Water Street will create a unique residential property in the fast-growing Financial District and we are excited to support this world-class sponsorship team in realizing this project,” Adam Piekarski, MSD Partners’ co-head of real estate credit, added.
Erected in 1969, 25 Water Street — formerly known as 4 New York Plaza — was designed by Carson Lundin & Shaw to house bank Manufacturers Hanover Trust. Over the years, it’s been home to high-profile tenants, including the New York Daily News and JPMorgan Chase.
Boasting views across Lower Manhattan and New York Harbor, the building also has floor plates ripe for multifamily conversion, positioning it well for its next chapter.

When its redevelopment is complete, the new 25 Water Street will feature units ranging from studios to four-bedroom apartments, and an amenity package that includes a basketball court, a steam room, indoor and outdoor pools and sports stimulators. The building is also expected to feature a sky lounge, rooftop terrace and coworking spaces.
“When complete, 25 Water Street will be the largest property ever to be converted from commercial to residential,” Brian Steinwurtzel, co-chief executive officer of GFP Real Estate, told CO. “GFP Real Estate and its partner, Metro Loft Management, are excited to bring some 1300 new rental units to New York’s burgeoning downtown, which has seen a number of successful conversions over the past two decades. We’d like to thank Newmark for their tireless work securing the financing for this incredible, visionary development.”
The Real Deal reported earlier this year that Jeffrey Gural’s GFP and Metro Loft were in contract to acquire the asset from its previous owner Edge Funds, which bought it for $270 million back in 2012 and, more recently, that MSD would lead a construction loan for its residential conversion.
The asset ultimately changed hands via a loan sale, which was led by Newmark’s Stolly and Roeschlaub, along with Brett Siegel and Evan Layne, vice chairmen and co-heads of New York capital markets investment sales at Newmark.
Nathan Berman’s Metro Loft is no stranger to office-to-resi conversions, having completed transactions spanning 5 million square feet over the past two decades. Those conversions include 180 Water Street, 67 Wall Street, 20 Broad Street, 20 Exchange Place and 116 John Street acquired by Silverstein Properties a year ago — to name a few. Earlier this month, Bloomberg reported that the firm, together with Fortress Investment Group, is nearing a deal to acquire a stake in 85 Broad Street with conversion plans for the former Goldman Sachs headquarters building.

GFP, too, has plenty of experience up its sleeve, having recently purchased and redeveloped 13 buildings spanning 3.9 million square feet. The firm completed the $550 million renovation of David Geffen Hall at Lincoln Center for the Performing Arts, which reopened on Oct. 8 to much fanfare.
And, they’re certainly not alone in seeing the value in repositioning tired, vacancy-ridden office buildings into in-demand, luxury multifamily assets. In early December, Silverstein Properties announced a $1.5 billion fund targeting that exact strategy.
Apollo officials declined to comment. Officials at GFP didn’t immediately return requests for comment.

David Goldsmith

All Powerful Moderator
Staff member

Manhattan office market grinds to halt in brutal fourth quarter​

Tenants took less than 5M sf in sharpest decline since onset of pandemic​

Manhattan office landlords hoping for continued recovery in the market this holiday season were mostly met with a lump of coal.
Office leasing in the borough plummeted 43 percent year over year in the fourth quarter, with tenants taking just 4.9 million square feet in the final three months of 2022, the lowest quarterly total since the second quarter of 2021, according to Colliers.

It was also an abrupt decline from the third quarter — 47 percent — marking the sharpest quarter-to-quarter drop since the start of the pandemic. Manhattan’s office availability rate increased for the first time in a year, rising 0.5 percent from the third quarter, though it’s still down 0.4 percent from the end of 2021.

The amount of available office space in the borough has increased almost 70 percent since the onset of the pandemic to 91.4 million square feet, and after 2.8 million square feet of negative net absorption in the fourth quarter, net absorption since the start of the pandemic now stands at negative 37.6 million square feet.

Declines throughout​

The dropoff in demand was consistent across the borough’s three primary office districts: Midtown, Midtown South and Downtown.

Midtown recorded 2.4 million square feet of leasing volume in the fourth quarter, its lowest since the second quarter of 2021. Volume was down almost 47 percent from the previous quarter and more than 50 percent year over year. The market had a negative net absorption of more than 393,000 square feet, compared to 2.6 million square feet of positive net absorption in last year’s fourth quarter.

Midtown South also recorded its lowest quarterly leasing volume since the second quarter of 2021. The 1.9 million square feet leased represented a quarterly decline of 44 percent and a year-over-year dropoff of almost one third. The market had a negative net absorption of 2.5 million square feet, its highest in nearly two years.

Downtown recorded just 638,000 square feet of leasing volume, a quarterly decline of 51 percent and a year-over-year decrease of nearly 36 percent. The market did, however, achieve a positive net absorption for the first time in two years at over 140,000 square feet.
Midtown and Midtown South saw their availability rates increase 0.2 and 1.3 percent, respectively, from the third quarter, while Downtown saw its availability rate decrease for the first time since before the pandemic. Only Midtown’s availability rate was down year-over-year.

Office investment also took a nosedive in the fourth quarter amid high interest rates. Manhattan saw $1 billion in sales volume in the final three months of the year, an 85 percent dropoff from 2021 for the largest annual decline in five years. The median sale price was $725 per square foot, down from $874 the previous year.

Asking rents tick upward​

Still, a brutal fourth-quarter performance was not enough to erase all of last year’s recovery.
Leasing volume for the full year totaled 29.1 million square feet, a nearly 17 percent increase from 2021, though still 12 percent below the borough’s ten-year rolling average.
And despite the slowdown in demand, average asking rents ticked up almost 2 percent in the quarter to $75.41 per square foot. That figure was partially buoyed by low-priced spaces being removed from the market, Colliers said. Manhattan’s average asking rent increased 0.5 percent over the course of the year.

The borough also achieved a positive net absorption of 1.3 million square feet last year, up from 17.3 million square feet of negative net absorption in 2021.
The average asking rent for Class A space increased 2.5 percent in the fourth quarter to $81.51 per square foot, bringing it closer to the $84.50 recorded in the fourth quarter of 2019. Rents for Class B were relatively unchanged, while Class C buildings saw average prices decline 1.5 percent.

After three consecutive quarterly decreases, Midtown’s average asking rent increased from $78.61 per square foot to $79.22 in the quarter, although it is still down from the end of 2021, when it was $79.95. Midtown South saw its average asking rent increase 2.3 percent from the previous quarter and 3.8 percent year over year to $81.52. Downtown’s average asking rent increased quarterly by 1.8 percent to $59.73, but was down 0.7 percent year-over-year.

Tenants in the financial, insurance, real estate and legal were responsible for 38 percent of leases signed last quarter. Occupants in the technology, advertising, media and information sectors accounted for 23 percent of leases signed.
Among the fourth quarter’s biggest leases were Stifel Financial Corp renewing for nearly 215,000 square feet at 787 Seventh Avenue, Ann Taylor parent Ann Inc. renewing and expanding to over 191,000 square feet at 7 Times Square and Medidata Solutions renewing for more than 176,000 square feet at 350 Hudson Street.

Notable investment sales to close last quarter were Vornado Realty Trust selling 40 Fulton Street for $101 million, the former AIG headquarters at 175 Water Street trading hands for $252 million and SL Green unloading more than half of the Lipstick Building at 885 Third Avenue to Memorial Sloan Kettering for $300 million.

David Goldsmith

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Staff member

Surviving the tech wreck: How the Manhattan office market could pivot​

Financial firms, smaller TAMI tenants could fill void left by likes of Meta​

When KKR snapped up Hudson Yards space abandoned by Meta Platforms this month, it may have signaled a trend in Manhattan’s office market: financial firms and other tenants filling a void left by Big Tech.
Technology firms had been on a leasing binge, heartening office landlords shellshocked by the pandemic. Then remote work’s persistence and pressure from investors forced even some cash-rich tech companies to reverse course.
“The financial companies are fortunately growing and taking advantage of the capital expenditures and the time and energy that a lot of these tech companies put into their space,” said JLL’s Steve Rotter, who brokered the deal for KKR at 30 Hudson Yards.
With recession fears and office availability increasing, the private equity giant and others swooped in, Current Real Estate Advisors’ Adam Henick said.

“I think overall periods of economic volatility and uncertainty create opportunity, and inevitably, companies with strong balance sheets that are positioned well are able to take advantage and use that as an opportunity,” Henick said.
Financial, insurance and real estate firms, sometimes called FIRE tenants, have — along with law firms — been the traditional backbone of Manhattan’s office market. But technology, advertising, media and information — or TAMI — tenants have expanded their presence in New York City over the past decade-plus, led by Amazon, Google, Meta and Twitter.
Now, notable tech companies are reducing their Manhattan footprints. Meta, the parent of Facebook and Instagram, did not renew its leases at Related Companies’ 30 and 55 Hudson Yards. The deals combined for roughly 250,000 square feet and ran through 2024.

Meta disclosed in October plans to spend $3 billion consolidating offices. The company spent $413 million terminating office leases in the third quarter, including at Orda Management’s 225 Park Avenue South. Meta expected to spend another $900 million on office realignment in the fourth quarter.
Amazon reportedly rolled back an office expansion this past summer after being in talks for space at Brookfield Properties’ 5 Manhattan West in Hudson Yards.

Although the TAMI sector continues to make up a sizable portion of Manhattan office leasing, signs that its footprint is shrinking have emerged. FIRE tenants led Manhattan office leasing in the fourth quarter, accounting for 38 percent of deals, according to a report by Colliers. TAMI tenants comprised 23 percent.
FIRE tenants produced 43 percent of Manhattan’s office leasing activity last year, up from 38 percent in 2021, according to CBRE. Meanwhile, TAMI’s share fell to 19 percent from 27 percent.
Colliers’ Frank Wallach, who authored the firm’s quarterly report on Manhattan office leasing, cautioned against declaring a market shift to be underway. He noted that FIRE and TAMI tenants’ 60 percent share of the borough’s office leasing was on par with pre-pandemic figures.

“In the third quarter of 2022, two of the top five leases were driven by tech,” Wallach said, pointing to Datadog reupping and expanding to more than 300,000 square feet at 620 Eighth Avenue and Indeed growing to roughly 250,000 square feet at 1120 Sixth Avenue.
“We are seeing some space, if not coming back to market from some of the tech companies, being leased or taken over,” Wallach acknowledged. “However, because the situation can still change on a quarter-by-quarter basis, it’s still too early to tell.”
Another factor could be landlords’ preferences for tenants whose employees come to work, as FIRE firms generally do. TAMI tenants, not so much: Their jobs are generally more adaptable to hybrid or remote work.

“At the end of the day, it’s the tenants who pay rent that allow the landlords to pay the mortgage,” Raise Commercial Real Estate’s Doug Regal said. “I think the driver is getting credit tenants to pay rent. But I do think there is certainly consideration into wanting to have a building that’s activated and alive.”
Regal said if tenants are using a building’s amenities and “there’s a buzz about the building,” it “makes other people kind of want to be there.” Filling space in a property that feels abandoned can be tougher.
If Big Tech is indeed pulling back from Manhattan, smaller tech companies might step up.
“There is always a new hot ticket, and I would say we look towards AI at this point in time,” Avison Young’s Larry Zuckerman said. “They’re hard at work. Deals are getting made. I think the future may be a stronger, more experienced group of AI tenants now surfacing.”

While TAMI space is most likely to be recycled within the sector, private equity and hedge funds such as KKR, Apollo Global Management and Ken Griffin’s Citadel that are flush with capital could set the pace for FIRE tenants in Manhattan this year, Colliers office broker Michael Cohen said.
“Those guys are growing,” he said. “If you are dependent on a growth economy, then you’re going to be cutting back. But if you are raising capital to take advantage of the anticipated distress in many sectors of the economy, then you’re gonna be running on all cylinders.”
He recalled Warren Buffet’s adage, “Be scared when others are greedy and greedy when others are scared.”

“I think we’re seeing certain finance firms saying, This is a good time for us to gear up.”

David Goldsmith

All Powerful Moderator
Staff member

$175B Of Real Estate Debt Is Already In Distress​

As much as $175B of global real estate credit is already in distress following slowdowns in commercial real estate markets last year, and more pain is expected in 2023.
Distress levels in Europe are now the highest they have been in a decade, and property values fell by 20% in the UK and 9% in the U.S. during the second half of 2022, Bloomberg reports. The drop in values means the industry has approximately four times as much distressed debt as the next biggest industry — and could potentially mean credit turmoil spreads to other parts of the global economy.

Decreased transactions and less development in commercial and residential real estate will likely have a knock-on effect on other spending in the economy, leading to risks to jobs and growth, per Bloomberg.​

“Property is a major recession variable,” Adam Tooze, a history professor at Columbia University who has studied the Great Recession, told Bloomberg. “It's the biggest asset class and is directly linked to household budgets, which means it carries consequences for consumption. It’s a large recession risk.”

Remote work and lifestyle changes have created ripple effects throughout CRE, leaving commercial owners at risk and adding to the likelihood of fire sales, experts told Bloomberg.

Multiple U.S. banks have also forecast an increase in credit losses this year. Bank of America predicted that an additional $1B of office property loans will have elevated risk of default or missed payments in 2023.

Many CRE players across the globe faced difficulties in refinancing projects during the second half of 2022, with everyone from Legoland Korea’s developers missing debt payments to Brookfield warning that it may face obstacles refinancing two downtown Los Angeles towers. In late December, the owners of the famed Chicago Board of Trade Building, unable to refinance their $256M debt, handed the 44-story tower over to their lenders.

David Goldsmith

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Staff member

Tech office leasing plummeted in fourth quarter​

Activity fell 57% from the previous quarter: Savills​

Big tech once appeared to be a savior in the office market. A year later, it’s more of a harbinger of doom.
Leasing by tech companies fell drastically in the fourth quarter, down 57 percent across the country from the previous quarter, according to Savills data reported by Bisnow. The report noted that the 2.2 million square feet leased in the fourth quarter was barely a quarter of the 8.5 million taken a year earlier.

The industry spent more than a decade leading office leasing. That changed in the second half of last year as companies economic headwinds set off waves of layoffs across major firms. Along with the acceptance of work-from-home, that reduced their need for office space.

Around 74,000 employees in the sector were laid off in the fourth quarter, according to Savills, and data from show more than 190,000 lost tech jobs in 2022.

The industry’s total share of office leasing at the end of the year was 16 percent, down from 21 percent in 2021.
There’s a decent chance of a further retreat from leasing by tech companies, or firms placing offices up for sublease so they can circle back during more optimistic times. This month alone saw tens of thousands of cuts across major firms including Alphabet (12,000), Amazon (18,000) and Microsoft (10,000).

Lower office lease volume from big tech could allow smaller technology firms to carve out space. Additionally, asking rents could drop as demand eases.
In Manhattan, the largest U.S. office market, pullback among tech companies’ plans for space opened the door for financial, insurance, real estate and law firms to fill the void. Tenants in these sectors, previously the backbone of the borough’s office leasing, accounted for 38 percent of deals in the fourth quarter, according to Colliers. Technology, advertising, media and information firms were only responsible for 23 percent.

David Goldsmith

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Staff member

Vornado-led JV defaults on $450M loan at 697-790 Fifth Ave​

REIT touts strength over debt-laden peers despite Midtown portfolio’s struggles
Steve Roth’s Vornado Realty Trust expects 2023 to be a “down year,” but one that will spotlight well-heeled landlords — even as the firm acknowledges it may need to turn some of its properties over to lenders.
Michael Franco, the REIT’s president and CFO, predicted that there will be a “heightened focus on quality of the landlord” among tenants and brokers savvy enough to avoid buildings with over-leveraged owners, who may be unable to invest or hold onto their properties.

Franco said such a dynamic will play in Vornado’s favor on the firm’s fourth-quarter earnings call Tuesday. It will not, however, shield it from high interest rates, slowing leasing activity and a lack of cheap construction financing.
At its retail properties, the firm is negotiating to keep tenants in place, offering discounted renewals to those with expiring leases or with options to leave early, such as Swatch and Levi’s at 1535 Broadway. In some cases, it is considering walking away from properties altogether.

Vornado reported that its joint venture with Crown Acquisitions and other investors defaulted on a $450 million non-recourse loan at 697-703 Fifth Avenue that matured in December. Franco said the asset was “not refinanceable,” and that the venture is negotiating with its lender to restructure the loan. If that’s unsuccessful, Vornado will hand over the keys to the property, an increasingly common move by commercial landlords. Still, Franco said he believes it is also in the lender’s best interest to work something out.
“We have the option to walk away,” he said. “Do I think that will happen? Probably not.”
The building is part of a struggling portfolio of seven retail properties along Fifth Avenue and near Times Square once valued at $5.6 billion but now worth $4 billion after Vornado announced a $600 million writedown earlier this month.
Vornado reported $493.3 million, or $2.57 per share, in net losses for the quarter, which can largely be attributed to its impairment loss on the retail properties, which include 640, 655, 666, 689 and 697-703 Fifth Avenue; and 1535 and 1540 Broadway. The latest writedown follows a $306 million loss in 2020.

“It is a very thin market, there are very few transactions on Fifth Avenue and Times Square,” Roth said Tuesday. “There is not the same lust for space that there was five years ago, but that will come back for sure.”

It has been a rough few weeks for the firm. In January, Vornado’s stock was booted from the S&P 500 because its stock was “more representative of the mid-cap market space,“ S&P Dow Jones Indices wrote in a late-December press release.
The REIT also slashed its dividend nearly 30 percent. Roth had previously warned that the board would “right-size dividends” this year in light of expected drops in taxable income, but the size of the cut was larger than some analysts projected.
But the firm reported higher-than-expected funds from operations, a key earnings metric used by REITs, at $139 million, or 72 cents per share, on an adjusted basis in the fourth quarter. Revenue hit $446.9 million for the quarter and $1.8 billion for the year.
Vornado executives reiterated on the earnings call that the environment for new construction is hostile — a sentiment that has raised doubts about the company’s involvement in the state’s Penn Station megadevelopment. The REIT recently reached a deal with Rudin Management and Ken Griffin’s Citadel that would pave the way for a 1.7-million-square-foot tower at 350 Park Avenue. If Vornado decides to stay on as a developer on the project, it already has Citadel as the anchor tenant and will use the land value as equity. Or it could cash out, “taking the money and run,” Roth said, but that will not be decided for a few years.
“Construction financing is very expensive if available, which it generally is not,” Franco told analysts on the call when asked about the timing for the Park Avenue property and the Penn developments. “Today is not the day that we have to line that up.”


David Goldsmith

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Staff member

Manhattan office market still suffering from long Covid​

Leasing, net absorption dropped by double digits in year-over-year

The health of Manhattan’s office market continued to decline in 2022, as return-to-office initiatives fizzled yet again and hybrid workplaces became the new normal.
Office leasing activity plunged year-over-year in the fourth quarter, ending 2022 more than 30 percent lower than in the last quarter of 2021.

Net absorption was also down over the same period, ending the year at negative 2.8 million square feet — nearly 23 percent below the year-earlier figure.
Despite those dreary results, the fourth-quarter vacancy rate for Manhattan office space improved marginally over the year to just below 17 percent, while average asking rent rose slightly to $75.41 per square foot.

The numbers come from a Colliers report.
Uneven terrain

Midtown’s Plaza District had the highest net absorption among all of Manhattan’s office submarkets in the quarter: 621,000 square feet. But that was far behind the previous year’s fourth-quarter champion, the Times Square district, which ended 2021 with net absorption of more than 1 million square feet.
In fact, the Times Square area plunged back to earth last year, ending 2022 with a net absorption of negative 484,000 square feet. But that wasn’t the worst performance on the island. That dubious distinction goes to the Penn Plaza/Garment District submarket, with net absorption of negative 1.3 million square feet.

The Financial District had the highest fourth-quarter availability rate for the second year in a row at more than 25 percent. U.N. Plaza was the tightest office submarket with an availability rate of 5.2 percent, followed by Greenwich Village at 12.8 percent and Columbus Circle at 12.9 percent.
Class A space continues to command a significant premium over Class B, though that margin declined over the past year — punching a hole in the “flight to quality” theory.

In the fourth quarter of 2021, top-notch space in Manhattan cost an average of 27.3 percent more than older offices, and by the end of last year that gap had narrowed to 24.7 percent. The change was mostly because the average Class B rent gained 2.17 percent, a hopeful sign for owners of legacy stock.
The Class A premium also varied widely across Manhattan’s submarkets. In Tribeca, for example, tenants pay on average 127 percent more per square foot for Class A space than for Class B, and in Hudson Yards, the price is nearly double.

But in some places, such as Greenwich Village, Columbus Circle and the City Hall area, the premium for Class A space is less than 4 percent.

Still building
Hope springs eternal in the real estate industry, and major office investors are keeping the faith, pressing forward with massive projects despite market headwinds.
Among the top five proposed Manhattan office projects of the year, the first four also topped the list in 2021. The new addition — a 1.7 million-square-foot tower at 350 Park Avenue — joined the list in late December, when Vornado Realty Trust and Rudin Management reached a deal with Ken Griffin’s Citadel to raise the 51-story building at what is also known as 40 East 52nd Street, currently the site of the BlackRock building.

Citadel will master-lease more than half a million square feet in the building for 10 years, with an initial annual rent of $36 million.


David Goldsmith

All Powerful Moderator
Staff member
Sternlicht’s LNR eyes auction for Midtown office facing foreclosure after $41M default
Bank sued Paul Sohayegh and Roni Movahedian after owners defaulted on 29 West 35th Street’s loan

Economic shocks haven’t been good to the owners of 29 West 35th Street.
Coming out of the Great Recession, Paul Sohayegh and Roni Movahedian faced foreclosure on the 12-story Garment District office building in 2010 after defaulting on a $29.2 million mortgage.

Their partnership that held the building, Empire State Equities, managed to right the ship — only to take on water again when Covid decimated the rent roll.
This time, the building looks unlikely to escape the auction block.

After LNR, the special servicing arm of Barry Sternlicht’s Starwood Property Trust, filed to foreclose on 29 West 35th Street in early 2022, the firm won two judgments against Sohayegh and Movahedian in December over the owners’ default on a $41 million loan.
The first decision appointed a receiver to collect rents. The second named a referee to tally up the landlord’s debt, ultimately pegged at over $54 million in January.
Now, LNR is asking the court to approve the foreclosure so it can sell the building at auction.
The property’s latest troubles surfaced in August 2020, when Sohayegh and Movahedian defaulted on the mortgage they’d taken out a year prior and the loan transferred to special servicing.
Two of the building’s tenants, flex-office startup Knotel and business software provider Sprinklr, had stopped paying rent months earlier and racked up a combined $819,000 debt, for which the landlords sued in September 2020.

Together, the tenants occupied more than 75 percent of the office space.
In October, the landlords, through the limited liability companies United Group and American Equities, sued its ground-floor tenant, a bar named The Liberty NYC, for $139,000 of unpaid rent accrued between March 2020 (when bars were shut down for Covid) and July of the same year.
By December, LNR had accelerated the loan, demanding immediate repayment of the outstanding debt.
The landlord’s repayment prospects grew dimmer: In February 2021, Knotel filed for bankruptcy. On the bright side, the non-paying startup did vacate its five floors of office space. It had been 29 West 35th Street’s largest tenant, according to Fitch Ratings.

By the end of 2021, the property’s occupancy had sunk to 40 percent from 56 percent earlier that year, and Sohayegh and Movahedian reported negative net operating income for the year, a Fitch report shows.

In January 2022, LNR filed the foreclosure suit.
Steven Schlesinger, partner at Jaspan Schlesinger Narendran and counsel for the landlords, chalked up the fallout to the pandemic and the lender’s failure to extend relief.
“Perfect storm,” he said.
Scott Tross, a partner at Herrick Feinstein representing LNR, declined to comment.
Last month, LNR filed a motion asking the court to agree with the referee that $54 million was due and to approve the building’s foreclosure and sale.

If the court agrees, the landlords would be on the hook for whatever the sale does not cover, which could be tens of millions of dollars. The property was last appraised for $39 million in August 2022, according to Morningstar, and the city’s office market had a brutal fourth quarter.
Not surprisingly, Sohayegh and Movahedian are fighting the foreclosure.
On Feb. 17, their lawyer asked the court to deny the servicer’s request for a foreclosure judgment to give the landlords time to refute the referee’s debt estimate. A hearing was set for Feb. 28.
Schlesinger, who represented the Trump Organization during its Great Recession-era defaults, noted lenders are less likely than they were then to make deals with delinquent borrowers.
“This is a whole new world,” Schlesinger siad. “Banks and lenders can withstand the drag and leveraged real estate investors cannot.”

David Goldsmith

All Powerful Moderator
Staff member

Auction set for Flatiron Building​

Sorgente, GFP, ABS at odds with co-owner Nathan Silverstein
The iconic but vacant Flatiron Building is heading to an auction to end a long-standing dispute among its owners.
Sorgente Group, Jeffrey Gural’s GFP Real Estate and ABS Real Estate Partners, who own 75 percent of the building at 175 Fifth Avenue, sued in 2021 to seek a partition sale after the owners said they could not see eye to eye with the 25 percent owner, Nathan Silverstein.

A New York state judge issued an order in January allowing the sale to go forward. An auction, to be conducted by Matthew Mannion of Mannion Auctions, has been set for March 22.
A partition auction occurs when multiple owners have a stake in a property. The proceeds from the sale will be based on the ownership interests. The owners can also bid on the property through a “credit bid” using their existing ownership stake.

In a past filing, Gural said the Sorgente-GFP-ABS group will likely bid at the auction.
The building’s shared ownership structure gives each owner veto power over any major decision at the property. This led to a stalemate that cost the owners hundreds of thousands of dollars a month, according to one filing.
The spat began shortly after the building’s long-time anchor tenant MacMillan Publishers announced in 2017 that it would move out in two years, according to court records. At the time, the book publisher occupied all 21 floors of the building.
“We have tried for years to work out these differences with Mr. Silverstein, but the defendant has delayed, resisted and ultimately refused to agree with plaintiffs’ proposed business plan,” Gural said in an affidavit.
By Gural’s account, Silverstein’s ideas were “preposterous.” He first sought to replace the departed MacMillan without upgrading the building. Gural said upgrades were required and, for fire safety reasons, the property could not legally be re-rented with only one means of egress.

Silverstein also proposed physically dividing the building into separate properties. But Gural said this was impossible for many reasons, including that the building is landmarked.
“It boggles the mind to suggest that we could nevertheless agree on a plan to physically divide this building into five smaller, independent properties, none of which would be marketable — and then agree on a plan as to how that work would be financed,” Gural said.

Silverstein, for his part, blames Gural and Newmark. Despite advance notice that MacMillan was leaving, Newmark never marketed the property, Silverstein alleged. He said once MacMillan left, Gural entered into negotiations to rent the office space to Knotel for an “exceptionally low cost per square foot” — under $44 — with renewal periods of close to 50 years.
He also claimed that Newmark’s Barry Gossin had a large stake in Knotel, and that Gural entered into negotiations with WeWork, according to a court filing.

“The proposed rental agreement would have locked the property into an unprofitable lease for a long period of time,” Silverstein said in an affidavit. The Knotel deal never came to fruition, and the startup filed for bankruptcy in 2021 and was bought by Newmark.
Eventually the building owners decided to proceed with an $80 million renovation of the 120-year-old property, including façade restoration, new elevators and an updated lobby.
But Silverstein alleged that Gural inflated construction costs. He claimed, for example, that he could obtain “very high-quality marble” from local sources at a fraction of what was paid. He also said he could find union construction labor for $35 per hour instead of the normal rate of $100. (Construction wages vary greatly; there is not a single rate.)
Gural ultimately said the parties found themselves at loggerheads with no end in sight. The building remains empty.
“Plaintiffs have reluctantly concluded that there is no alternative but to end their relationship with defendant as co-owners of this historic property,” Gural said in a filing.

The Flatiron Building — the first Manhattan skyscraper north of 14th Street — is one of the city’s most famous towers. PincusCo first reported news of the auction.
An attorney for Silverstein did not immediately return a request for comment.

David Goldsmith

All Powerful Moderator
Staff member
And the winner (loser?) is...

Outsider wins Flatiron Building after bidding war with Gural​

Jacob Garlick’s Abraham Trust swoops in with winning $190M bid for famed office building
MAR 22, 2023, 4:09 PM
The Flatiron Building will soon have a new owner after a surprise bidder emerged victorious in an auction for the famed property.

Outsider Jacob Garlick’s Abraham Trust beat out one of the building’s previous owners, Jeffrey Gural, in a bidding war for the property on the steps of the Manhattan County Courthouse Wednesday afternoon.
Garlick placed a winning bid of $190 million for the landmarked triangular building, according to sources at the proceeding.

Abraham Trust's Jacon Garlick and GFP Real Estate's Jeff Gural seen at the Manhattan County Courthouse
Abraham Trust’s Jacob Garlick and GFP Real Estate’s Jeff Gural at the Manhattan county courthouse (Photo via Tom Brady of Douglas Elliman)
Sorgente Group, Gural’s GFP Real Estate and ABS Real Estate Partners, who owned 75 percent of the Flatiron Building at 175 Fifth Avenue, sued in 2019 to initiate a partition sale after they said they could not see eye-to-eye with Nathan Silverstein, who owned the remaining 25 percent.
A partition auction occurs when multiple owners have a stake in a property. Owners can use their existing stakes to place a “credit bid” on the property, which made Gural’s group a favorite to win Wednesday’s auction.

The ownership spat began shortly after the building’s longtime anchor tenant, MacMillan Publishers, announced plans to move out in 2017, according to court records. At the time, the book publisher occupied all 21 floors of the building.

Silverstein proposed physically splitting up the building, an idea Gural called “preposterous.”
(Video via Tom Brady of Douglas Elliman)
The building’s ownership structure, which gave each of the stakeholders veto power over any major decision at the property, led to a stalemate, according to a court filing.
The first Manhattan skyscraper north of 14th Street, the 120-year-old Flatiron Building is one of the city’s most iconic properties.
Matthew Mannion of Mannion Auctions was the auctioneer.

David Goldsmith

All Powerful Moderator
Staff member
I can't believe Garlic was allowed to bid without certified funds for the deposit. We bought many pieces at auctions held by Mannion Auctions and that was always a requirement to prevent situations just like this.

I agree with the decision by Gural not to exercise the option to go with his "backup" bid in a juked up auction. When we were in similar situations in the past we chose the same course of action and demanded the auction be done over from scratch. However it's a shame it didn't happen on the spot because this will require a rescheduled auction with increased costs and time spent.

It almost seems like it was a charade with an agenda.
#flatiron #auction #deposit #goodfaith #jpradvertising #matthewmannion

Garlick fails to cough up deposit for Flatiron Building​

Surprise bidder for NYC icon was required to hand over $19M by Friday; Gural says he will not exercise option to purchase
MAR 24, 2023, 6:41 PM
He didn’t come through.
After making a surprise winning bid to acquire the Flatiron Building Wednesday, Jacob Garlick, who this week became the most talked-about man in New York real estate, failed to come up with the required deposit to close on the property.

Terms of the sale dictated that Garlick put down $19 million, or 10 percent of his $190 million bid, by close of business Friday. But according to multiple sources familiar with the deal, Garlick has not yet delivered the funds, throwing his future ownership of the storied property into question.
When reached by phone Friday evening, Garlick said he could not talk about the deposit or the deal, but could talk next week. It is possible that a court-appointed referee could offer him more time. But if an extension is not granted, the second-highest bidder in the auction, a group led by GFP Real Estate’s Jeffrey Gural, will have the option to purchase the property at their last bid of $189.5 million, according to a court filing.

Reached Friday, however, Gural told The Real Deal that he would not be exercising his option to buy the building at $189.5 million. This means the likely scenario is the property heads back to the auction block and the bidding restarts.

Garlick, a 30-something investor unknown in New York City’s real estate industry, seemed to come out of nowhere to outbid Gural in a live auction in front of the New York County Courthouse.
“We are honored to be a steward of this historic building,” Garlick said after his victory, “and it will be our life’s mission to preserve its integrity forever.”
“I was totally shocked that somebody would bid so much money for the building,” Gural told Commercial Observer after the auction. “It’s a beautiful building, but not really worth that much.”

Garlick’s firm, Abraham Trust, is headquartered in Northern Virginia and invests in private equity buyouts, mergers and acquisitions and venture capital. His journey to buying the Flatiron Building started because of a partnership spat between its former ownership group. Sorgente Group, Gural and ABS Real Estate Partners, who together controlled a 75-percent stake, could not see eye-to-eye with the remaining 25 percent owner, Nathan Silverstein, about the landmarked property’s future.