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

David Goldsmith

All Powerful Moderator
Staff member

The Flatiron fiasco: How a key blunder left a New York icon in limbo​

Jacob Garlick’s questionable $190M bid was enabled by unusual auction conditions
MAR 30, 2023, 11:52 AM
By
For two days, Jacob Garlick was a New York City celebrity.
The 31-year-old from Northern Virginia came out of nowhere to outmuscle real estate titan Jeffrey Gural in a Wednesday afternoon auction for the Flatiron Building.

But by Friday, Garlick had blown a deadline to come up with a $19 million deposit — 10 percent of his winning $190 million bid. Now the property will likely head back to auction.
With Gural noncommittal about exercising his second-place bid, the century-old building’s future is murkier than ever.

Garlick is a mystery even to the most hardcore New York real estate insiders. Attempts to reach him since last week have been unsuccessful. Developers, attorneys and brokers say they’d never heard of him before the auction. His company’s website is vague. His Twitter account is suspended. A good chunk of his LinkedIn activity consists of engagement with videos of Gary Vaynerchuk.
Nonetheless, he showed up on the steps of the New York County Courthouse in Lower Manhattan on a mild March day and won an auction for a Big Apple landmark, claiming it had been his dream to own the building since he was 14 years old.
But Garlick’s coup and the fracas that ensued may never have been possible without a key lapse in the proceeding: Bidders were not required to put down any deposit before participating in the auction, according to court filings.

“It’s highly unorthodox to do an auction without requiring a deposit”, said Greg Corbin, a bankruptcy specialist at brokerage Rosewood Realty Group. “Over the past 15 years of conducting distressed asset auctions, only once have we allowed people to bid without providing funds up front.”

“I’ve never seen that before,” said real estate attorney Adam Leitman Bailey, who said he generally asks for proof of funds before an auction.
The Flatiron Building wound up on the auction block because of a dispute between its majority owners group and Nathan Royce Silverstein, who owned 25 percent. The property was vacant and losing hundreds of thousands of dollars a month, but the owners could not agree on how to finance a costly renovation.

To resolve the impasse, they agreed to something called an interlocutory judgment, which laid out the bidding process for an auction and conditions for a sale.
The judgment required that bidders provide a court-appointed referee with their name, address, phone number, companies and the names of any shareholders or officers, according to the documents.

Only after the auction would a winning bidder need to show proof of their finances to the referee and put down a 10 percent deposit within two days, according to a notice of sale filed as part of the interlocutory judgment. The winner would then need to post the remaining balance within either 10 days after the court confirmed the sale or 90 days after the auction date, whichever came later.
But because there was no deposit required before the auction, anyone who happened to be in Lower Manhattan that afternoon might have placed a bid – whether or not they had the ability and desire to actually follow through.
It’s unclear why attorneys for the feuding property owners or the judge didn’t require a deposit up front.

It’s possible the majority owners, who didn’t hire a broker to market the property, couldn’t imagine anyone outbidding them for a vacant, money-bleeding office building. The building needs an extensive renovation that will cost upwards of $100 million, according to Gural. Under the terms of a partition sale, the existing owners could use their equity in the building as part of a bid, and with a 75-percent stake, the Gural-led group was the clear favorite.
Under the interlocutory judgment, Garlick could still be on the hook for the $19 million deposit and any costs associated with restarting the auction process. But it’s unlikely he’ll have to pay up, according to legal experts. For starters, who would pursue him? And if he couldn’t put down the deposit, going after him may not be worth the effort.

With Garlick out of the picture, Gural has a chance to buy the property at his final bid of $189.5 million. If he doesn’t make that offer, it will likely go back to auction.

The burning question for New York real estate observers remains unanswered: What was Jacob Garlick thinking? Was he connected to Silverstein, the property’s minority owner? Did he get too amped at the auction and bid too high? Did his financing fall apart?
Was he just a delusional gambler hoping that once he told his friends he could own the Flatiron Building, they would chip in on the deposit? Or maybe Garlick, like so many others, just wanted a brief moment as a King of New York.
If what he wanted was his 15 minutes of fame on the New York skyline, he certainly achieved that.
 

David Goldsmith

All Powerful Moderator
Staff member

Manhattan office vacancy finds no relief in first quarter​

Completed space at 660 Fifth Ave added to market’s availability woes
MAR 31, 2023, 9:53 AM
By
The completed renovation of a prominent Fifth Avenue property has sounded a familiar refrain to many landlords: too much empty office space.
Manhattan closed out the first quarter with a 16.1 percent office vacancy rate, according to JLL data reported by Bloomberg.

The brokerage, which tracks 470 million square feet, found a mere 4.6 million square feet of office space was leased in the first quarter. Average asking rents also declined across office qualities, including trophy offices, Class A offices and Class B offices.
JLL’s data on Manhattan’s office vacancy rate was touted as a record high, but the report adds to a consistently dim picture, following higher vacancy rates. Colliers recorded a 16.9 percent vacancy rate in the fourth quarter and a 17.3 percent rate in the first quarter of 2021.

The recent data highlights space that debuted on the market and kept the vacancy rate high in the first quarter, including the completion of Brookfield Properties’ renovation of 660 Fifth Avenue. The $400 million improvement project brought 1.5 million square feet online.

Some of that space is already being leased. In August, asset manager 400 Capital Management signed a lease for 25,000 square feet and is expected to move in next year. Prior to that, Australian financial services company Macquarie Group became the revamped building’s first tenant, signing a lease for 220,000 square feet.

 

David Goldsmith

All Powerful Moderator
Staff member

Midtown megadeals fail to spark Manhattan office comeback​

Major renewals in January helped Q1 leasing surpass brutal Q4, but vacancies still piled up

Manhattan’s office market began the year by rebounding from a dreadful fourth quarter of 2022, but that was about where the good news ended.
Tenants took 7.4 million square feet of office space in the first quarter, a 49 percent increase from the fourth quarter, according to a Colliers report released Monday, but still about 270,000 square feet short of last year’s first quarter. Net absorption was negative 1.2 million square feet and average asking rents declined in all three submarkets tracked by the report.

What’s more, the uptick in leasing was largely driven by just five large deals that accounted for nearly a third of leasing volume. Those transactions primarily occurred in January, before deal volume slowed in February and March, and mostly involved tenants renewing or extending existing leases.
Midtown was the only market to see leasing volume increase year-over-year, but nearly half of that volume came from just a few deals recorded in January: Fox and News Corporation’s combined 1.1 million-square-foot renewal at 1211 Sixth Avenue, and two leases signed by Ken Griffin’s Citadel at 350 Park Avenue and 40 East 52nd Street.

Overall, Manhattan’s office leasing volume was more than 6 percent below the borough’s five-year rolling average of 7.9 million square feet and 11 percent below its ten-year rolling average of 8.3 million square feet.

The average asking rent declined by 1.3 percent to $74.42 a foot. Quarterly declines were consistent across Midtown, Midtown South and Downtown, as well as Class A, B and C buildings. Midtown’s average asking rent dropped to $78.35, its lowest since June 2015, although Midtown South, specifically, did see its average increase year-over-year, from $79.95 per square foot in the first quarter of 2022 to $80.33 now.
Manhattan’s availability rate increased for a second straight quarter, climbing 0.2 percentage points to 17.1 percent. Midtown South reached a record high of 17.2 percent.

Distress is coming for Class A offices

FIRE and TAMI tenants accounted for more than 70 percent of office leases signed in Manhattan last quarter. While that trend was consistent in Midtown and Midtown South, tenants in professional services and the public sector made up close to 60 percent of Downtown office leases.

Investors remained mostly on the sidelines too. Only five deals for office properties were recorded in the quarter, totaling $980 million — an 85 percent year-over-year decline. Among the deals that did occur were Brookfield buying out Blackstone’s minority stake in One Liberty Plaza at a $1 billion valuation and Pearlmark’s forced sale of Tower 56 at 126 East 56th Street for $110 million.

 

David Goldsmith

All Powerful Moderator
Staff member
If the Big Tech firms are downsizing and the Banks are downsizing and the law firms are downsizing and the Wall Street firms are downsizing...
Who is going to be taking big spaces in NYC.

JPMorgan shed 2M sf in NYC last year​

Bank consolidating even before finishing Midtown HQ tower

JPMorgan Chase is developing one of the most prominent office projects in Manhattan — and slashing space left and right as it prepares to consolidate there.
JPMorgan cut its New York City office footprint by 22 percent last year, Crain’s reported. Regulatory filings revealed the depth of the bank’s office shift, a continuing trend from previous years.

The bank shrank its space by nearly 2 million square feet, a staggering amount for one of the city’s largest commercial tenants. The reductions include the subletting of 700,000 square feet at 4 New York Plaza and the sale of the 350,000-square-foot 3 MetroTech Center in Brooklyn, which New York University picked up for $122 million.
The bank is down to 6.8 million square feet of New York City offices, only three years after it occupied 9 million.

JPMorgan is focused on centralizing its operations around one office, 270 Park Avenue. The 2.5 million-square-foot development is expected to be completed in 2025.
“We remain committed to New York City and are planning for the next 50 years with our new headquarters,” a bank spokesperson told Crain’s.

The 60-story, 1,388-foot-tall tower in Midtown East will be able to accommodate up to 14,000 employees, more than half of the bank’s total. It will have flexible floorplans, a nod to the remote and hybrid work patterns that have emerged since the pandemic scattered office workers to wind.
The tower project was paused last month by the Department of Buildings after a carpenter fell to his death at the site. The stop-work order was partially lifted to allow for safety-related measures to be enacted, but it’s not clear when work will fully resume.

JPMorgan has exhibited a pattern of cutting office space since the onset of the pandemic. In 2021, the bank slashed its footprint in the city by 400,000 square feet. The year before, it cut 300,000.
Other banks and financial institutions, such as Wells Fargo, are making similar moves in the city, though Bank of America’s footprint remained the same last year.
 

David Goldsmith

All Powerful Moderator
Staff member
https://therealdeal.com/

Concessions are king at the top of Manhattan’s office market​

Months of free rent, improvement allowances abound in triple-digit lease asks
There’s no such thing as free rent — unless you’re a Manhattan office tenant.
Concessions continue to abound in the borough’s office landscape, according to CBRE data reported by the Commercial Observer. While no longer at the peaks seen in 2022, discounts don’t appear to be disappearing anytime soon, muddying the overall picture of the office market.

Landlords in the first quarter inked 28 deals with starting rents of $100 per square foot or more, according to CBRE, slightly higher than the five-year quarterly average. CBRE’s data includes deals for at least 25,000 square feet and 10 years.
But rising prices have been outpaced by the concessions tenants are scoring from landlords desperate to fill their vacant spaces. During the first quarter, an average tenant landed 16 months of free rent on their leases, down only one month from last year’s peak, according to CBRE. Prior to the pandemic, the average was 13 months.

“There are some buildings that are either brand new or have gone through a revitalization, so even offering very high concessions, net effectively, some of those deals are still ahead of where they were 15 years ago,” Frank Wallach, an executive at Colliers, told the outlet “But, on an overall basis, the concessions have increased at a faster rate than the rent.”
Tenant improvement allowances are also hovering near record highs. The perk peaked last year at an average of $147 per square foot, and only declined to $145 per square foot in the first quarter, CBRE revealed. The pre-pandemic average was $104 per square foot.

Trophy office buildings, the beneficiary of tenants’ flight to quality, are head of the class when it comes to concessions.

Tenants are more likely than ever to land a lease below the $100 per square foot threshold at Class A buildings, but the properties remain above prices at Class B or C properties.

The pandemic and murky future of the city’s office market are big factors driving concessions. There are other forces at play, though, including rising construction costs and the desire of some landlords to save face with their lenders.
Tenants took 7.4 million square feet in the first quarter, up 49 percent from the fourth quarter, according to Colliers. The uptick, however, was largely driven by renewals and extensions and the availability rate ticked up slightly to 17.1 percent.
 

David Goldsmith

All Powerful Moderator
Staff member

SL Green posts worst occupancy drop since pandemic​

CEO Marc Holliday expects things to “come around” by late 2023

Manhattan’s largest office landlord is emblematic of the continued struggles of the market, seeing its decrease in occupancy accelerate.
Occupancy across SL Green’s 25 Manhattan buildings dropped to 90.2 percent in the first quarter, Crain’s reported. That was a decline of 280 basis points year-over-year, nearly twice the rate of decline from 2021’s first quarter to 2022’s first quarter.

Shares for the office landlord on Thursday fell 4 percent to nearly $25 per share. The stock is trading at its lowest levels since the previous financial crisis in 2009.
Despite the dive, executives sounded an optimistic note about SL Green’s future. Chief executive Marc Holliday noted during a conference call that the pipeline of expected leasing activity jumped by 70 percent in the first quarter. A spokesperson for the company said it expects occupancy to be back up to 92.4 percent by year’s end.

“Things are coming around in the right direction,” Holliday said during the call.
The company’s forecast comes after a quarter of financial difficulty. Funds from operations declined 7 percent in the first quarter to $105 million, beating Wall Street expectations, but possibly due to recoveries from litigation in a case against retail tenant Victoria’s Secret. Borrowing costs for the company, meanwhile, tripled to $42 million.

Holliday previously aired a sobering message during the company’s investor day in December, when he called the city a “challenging office leasing market” and admitted the hybrid work model persisted far longer than he anticipated.

with a 16.1 percent office vacancy rate, according to JLL. Only 4.6 million square feet of office space was leased during the quarter.


SL Green made headlines in the first quarter as more details surfaced around its proposal to bring a casino to Times Square. Caesars Entertainment and Jay-Z’s Roc Nation are on board with the proposal, which is competing for one of three gaming licenses expected to be handed out by the state this year.
 

David Goldsmith

All Powerful Moderator
Staff member

Inside the Greek tragedy at the Flatiron Building​

A partnership spat, a botched auction and a mysterious outsider who briefly became the most talked-about man in NYC real estate

Real estate is high drama playing out on the skyline. But rarely does it rise to the level of Greek tragedy that it has at the Flatiron Building.
After coming out of nowhere to win a live auction for the iconic property in March, then failing to produce a deposit to secure his $190 million bid, a complete outsider, Jacob Garlick, spent the weeks that followed scrambling to show that he had the money.

Even as its owners prepare to restart the auction process that he dramatically derailed, the 31-year-old with zero track record in big-ticket real estate has maintained that he’s still in the running to buy the property.
Nobody seems to believe him.

GFP Real Estate’s Jeffrey Gural, who has long held a stake in the office building and was the runner-up in the March 22 auction, said there was only one scenario in which Garlick’s bid should even be considered: if he wired the entire $190 million into an escrow account.
“Why would you take anything he is saying seriously?” Gural said.
According to Gural, immediately after Garlick won the auction on the steps of the New York County Courthouse — which, unusually, did not require participants to post an upfront deposit or proof of funds — Garlick turned to him and asked if he wanted to partner in the deal. Later, Gural said, Garlick even asked him if he would put up the $19 million deposit in exchange for a 10 percent stake in the vacant building.
“It was such a ridiculous proposal,” said Gural. “It concerned me. It was a red flag that he didn’t have the money.”
In Gural’s telling, Garlick’s group kept promising that the money was coming. It was to be wired from one bank, then from another. The deadline arrived, but the money never did.

Now the building will be auctioned off again on May 23, on the same courthouse steps in Lower Manhattan where Garlick’s 15 minutes of fame began.

Cracks in the facade

Garlick’s wild ride only came about because of a partnership spat between the building’s owners.
Sorgente Group, GFP Real Estate 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.
The majority owners sued, claiming they simply could not go on co-owning the property with Silverstein, who they said had proposed physically splitting up the building. Gural, in court filings, called that idea “preposterous.”

It’s highly unorthodox to do an auction without requiring a deposit.
GREG CORBIN, ROSEWOOD REALTY GROUP
“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.
The building’s tenancy-in-common ownership structure, which gave each of the stakeholders veto power over decisions at the property, led to a stalemate.
By that point, the building’s longtime anchor tenant, Macmillan Publishers, which occupied all 21 floors, had announced plans to move out.
In 2019, co-working startup Knotel was in talks to lease the entire property, but a deal never materialized. Silverstein blamed Newmark, which GFP Real Estate had split off from only two years earlier, for failing to market the building after Macmillan left and said Gural was negotiating to lease it to Knotel at an “exceptionally low cost.” He also claimed in court filings that Newmark CEO Barry Gosin held a large stake in Knotel. The co-working firm filed for bankruptcy in 2021 and was acquired by Newmark.

The majority owners eventually sought a partition sale, which would put the building up for auction but provide them an advantage by allowing them to buy it back using their existing ownership interests as part of a bid.

“I was hoping that we would be able to buy [Silverstein’s] interest at a lot lower price,” Gural said.
Garlick, who seemed to want the property no matter what, price be damned, spoiled those plans.
Insiders speculated that Garlick was connected in some way to Silverstein. Garlick, the theory went, was there to drive up Gural’s bid, giving Silverstein a bigger payday as a minority owner.

Silverstein confirmed to The Real Deal that he is a “distant relative” of Garlick, but said he’s only ever met him once.
Others involved in the auction said that Garlick’s continued effort to seal the deal after flopping on the deposit was news to them. Matthew Mannion, the auctioneer, and Peter Axelrod, the court-appointed referee, both said last month that they were not aware that he was a realistic contender to acquire the building.
Gural added that Garlick could be liable for the deposit regardless.
“I hope he has $19 million,” he said.

Highly unorthodox”

Who-is-Jacob-Garlick-1002x1024.jpg

The fracas Garlick set off might never have been possible without a key lapse in the proceedings: Bidders were not required to put down any deposit before participating in the auction, according to court filings.

“It’s highly unorthodox to do an auction without requiring a deposit,” said Greg Corbin, a bankruptcy specialist at brokerage Rosewood Realty Group. “Over the past 15 years of conducting distressed asset auctions, only once have we allowed people to bid without providing funds up front.”
“I’ve never seen that before,” said real estate attorney Adam Leitman Bailey, who noted that he generally asks for proof of funds before an auction.
Those present at the auction said Garlick, wearing a charcoal suit with a patterned tie and pocket square, stood just a few feet from the auctioneer, like a prizefighter steeling himself for a title bout. He rarely broke eye contact, calmly raising his paddle to outbid Gural until the price hit $190 million.
Garlick told NY1 on the scene that owning the historic building had been his “lifelong dream since I’m 14 years old.”
“I’ve worked every day of my life to be in this position,” he said.

That night, he had a celebratory party at the Ritz Carlton in NoMad with the same entourage that had accompanied him to the auction, according to witnesses.
Reality came knocking two days later, when Garlick failed to cough up the $19 million deposit. As runner-up, Gural had the option to buy the building at his final bid of $189.5 million, but declined to make the deal at that price.
The building, which Gural estimates needs a $100 million renovation, is now set to be auctioned again unless a deal can be made with Silverstein to buy out his stake.
“I’m not Nathan’s favorite person,” said Gural. But “the reality is, we have an empty building.”
The-trouble-with-tics-1024x795.jpg

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David Goldsmith

All Powerful Moderator
Staff member

Manhattan office market reaches record 94M sf available​

Tenants took 1.5M sf in April: Colliers

The clouds failed to part for the Manhattan office market in April, marking another dreary month for commercial landlords in the borough.
A record 94 million square feet of office space was available last month, according to Colliers data reported by Crain’s. Tenants leased just 1.5 million square feet in the period, far below the monthly average from the three previous years.

The 17.4 percent availability rate also matched a record from February 2022, and marked a nearly 75 percent increase in available office space since March 2020.
Only two leases signed last month exceeded 100,000 square feet and just one additional lease surpassed 50,000 square feet. All three were renewals or extensions (or both).

Midtown was the star of the report as leasing volume rose from the previous month, but was still down year-over-year.
The neighborhood counted 891,000 square feet leased in the period to reach an availability rate of 15.6 percent. Average asking rent was $78.74 per square foot.

Trailing were Midtown South and Downtown, both of which also were down year-over-year.
For Midtown South, April was the slowest month in more than two years and the availability rate reached a record 17.9 percent, partially because of the space that came online at L&L Holding Company and Columbia Property Trust‘s Terminal Warehouse at 261 11th Avenue, and Vornado Realty Trust’s Penn 2. While those additions boosted the availability figure, they also helped boost the average asking rent to $81.77 per square foot.

Meanwhile, availability Downtown remained a stubborn 20.5 percent amid the slowest month of the year so far in the neighborhood. The asking rent was $58.69 per square foot and has fallen by 10.8 percent since the first month of the pandemic.
 

David Goldsmith

All Powerful Moderator
Staff member

SL Green, Vornado plan office sales despite dreadful market​

Landlords will raise cash to buy back stock, reduce debt

The sales market for office properties is at a virtual standstill. Yet some of New York’s biggest office owners are turning to it to raise cash.
SL Green Realty and Vornado Realty Trust are planning large-scale asset sales this year — a move others are resisting. But with their stock prices plummeting and debt costs mounting, both New York-focused REITs are under pressure to buy back shares and shore up their balance sheets.

“SL Green and Vornado both have uses for capital,” said Truist Securities REIT analyst Michael Lewis. “These two companies are going to have to be strategic and thoughtful about it.”
It’s a tough time to be selling offices. Manhattan office sales totaled just $470 million in the first quarter — down a stunning 85 percent from $3 billion a year ago, according to Ariel Property Advisors.

The first quarter had just one office sale. It was priced at $650 per square foot, down from an average of $865 in the fourth quarter across seven deals. In the first quarter of last year, the average price was north of $1,160.
But there are factors beyond price that influence these public companies’ decisions on whether to sell.

SL Green’s calculus

SL Green is looking to raise cash to achieve the largest single-year debt reduction in the company’s history and to buy back its stock, which is down 78 percent since the pandemic hit.
At the REIT’s institutional investor conference in December, company executives outlined a plan to sell $2.4 billion worth of properties. The largest piece is a 75 percent stake in its office tower at 245 Park Avenue. Selling the stake would remove about $1.3 billion of the property’s mortgage from SL Green’s books.

The property has a low-cost mortgage that could be passed on to a buyer — a key selling point at a time when finding affordable financing is difficult.
Other planned sales include a joint-venture interest in its new, signature skyscraper One Vanderbilt; and 750 Third Avenue, a mostly vacant, 730,000-square-foot office tower that SL Green says is a strong candidate for a full or partial residential conversion.
The REIT last month refinanced another office property nearby — 919 Third Avenue — with a $500 million loan.
CEO Marc Holliday acknowledged the tough sales environment on the company’s April earnings call, but said he believes things are improving.
“It’s still got a long way to go this year. And I think the market is coming around and I think the assets we’ve selected are the right ones,” he said.

In addition to paying down debt, the REIT is also buying back stock. The company has $122 million left under its $3.5 billion repurchase program before it must ask the board for authorization to buy more stock.

SL Green sees its stock as underpriced. Wall Street investors value the company’s shares at a rate that implies its portfolio is worth $330 per square foot. If the company can sell properties above that price, its executives believe stock buybacks would be a bargain.

Vornado’s strategy

Vornado recently shifted its tone on sales.

Acknowledging the volatile financing market, executives in February said they weren’t looking at selling assets. But the company’s stock price has fallen by half since Groundhog Day. Vornado responded by suspending its dividend for 2023 and authorizing a $200 million share buyback.
On its May earnings call, the company pivoted, saying it will look to sell a mix of retail and office assets. It declined to say which ones.
CEO Steve Roth, however, resisted the idea of being a forced seller.
“We are not a distressed seller. We are not a weak seller,” he said. “In fact, we are focusing on a very select pool of assets … where we consider ourselves to be offensive sellers.”
Vornado will use some of the proceeds of those sales to fund the share buyback program — another reversal by Roth, who had long opposed buying back the REIT’s stock. The firm’s justification is similar to SL Green’s: It says its stock is selling at a discount relative to the value of its assets.

“While the market may not be strong, or as strong as it was, and pricing has been impacted, our share price has been impacted more,” CFO Michael Franco told analysts on the call.
The company’s balance sheet could also be motivating it to sell. Goldman Sachs analysts warned this month that rising interest costs and reduced rents from tenants relocating could squeeze Vornado’s debt buffer.
The analysts said the REIT could be trending dangerously close to breaching its debt covenants, questioning whether this was putting pressure on the company to sell properties.

Truist’s Lewis said he’s optimistic about the companies’ plans, but said they need to be clear-eyed about the market.
“Nobody should be shocked by office assets being down by 30 percent,” he said.

 

David Goldsmith

All Powerful Moderator
Staff member

Gural Finally Secures Flatiron Building for $161.5M in Redo Auction​

Gural and partners plan to convert the upper portion of the famed building to residential.​

BY MARK HALLUM MAY 23, 2023 3:27 PM​

C52D8E5B-4EB0-40B3-81C7-11036A3D43DC-10533-0000030A83AEEB06.jpg

JEFF GURAL BIDDING ON THE FLATIRON BUILDING ON MAY 23, 2023.PHOTO: MARK HALLUM

The second auction for the Flatiron Building went off without interference from Soundcloud DJs Tuesday afternoon.
Jeff Gural and his partners — sans Nathan Silverstein — managed to retain the property with a winning bid of $161.5 million, a price that was driven up only by bidders who had presented the court-appointed referee with a $100,000 deposit, with plans to convert part of it to residential.

“It’s a relief, we finally own the whole building and buy out Nathan’s share, so it’s a good day for us,” Gural said following the auction.

There was no Jacob Garlick in sight on the front steps of the courthouse at 60 Centre Street, where just two months prior he outbid the current owners at $190 million, something that came to be viewed as a suspicious attempt to snag the historic landmark when he failed to pay the $19 million deposit that was due two days after the bidding closed.

Gural said he bears no animosity toward Silverstein or Garlick. In fact, he feels sorry for the latter, saying he believes Garlick genuinely wanted to own the property. Now the new owners plan to make the top half of the landmarked building residential while keeping the lower half as office space.
“If we were to condo the building as residential, we’d make a lot of money,” Gural stated regarding how long it could take the partners to make the building profitable. “The problem with that is that you don’t own it anymore, and you have to pay taxes at ordinary income rates. So making a profit for us at the level that we own is not difficult. People will buy.”
Even without the drama of an unknown person in New York City real estate buying the building, the auction of 175 Fifth Avenue drew a hardy crowd of spectators.
Eli Lever, an executive with housing development company 21B Group, was one hopeful buyer who went to the bank for a cashier’s check for $100,000 and posted a redacted photo of it to Twitter with the caption, “Bidding funding secured!”

Gural’s GFP Real Estate has owned the property in partnership with Newmark, Sorgente Group, ABS Partners Real Estate and Silverstein, who had a majority stake, since 2006.
But, Silverstein fell out of favor with the other partners after publishing house Macmillan departed in 2019, leaving all 21 floors vacant. With the building needing up to $100 million in renovations, and Silverstein allegedly stonewalling those plans,, the other four partners took him to court in 2021. A judge set a partition auction for March 22.
The rest is history. Garlock drove the price up to $190 million, ghosted on the deposit and Gural declined the option to purchase the building at $189.5 million, and so May 23 became the date for the second auction.
But Garlick hasn’t exactly gotten away with wasting the Flatiron owner’s time.
As contingent in the original auction, a failure to pay would result in the winning bidder being required to pay the expenses to hold a second auction. But Gural and the other partners have gone a step further in suing Garlick’s firm, Abraham Trust, for damages and the full $19 million deposit as liquidated damages.

In the suit, the plaintiffs claim that Garlick knowingly breached that auction contract signed before bidding and drove the price up even without the financial capacity to cover the deposit, using 175 LLC to shield himself and Abraham Trust from liability.
They also suggest foul play in the complaint, stating that Garlick spent a few hours with Silverstein — a relative of his — the day before the auction.
 

David Goldsmith

All Powerful Moderator
Staff member

Remote work will destroy 44% of NYC office values​

Academics’ projections grow increasingly dire as work-from-home persists

With the return to office seemingly plateauing at about 50 percent occupancy, the long-term impact of remote work on New York’s office values looks even more dire than previously thought.
That’s according to an update from researchers at New York University and Columbia University, who revised a study they released last year measuring the effect of work-from-home on New York City’s office stock.

The update, published in May, now calculates that the city’s offices as a whole will lose 44 percent of their pre-pandemic value by 2029 — up from the estimated 28 percent when the authors first published the study a year ago.
“We now estimate a more persistent work-from-home regime, which has more of an impairment of office values even in the long run,” NYU’s Arpit Gupta, one of the authors, wrote in an email.

Even the most optimistic office evangelists have come to admit that remote work has proven more enduring than they expected.
“The hybrid work model has persisted far longer than I expected it to,” SL Green Realty CEO Marc Holliday acknowledged in December.

New York’s office buildings saw a notable uptick in physical occupancy after Labor Day last year, hitting nearly 47 percent. But that seems to have been somewhat of a ceiling. As of May, occupancy was slightly higher than 48 percent.
(For its occupancy figures, the NYU/Columbia study used data from the entry-swipe company Kastle Systems, which some have criticized as an incomplete measurement because it misses some large office portfolios with high occupancy rates.)

The authors found that companies that make little use of their office space are declining to renew leases or moving forward with only a portion of their space. They point to data from Cushman & Wakefield that show just shy of 78 percent of Manhattan’s office stock was contractually leased in the fourth quarter — a 30-year low.

Remote work is “shaping up to massively disrupt” office values, the authors wrote.
“Firms appear to demand substantially less office space when they adopt hybrid and remote work practices,” the authors wrote of their findings. “Such practices appear to be persistent.”
 

David Goldsmith

All Powerful Moderator
Staff member

I-sales recap: Midtown offices sell for steep discounts​

One property on West 55th Street went for 40 percent below ask

A pair of Midtown office buildings once valued above $40 million recently sold for about half of that amount, dragging the properties into the mid-market range and topping the list of commercial real estate deals between $10 million and $40 million that hit city records last week.
DuArt Media, an Academy Award-winning film studio, sold its longtime home on West 55th Street for $28.5 million, a whopping 40 percent discount from the $48 million it sought when it placed the building on the market last year. And a few blocks south, TA Realty sold a Diamond District office building for just over half the $43 million it paid for it in 2017.

Below are more details on all six mid-market deals from last week, ranked by dollar amount:
  1. Having permanently closed after 100 years, DuArt unloaded its 11-story office building at 245 West 55th Street in Midtown for $28.5 million. The identity of the buyer, listed only as 245 West 55th Street LLC, is unclear.
  1. TA Realty took a massive haircut on a Diamond District office building at 1200 Sixth Avenue, selling it for $22.3 million after buying it in 2017 for $43 million. According to Crain’s, the buyer is Josh Rahmani and Ebi Khalili’s Empire Capital Holdings, which has picked up a slew of Midtown properties in recent months.
  1. An East New York shopping center swapped hands for $15.2 million. Located at 1110 Pennsylvania Avenue, the 12-unit, two-story property is home to a number of medical offices and was marketed as such. Multiple members of the Bokhour family are listed as sellers, and Crain’s reported that the buyer was Newark-based RHS Realty. The building has an alternate address of 98 Cozine Avenue. The First National Bank of Long Island provided a $9.3 million mortgage.
  1. Sowa Kousan, Inc., purchased a 10-unit, five-story apartment building at 506 East 84th Street in Yorkville for $12 million. The seller, Susa Makoto, bought the 8,065-square-foot building in 2017 for $11.2 million. It was built in 1910 and renovated in 1960.
  1. JAI Studio, Inc. paid $11.5 million for a townhouse at 154 East 71st Street on the Upper East Side with two residential units and one commercial space. The property was the home of ophthalmologist Stephen E. Kelly, who passed away in 2019. His estate sold the townhouse, which was known for being filled with Kelly’s pricey Art Deco collection.
  1. Another Upper East Side townhouse, at 11 East 76th Street, sold for $10.2 million after being listed for $12.5 million. The property, which was built in 1896 and received a Landmark Designation in 1982, was sold by Don Wise, who had owned it since 1968, according to property records. The buyer is The Moinian Group, which last month took over most of a 24-story office building at 245 Fifth Avenue and sold a 467-unit Flatbush apartment complex for about $325 million.
 

David Goldsmith

All Powerful Moderator
Staff member
That empty feeling: Available office space in Manhattan reaches all-time high
Amazon inked two large leases in quarter, but market’s struggles continued

Available office space reached an all-time high in the second quarter, with 70.3 million square feet ready for leasing.
That left 19.7 percent of office space available, the highest since the pandemic began, according to a report from Savills.

The report is another sign of how much the office market is struggling and the extent to which tenants have the upper hand in negotiating leases. Leasing activity fell 12.1 percent in the first half of the year from the same period in 2022, and the pace in the second quarter was a whopping 25.2 percent lower than the pre-pandemic average for April through June.
Further, lease renewals and expansions accounted for 49 percent of activity in the second quarter. This is down from 63.1 percent last quarter, but is still higher than historical levels. It reflects the degree to which leasing activity is failing to put a serious dent in overall available space.
While the tech and media industries continued to lag in leasing activity last quarter, e-commerce giant Amazon renewed 210,000-square-foot lease at 1440 Broadway near Penn Station and signed a new one for 90,000 square feet at 75 Rockefeller Plaza.
Financial and legal services accounted for the highest share by industry. Of the top 10 transactions in the quarter, seven were from those two industries, with Amazon accounting for two of the remaining three.

The largest deal of the quarter was at 110 William Street in the Financial District, where the Department of Citywide Administrative Services took 840,000 square feet in a relocation.
Coming in second was law firm Paul Hastings, which renewed for 277,000 square feet at 200 Park Avenue next to Grand Central Terminal. Third was another law firm — Wachtell, Lipton, Rosen & Katz — which renewed 249,000 square feet at 51 West 52nd Street in Plaza South.

The Financial District continued to struggle to fill space, as its 29.3 percent availability rate was the highest of any submarket in Manhattan. This has dragged asking rents down dramatically to an average of $57.62 per square foot; only the City Hall area has a lower asking rent at an average of $48.56 per square foot.
Atop the asking-rent rankings was Hudson Yards, which is dominated by new, Class A offices. The average asking rent there was $136.97. In second place at $112.07 was Plaza South, which also had the lowest availability rate at 14.2 percent.

 

David Goldsmith

All Powerful Moderator
Staff member
Empty spaces and hybrid places: The pandemic’s lasting impact on real estate

Real estate in the world’s superstar cities has not kept up with shifts in behavior caused by the pandemic. The cities’ vibrancy is at risk, and they will have to adapt.

  • Hybrid work is here to stay. As a result, office attendance has stabilized at 30 percent below prepandemic norms.
  • The ripple effects of hybrid work are substantial. Untethered from their offices, residents have left urban cores and shifted their shopping elsewhere. For example, New York City’s urban core lost 5 percent of its population from mid-2020 to mid-2022, and San Francisco’s lost 6 percent. Urban vacancy rates have shot up. Foot traffic near stores in metropolitan areas remains 10 to 20 percent below prepandemic levels.
  • Demand for office and retail space in superstar cities will remain below prepandemic levels. In a moderate scenario that we modeled, demand for office space is 13 percent lower in 2030 than it was in 2019 for the median city in our study. In a severe scenario, demand falls by 38 percent in the most heavily affected city.
  • Real estate is local, and demand will vary substantially by neighborhood and city. Demand may be lower in neighborhoods and cities characterized by dense office space, expensive housing, and large employers in the knowledge economy.
  • Cities and buildings can adapt and thrive by taking hybrid approaches themselves. Priorities might include developing mixed-use neighborhoods, constructing more adaptable buildings, and designing multiuse office and retail space.

When the COVID-19 pandemic began, it dramatically changed the way people worked, lived, and shopped in cities around the world. The starkest change was where and how they worked. Obeying lockdowns and office closures, tired of uncomfortable masks, and enabled by remote-work technology, many employees abruptly retreated from traditional offices to home offices. Many of those employees, newly freed from their daily commutes, chose to move out of urban cores. And now that fewer of them were working and living near urban stores, fewer of them shopped there. In recent months, some of those behavioral shifts have slowed. Others persist, particularly among office employees continuing to engage in hybrid work (that is, a combination of remote and in-office work).
The behavioral shifts have already had major effects on real estate in “superstar” cities—roughly speaking, cities with a disproportionate share of the world’s urban GDP and GDP growth. In superstar cities’ urban cores, the percentage of office and retail space that is vacant has grown sharply since 2019, and home prices have increased more slowly than in the suburbs and other cities.

To what extent could real estate in superstar cities continue to suffer? In this research, the McKinsey Global Institute has modeled future demand for office, residential, and retail space in several scenarios.] In those scenarios, demand for office and retail space is generally lower in 2030 than it was in 2019, though the anticipated reductions in our moderate scenario are smaller than those projected by many other researchers. Our analysis also shows that the ripple effects will be complex—for example, that certain kinds of cities and neighborhoods will be more heavily affected than others. We considered a wide variety of factors, including long-term population trends; employment trends, such as the ongoing effects of automation; office attendance patterns by industry; employee coordination, defined as the maximum share of workers in the office at a given time; workers’ ages and incomes; the share of a city’s population that commutes from elsewhere; housing price variation among neighborhoods; and shopping trends, such as the ongoing increase in online shopping. In addition to many secondary sources, our modeling includes information from a large global survey that we conducted to understand the behavioral shifts caused by the pandemic.
We performed this research during a time of exceptional macroeconomic uncertainty. Inflation and interest rates are high; fears of recession are mounting; stress in the financial system has been making headlines. Actual outcomes, of course, will depend on how those variables and others play out.
What is certain is that urban real estate in superstar cities around the world faces substantial challenges. And those challenges could imperil the fiscal health of cities, many of which are already straining to address homelessness, transit needs, and other pressing issues. But the challenges also provide an opportunity to spur a historic transformation of urban spaces. By becoming more flexible and adaptable in everything from the makeup of neighborhoods to the design of buildings—in essence, becoming more “hybrid” themselves—superstar cities can not only adapt but thrive.


[How hybrid work has changed the way people work, live, and shop​

During the pandemic, workers’ office attendance plummeted. Untethered from their daily commutes, urbanites moved away from urban cores in greater numbers than they had before the pandemic (and fewer people moved in), and people spent less in urban stores (see sidebar, “How we define cities”). The rate of out-migration has now returned to its prepandemic trend, but our research suggests that few of the people who left will return and that urban shopping will not fully recover.
[COLOR=var(--text-color-default)]

How we define cities​


This report is about real estate in superstar cities—roughly speaking, cities with a disproportionate share of the world’s urban GDP and GDP growth. We have borrowed the term and the concept from the 2018 MGI report Superstars: The dynamics of firms, sectors, and cities leading the global economy. The report does not examine real estate outside superstar cities.
By city, we usually mean a large metropolitan area. Our analysis often separates such a metropolitan area into two parts: the urban core, which refers to the densest part of the area, and the suburbs, which refers to everything outside the urban core. For example, when we discuss San Francisco’s urban core, we mean San Francisco County, Alameda County, and San Mateo County. And when we discuss San Francisco’s suburbs, we mean the rest of the San Francisco metropolitan area (that is, Marin County and Contra Costa County).
We focus most closely on nine superstar cities: Beijing, Houston, London, New York City, Paris, Munich, San Francisco, Shanghai, and Tokyo. However, in the survey that underlies much of this report, we collected data from a larger set of 17 superstar cities in six countries in order to better understand behavior. At one point in our research, we were able to extend our analysis to a still larger set of 24 superstar cities to help us identify patterns in


Hybrid work is here to stay, and office attendance is down by 30 percent
Employees still spend far less time working at the office than they did before the pandemic, according to our survey. In early 2020, as they adopted remote work and hybrid work in response to lockdowns and health concerns, office attendance in the metropolitan areas we studied dropped by up to 90 percent. It has since recovered substantially but remains down by about 30 percent, on average. As of October 2022, office workers were visiting the office about 3.5 days per week. That number varied among cities, from 3.1 days in London to 3.9 in Beijing. (For more information about the survey, see the technical appendix.)
Office attendance also varies by industry and neighborhood. In large firms in the knowledge economy—which we define as the professional services, information, and finance industries—employees tend to go to the office fewer days per week (Exhibit E1). Characteristics of areas with lower office attendance include expensive housing, a higher ratio of inbound commuters to residents, and a small share of retail, according to our research on US counties. Local culture also plays a role.
[COLOR=var(--text-color-default)]Exhibit E1
Office attendance is lower in large firms in the knowledge economy.

Image description: A dot plot shows workers' the reported number of days per week worked in the office across 15 industries. Professional services and information are the lowest at 3.2 to 3.3 days, while agriculture and mining and transportation are the highest at 3.8 to 4 days. A second dot plot shows the same information for all industries broken down by firm size. Large firms with 1,000 or more employees were the lowest at 3 to 3.3 days, and small firms with less than 100 employees were the highest at 3.6 to 3.8 days. End of image description.[/COLOR]
There are several reasons to believe that the current rate of office attendance could persist. First, the rate has remained fairly stable since mid-2022. Second, three key numbers—the number of days per week that survey respondents go to the office (3.5), the number of days they expect to go to the office after the pandemic ends (3.7), and their preferred number (3.2)—are not far apart. Third, 10 percent of the people we surveyed said that they were both likely to quit their jobs if required to work at the office every day and willing to take a substantial pay cut if doing so let them work from home when they wanted. That group contains many senior, high-income employees, suggesting that they may wield influence over companies’ decisions. Nevertheless, it is not certain that the current rate of office attendance will persist; it could change, for example, if labor market dynamics shift or if research conclusively indicates either a negative or a positive relationship between hybrid work and productivity.


[Up to 7 percent of the people in urban cores left for good​

During the pandemic, a wave of households left the urban cores of superstar cities, and fewer households moved in. For example, New York City’s urban core lost 5 percent of its population from mid-2020 to mid-2022, San Francisco’s lost 6 percent during the same period, and London’s lost 7 percent from mid-2020 to mid-2021.] The main reason was out-migration. In the suburbs, by contrast, populations grew, or they shrank less dramatically than populations in the urban cores did. In the United States, suburbanization had already been happening before the pandemic, and the shock accelerated an existing trend; by contrast, in most of the European and Japanese cities we studied, urbanization gave way to suburbanization (Exhibit E2).
[
During the pandemic, most suburbs grew more quickly than their urban cores.

Image description: A dot plot shows growth rates in urban and suburban areas around 24 cities across North America, Europe, and Asia. Comparing growth in the pandemic years of 2020 to 2020 versus the five prior years, nearly all of the metro areas saw greater growth rates in their suburbs, especially in U.S. cities. End of image description.
The urban cores where population growth was smallest in relation to their suburbs tended to be those with expensive homes, high office density, a high share of workers in the knowledge economy, and limited retail presence—some of the same characteristics that shaped office attendance. London, Dallas, New York, San Francisco, and Boston were the most affected. In general, US urban cores were more affected than European and Japanese ones, which tend to have more mixed-use development, in which office, residential, and retail space exist alongside one another. The migration trends in Beijing were primarily shaped by prepandemic efforts to control the population size in urban cores by encouraging out-migration, efforts that were paused during the pandemic.
[
Hybrid work seems to have contributed significantly to out-migration. In our survey, among respondents who moved after March 2020, 20 percent said that their move was possible only because they could now work from home more frequently. In the United Kingdom and the United States, people who had moved from urban cores to suburbs, and who said that their move was possible only because they could now work from home, said that they were drawn by housing conditions: better neighborhoods, the prospect of homeownership, and outdoor space. In Japan and China, wanting to own a home was far and away the strongest factor motivating people’s moves to the suburbs.
Out-migration from urban cores of superstar cities seems to have slowed, but it is still above prepandemic levels. From 2019 to 2021, net out-migration from US superstar city cores doubled; then it fell in 2022, although it remained above 2019 rates. In other words, the people who moved out during the pandemic are not moving back, and others keep leaving.


[]Shopping remains depressed, especially in urban cores​

As people stayed home during the pandemic, they radically shifted the way they shopped. Foot traffic plummeted near stores in the cities we studied, and online spending as a share of retail spending spiked.
More recently, foot traffic near stores in metropolitan areas has risen again, but it is still 10 to 20 percent lower than it was before the pandemic. A major reason for the decline is that online spending as a share of retail spending, which admittedly grew more slowly after the initial spike, nevertheless remains higher than it was in 2019.
Retailers in urban cores face particularly acute challenges in attracting customers. As of October 2022, foot traffic had recovered noticeably less near those stores than near suburban ones (Exhibit E3). In New York, for example, foot traffic near suburban stores was 16 percent lower than it had been in January 2020, but foot traffic near urban stores was 36 percent lower. And office-dense neighborhoods in urban cores are facing even more challenges. The reason seems to be that when people come to the office less often, they shop less often near the office. In our survey, respondents in the United States who worked at the office no more than one day per week reported doing much less of their total retail spending near the office than did those who worked in the office two to five days a week.
[]Exhibit E3
Foot traffic near stores is recovering more quickly in the suburbs than in urban cores.

Image description: A package of line charts compare foot traffic near stores during the pandemic years of 2020 to 2022 in urban and suburban areas around six cities. All traffic plunged initially and then gradually climbed back near 2020 levels, with suburban areas outperforming urban areas across each metro. End of image description.
Empty and boarded-up storefronts with apartments above them.

[During the pandemic, vacancy rates increased in all the superstar urban cores we studied.
Empty and boarded-up storefronts with apartments above them.]


[]The impact on real estate​

The behavioral changes caused by the pandemic—lower office attendance, accelerated out-migration from cities, and less shopping in office-heavy neighborhoods—will push down demand for real estate in most superstar cities. By 2030, in the scenarios we modeled, demand for office and retail space is generally lower than it was in 2019 (Exhibit E4). Residential space is less affected, though the price differences between urban cores and suburbs are narrower than they used to be. (Note that our model does not consider price elasticity; that is, it does not account for the fact that when demand decreases, prices fall, pushing demand partway back up. For more information about the model, see the technical appendix.)
[]Exhibit E4
In a moderate scenario, demand for office and retail space falls sharply between 2019 and 2030.

Image description: A repeat of the first exhibit above, waterfall-style bar charts plot the projected change in demand for real estate from 2019 to 2030 across nine cities across North America, Europe, and Asia. End of image description.]


[There will be 13 percent less demand for office space in the median city we studied​

Demand for office space has already declined, partly because of the increase in remote work and partly because of a challenging macroeconomic environment. Vacancy rates have increased in all the cities we studied. In the US cities, transaction volume (the total dollar value of all sales) fell by 57 percent, average sale price per square foot fell by 20 percent, and asking rents fell by nearly 22 percent (all in real terms) from 2019 to 2022. In San Francisco, the most strongly affected city in the United States, the share of office space that was vacant was ten percentage points higher in 2022 than it was in 2019, transaction volume was 79 percent lower, sale prices per square foot were 24 percent lower, and asking rents were 28 percent lower (also in real terms). The decline in demand has prompted tenants—wary about current macroeconomic conditions, uncertain about how much their workers will come to the office, and therefore uncertain about how much space they will need—to negotiate shorter leases from owners. Shorter leases, in turn, may make it more difficult for owners to obtain financing or may cause banks to adjust valuation models, which rely in part on the duration of existing leases.
In the scenarios we modeled, the amount of office space demanded in most cities does not return to prepandemic levels for decades. By 2030, demand is as much as 20 percent lower than it was in 2019, depending on the ] That estimate is what our model yields in a moderate scenario—one in which, by 2025, office attendance is higher than it is now but still lower than it was before the pandemic, and that partial recovery continues indefinitely.] In a more severe scenario, in which attendance for all office workers in 2030 falls to the rate already seen in large firms in the knowledge economy, demand is as much as 38 percent lower than it was in 2019, again depending on the city.
Falling demand will drive down value. In the nine cities we studied, a total of $800 billion (in real terms) in value is at stake by 2030 in the moderate scenario. On average, the total value of office space declines by 26 percent from 2019 to 2030 in the moderate scenario and by 42 percent in the severe one. The impact on value could be even stronger if rising interest rates compound it. Similarly, the impact could be stronger if troubled financial institutions decide to more quickly reduce the price of property they finance or own.
Falling demand will also result in a surplus of office space, particularly in the lower-quality and older buildings that the real estate industry calls Class B and Class C. From 2020 to 2022, rents, demand, and sometimes prices generally grew more quickly (or fell less sharply) for Class A buildings than for Class B buildings in US superstar cities. For example, in New York City during that period, the average sale price per square foot rose 3 percent for Class A buildings but fell by 8 percent for Class B buildings. There are a number of reasons for this “flight to quality.” One is that many employers see high-quality space as a way to encourage office attendance among their employees. Another is that Class B and Class C office space is often not suited to hybrid work; for example, it may have less sophisticated audiovisual equipment. Also, now that hybrid work has reduced the total amount of space that employers need, they can spend their budgets on smaller amounts of higher-quality space rather than larger amounts of lower-quality space.


[Demand growth for residences will be muted, especially in urban cores​

During the pandemic, partly because of out-migration, demand for residences grew less quickly in superstar urban cores than it did in suburbs and other cities. Residential vacancy rates increased from 2019 to 2022 in every superstar urban core that we studied, from a 0.8-percentage-point increase in Tokyo to a 9.9-percentage-point increase in London; meanwhile, in the suburbs, vacancy rates grew much less or even ] Prices followed suit, rising eight percentage points more slowly in US superstar urban cores than in their suburbs and 13 percentage points more slowly than in non-superstar urban cores. In San Francisco, nominal prices in some neighborhoods fell by 12 percent from the end of 2019 to 2022. Residences in San Francisco’s urban core are now worth $750 billion less than they would have been if prices there had risen at the national average rate. The effect seems to be a global phenomenon.
Before price adjustments are accounted for, the demand for residences in superstar urban cores that we modeled is up to 10 percent lower by 2030 than it would have been if not for the pandemic. It is nevertheless higher than it was in 2019 in every city we studied except San Francisco and Paris. That estimate rests on the assumption that the wave of residents who left urban cores will not return but that population growth in each city will return to its prepandemic rate by 2024. Should population growth remain depressed for longer, the impact on demand would be even bigger.
However, prices will probably adjust, and so will rents. Again, our model does not account for such price adjustments, so we could not create demand scenarios that incorporated them. But we can say that homes in urban cores are unlikely to stay empty. Residential space differs from office space in that regard: once prices and rents fall, any available floor space is usually taken up quickly. Indeed, vacancy rates in urban cores have already increased less sharply than urban out-migration would suggest. Unfortunately, the downward pressure on prices and rents is unlikely to make residences in superstar cities—many of which suffer from expensive housing and homelessness—much more affordable.


]There will be 9 percent less demand for retail space in the median city we studied]​

Because of reduced foot traffic near urban stores during the pandemic, vacancy in retail space has increased and rents have declined, particularly in office-dense locations. As with office and residential space, vacancy rates increased from 2019 to 2022 in all the superstar urban cores we studied, ranging from a 1.8-percentage-point increase in San Francisco to a 6.2-percentage-point increase in London. From 2019 to 2022, asking retail rents declined an average of 5.4 percent (in real terms) in the cities we studied. The rents that were actually paid may have fallen even more.
Before price adjustments are accounted for, the demand for retail space in superstar urban cores that we modeled is lower in 2030 than it was in 2019, putting downward pressure on rents.[] In San Francisco’s urban core, for example, demand will be 17 percent lower. That estimate is what our model yields in a scenario in which there is a partial return to office (and therefore a partial recovery of retail spending near the office), people’s adoption of online shopping returns to its prepandemic rate of growth by 2025, and people who moved during the pandemic do not move back. In a more severe scenario, the decline in demand in San Francisco’s urban core would be as high as 42 percent. In most superstar urban cores, demand would be projected to decline even if the pandemic had not happened; the reasons are population trends and the increasing move to online shopping. As with residential real estate, however, prices are likely to adjust.

[]What strongly affected neighborhoods and cities have in common[]​

A review of various components of this research—regression analyses, survey responses, and literature reviews—suggests that cities where the pandemic has strongly affected real estate demand tend to have certain characteristics. (We were unable to determine which of those characteristics correlated most strongly with the impact on demand.)
Some of the characteristics are related to the business mix in a city. Specifically, cities with a larger share of workers in the knowledge economy, a higher number of large firms, a higher ratio of commuters to residents, and more cultural acceptance of remote work have tended to experience a greater impact on demand. Those factors lead to lower rates of office attendance, which reduce demand for office space directly, reduce demand for retail space by diminishing the number of office workers shopping at urban stores, and reduce demand for residential space by prompting people to move out of cities’ urban cores.
[
Other characteristics that correlate with the impact on demand are related to the urban structure of a city. Specifically, cities with office-dense real estate and little mixed-use development, as well as expensive housing and little green space, have tended to experience a greater impact on demand. Such characteristics make places less desirable for working, living, and shopping.
Two of those characteristics seem to correlate with the impact on demand at the neighborhood level as well. We examined neighborhoods defined by zip codes in Manhattan and San Francisco County (Exhibit E5). According to our analysis, the larger the share of real estate in a neighborhood that was occupied by offices, the more out-migration from that neighborhood. Similarly, home prices correlated with out-migration: pricier neighborhoods experienced more out-migration. (Data limitations prevented us from finding out whether the other characteristics also correlated with demand at the neighborhood level.)
[Exhibit E5



[Business mix and urban structure make a difference at the neighborhood level[​

Two very different Manhattan neighborhoods show that business mix and urban structure correlate with demand at the neighborhood level. The business mix of the first neighborhood, the Financial District, is heavily skewed toward the knowledge economy; 50 percent of all office space there is occupied by knowledge-economy tenants. The Financial District’s urban structure is office dense: 80 percent of real estate is dedicated to offices. And the average price of a home is roughly $1.5 million. Now consider the nearby Lower East Side, where just 22 percent of office space is dedicated to the knowledge economy, 7 percent of all space is dedicated to offices, and the average home price is about $1.0 million.
Those factors help us understand why the pandemic has driven such different outcomes in the two neighborhoods. The domestic out-migration rate from the start of 2020 to the start of 2022 was 2.2 times higher in the Financial District than in the Lower East Side, for example. It stands to reason that residents of the Financial District could easily work from home, as the prevalence of the knowledge economy there suggests, and were therefore likelier to move to bigger homes far from their offices; meanwhile, expensive housing may have given them another reason to leave.

[At the city level too, business mix and urban structure drive differences[​

San Francisco’s business mix helps explain the pandemic’s heavy impact there. The city has long cultivated a technology-focused economy with a large population of office workers, especially knowledge-economy workers. It has many inbound commuters, as the employment-to-population ratio shows: that ratio, a proxy for the prevalence of commuters, is 0.87 in San Francisco, starkly higher than the national average of 0.48. And the city’s employers, many of which are in the technology industry, may have been more likely to be aware of and adopt remote work technology when the pandemic began. San Francisco’s urban structure also helps explain why the pandemic affected demand so strongly there. Home prices in San Francisco County are five times higher than the national average and almost twice as high as prices in the suburbs. Furthermore, San Francisco has limited mixed-use development: offices represent 30 percent or more of all real estate in nine of San Francisco’s 26 neighborhoods.
The pandemic has affected demand less strongly in Paris than in San Francisco. Paris’s business mix helps show why: unlike San Francisco, which is heavily dependent on tech firms and the knowledge economy, Paris is home to companies that are global leaders in a wide variety of industries, such as beauty, hospitality, and consumer retail. But the city’s urban structure has features that push residents away as well as those that pull them in. On the one hand, home prices are twice as high in Paris’s urban core as in its suburbs and four times higher than the national average. On the other hand, Paris has a great deal of mixed-use development.
Finally, consider Tokyo, where real estate demand has been affected less than in most cities we studied. Most of Tokyo’s workers are in wholesale and retail trade, in contrast with technology-dependent San Francisco. Like Paris, Japan has a culture that values being present in the office, in particular among employees of small and medium-size businesses; in our survey, respondents in Tokyo said that they expected to be required to be in the office 3.7 days per week, a response noticeably higher than Paris’s 3.3. Loyalty to employers is also common in Japan, as are lower rates of technology adoption than in San Francisco. Furthermore, online spending as a share of retail spending was lower in Japan than in any other country we studied; that may have contributed to higher office attendance and continued in-person retail shopping. And in Tokyo, home prices in the urban core are 2.1 times higher than the national average—a starkly smaller number than Paris’s 4.1 and San Francisco’s 5.0.


[Thriving in hybrid places[​

Superstar cities are facing a new reality in which hybrid work worsens vacancy rates, threatens the vibrancy of neighborhoods, and thus makes urban cores less attractive to employers, employees, and residents. To adapt to that new reality, urban stakeholders could consider adopting more hybrid approaches themselves. At the neighborhood and building levels, and even in the design of the floors of buildings, choosing diversity, adaptability, and flexibility rather than homogeneity can help cities thrive.

[]At the neighborhood level, consider mixed-use development[​

One way cities could adapt is through mixed-use neighborhoods—that is, neighborhoods that are not dominated by a single type of real estate (especially offices) but instead incorporate a diverse mix of office, residential, and retail space. Such hybrid neighborhoods were becoming more popular even before the pandemic. And now that the pandemic has reduced demand for offices, cities have been left with vacant space that could be converted to other uses. Furthermore, our research shows that mixed-use neighborhoods have suffered less during the pandemic than office-dense neighborhoods have. That resilience gives investors, developers, and cities still more reason to engage in placemaking.
Redeveloping neighborhoods is an enormous undertaking, of course, so mobilizing the many stakeholders is important. Governments may be particularly helpful in reforming restrictive zoning policies. Investors would be needed to finance redevelopment. And developers would be the ones to turn mixed-use visions into realities.
Suburbs can benefit from hybridity as well. City dwellers, untethered from their daily commutes and thus less concerned about living far from urban cores, are increasingly seeking larger homes in greener areas. More housing and retail in the suburbs could help satisfy their preferences. More multifamily housing could be particularly beneficial because it would accommodate more people than single-family homes do. So long as the apartments are larger and more comfortable than apartments in urban cores, they could attract urbanites seeking space. Suburban policy makers could consider encouraging multifamily development by adjusting zoning, offering incentives to developers, and reexamining regulations that prevent housing from being built, such as those governing minimum dwelling sizes and window requirements.
Furthermore, multifamily housing is more energy-efficient than single-family homes, so it could help push down carbon emissions. And because it accommodates many people, it could help alleviate the shortage of housing that many metropolitan areas suffer from, making living in those areas more affordable.


[At the building level, construct space that is adaptable and flexible[​

To adapt to declining demand for traditional office and retail space, developers could create hybrid buildings. The most ambitious vision is a universal, “neutral-use” building whose design, infrastructure, and technology could be easily modified to serve different uses. Imagine a medical building that could be easily converted into, say, a hotel or an apartment building if customers’ preferences changed. More modestly, buildings could be designed to accommodate different degrees of collaborative and individual work or different arrangements of open and closed offices. They could also include technology that promotes flexibility, such as sensors to track patterns of usage that could inform an employer’s approach to hybrid work.
Hybrid buildings would bring at least two advantages. One is that they would protect owners from shifts in preferences that are impossible to predict now. The second relates to a current trend toward shorter leases in the office sector. Because tenants will now be moving in and out more frequently, buildings might become more valuable if they grow more adaptable.
Developers could also try to convert offices into the kinds of space for which there is more demand, such as apartments, hotels, and schools. Conversions are very hard, however. Obstacles include rezoning, renegotiating existing lease commitments to allow for renovations, and dealing with physical limitations. Furthermore, in the cities we studied, even if all excess office space were converted into housing, the amount of residential space in each city would grow by less than 3 percent.[COLOR=var(--footnote-number-color)]8[/COLOR] Still, for owners facing the prospect of lower occupancy and lower rents in their office buildings, the opportunity cost of conversion has fallen, and the number of successful conversions may grow.
Developers of retail space too could keep adaptability in mind. Of late, retail tenants have been evaluating their footprints with a stricter eye, shutting down stores or moving into smaller spaces. If developers built more adaptable spaces, they would be likelier to remain relevant to tenants’ shifting needs. Developers might also offer new store formats, such as spaces intended for delivery and fulfillment or for logistics rather than traditional retail. Or they might design buildings that are more integrated with their environments—for example, with dining spaces that extend onto sidewalks.


[At the floor level, design space that is modular and multiuse[​

Tenants in urban cores—both the employers who rent office space and the merchants who rent retail space—may have to start “earning the commute” from office workers and shoppers who would otherwise visit less often. Here too, thinking flexibly and adaptably can help. For example, the office does not have to be just a place to work; it can also be a place where employees genuinely enjoy spending time or where they can take part in compelling events and activities. Office tenants might try to attract them by building magnetic, hospitality-oriented workplaces. Office tenants might also design more modular spaces that can adapt to changes in work patterns from week to week. And the most forward-thinking tenants will provide an efficient, digital way to organize hybrid work patterns and preferences.
[
Retailers too may have to “earn the commute” by designing spaces that cater to many different uses. A prime example is stores that easily accommodate omnichannel retail—a single, seamless experience for customers, whether they shop online or in person. Similarly, stores can provide experiential retail. For example, one department store brand is launching smaller stores where customers can pick up products bought online, get clothes altered, find style advice, and patronize a beauty salon.
Indeed, it is not hard to imagine more “hybrid floors” in which offices, residences, and stores exist side by side. For floors—as for buildings and neighborhoods—turning empty spaces into hybrid places may not simply be a way to counter the damage wrought by the pandemic. It could be a way to transform superstar cities and prepare them for a dynamic, prosperous future.
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David Goldsmith

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Soloviev nears full occupancy at 9 West​

As offices continue to empty across the nation, three new leases push vacancy rate below 10 percent in the 50-story tower

Stefan Soloviev called his shot in May at The Real Deal’s New York City Showcase + Forum.
The heir to Sheldon Solow’s real estate empire predicted he would soon fill the portfolio’s crown jewel, the office building at 9 West 57th Street, despite the soft market, during an interview with TRD publisher and founder Amir Korangy. Three leases signed last week for nearly 65,000 total square feet have brought him closer to that goal, pushing the building’s occupancy rate over 90 percent.

“Despite all the negativity about commercial leasing in New York City we are seeing a dramatic uptick in our activity at 9W,” said Soloviev in a statement. “As I’ve said time and again we are heading to 100-percent occupancy and we will be there even sooner than I’ve said we would in the past.”
Mousse Partners, the investment vehicle behind Chanel, according to Forbes, signed a lease for the entire 33,000-square-foot 43rd floor. It’s a nearly 16,000-square-foot expansion for the company, which is vacating a smaller space on the 46th floor as a result of the deal.

Pointstate Capital, an investment management company, signed a lease for 20,000 square feet on the 37th floor, and Panco Management, a property construction and management company, signed an 11,700-square-foot deal on the 33rd floor.

Howard Fiddle of CBRE represented Soloviev Group.
The sloped skyscraper that towers 50 stories above Central Park has cast perhaps an even taller presence in the commercial real estate world. Built in 1974, Solow’s reported habit of hand picking his tenants gave the building an air of exclusivity. But the building’s vacancy rate hovered near 50 percent under Solow, who preferred empty space over lower rents.
“He did an amazing job putting different properties together,” Soloviev told Korangy. “Running them, that’s where we clashed.”

Despite the leases at 9 West, New York’s office market remains challenged as a result of the work-from-home policies that became popular during the pandemic lockdown. The office occupancy rate was just 48 percent the week of July 26, according to Kastle Systems’ analysis of the number of times employees used Kastle fobs and keycards to access their buildings.

 

David Goldsmith

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There seems to be a rather extreme unwillingness to acknowledge that the single biggest impediment to these conversions is price, and that the acquisition needs to be done at substantially lower numbers to make them work.

NYC could be first to rescue office properties: Walker & Dunlop CEO​

Midtown Manhattan conversion plan faces languishing commercial properties

Mayor Eric Adams’ goal of turning Midtown South into a live-work-play neighborhood with the help of office conversions appears to have an ally in one commercial real estate executive.
Walker & Dunlop CEO Willy Walker said the rezoning plan for the neighborhood would help prop up the city tax base, according to comments in an interview with Bloomberg, and despite challenges it could be the first of cities to see the light when it comes to flailing office properties.

“In New York and Boston and some other metro areas, there are mayors and city councils that realize that their tax revenue is going to decline precipitously unless they do something to enable the conversion of these buildings into functioning real estate,” Walker told Bloomberg.
Walker noted the transformation of Midtown South would be a boon for residents seeking more housing options and landlords who are struggling as office tenants flee traditional workspaces.

But even with the potential for 20,000 housing units, office tenants in part-empty buildings may be reluctant to part ways with their space completely.
“The process of buying out those leases is very expensive and often very difficult to do,” Walker said.

Adams last week rolled out a plan to rezone vacant offices in the district by way of the initiative, which also includes the creation of a multi-agency group to help weave through the enormous amount of red tape in the city.
The city will still need state approval for its conversion plan, according to Bloomberg. Adams is also calling for the state to craft a tax incentive for conversion projects, as many multifamily developers have shied away from projects that no longer pencil out after the lapse of the 421a tax break.

Walker’s firm is all too familiar with the struggles facing commercial real estate. While announcing layoffs for eight percent of employees in April, the chief executive said economic turbulence had lowered the firm’s outlook, but there were no plans to exit or “dramatically cut” any business lines.
 

David Goldsmith

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Will the post-Labor Day return to office finally pan out?​

Employers gain leverage to pull workers back, but we’ve seen this movie before

In the Great Resignation, millions of Americans ditched old jobs for new ones or none at all, leaving employers powerless to demand workers return to the office.
But the Great Resignation is over, data show. Could that mean the annual prediction of employees streaming back to their desks after Labor Day actually pans out?

Such expectations never materialized in the first year of the pandemic (2020), the first year of vaccines (2021) and the first year that pretty much everything but office work was back to normal (2022). That was because employees relished their new flexibility and companies feared they would bolt if forced back to their desks.
This time will be different, some say, citing employers’ increased leverage in the never-ending back and forth with workers.
“The pendulum has swung back towards the company,” said Nick Romito, co-founder, and CEO of VTS, a commercial real estate leasing and asset management platform.

One analysis supports that notion. A JLL study found that 2.5 million office-based employees in the U.S. will face return-to-office mandates through the end of the year.
Most of those policies are set to take effect in September as school resumes and summer winds down. Firms including BlackRock, Meta, Robinhood, and even the company that became synonymous with remote work —  Zoom — have called their employees back into the office.
The industry’s argument is that productivity will be better over the long term.

“For the first time in a long time, there’s going to be clear winners and losers,” Romito said. “And the winners are going to be the most connected, productive teams. These are folks who are together. And the result of that is them winning in the market, whatever category they’re in.”
A VTS study found that the national demand for office space has stabilized, but New York City’s office demand index increased by 7.4 percent  year-over-year —  the most of any market in the study.

Between mandates and employees’ feeling less confident that they could pick up and go elsewhere, JLL projects office occupancy will increase to 55 percent to 65 percent by year-end and likely set a post-pandemic record. On the most popular midweek days it could trend over 80 percent.
Offices have remained ghostly on Fridays, and even if a return-to-office surge happens, it would likely be on Tuesday through Thursday.
Last year between Aug. 29 and Sept. 12, 49 percent of Manhattan office workers came in, according to a survey of 160 major employers reported by the Commercial Observer.
This year, pre-Labor Day, some have already noticed a difference.
Marie Boster, president of the Fifth Avenue Association, a Midtown business improvement district, said, “I’m seeing a lot more of my restaurants in the post power lunch hour have no availability because everybody’s going out for lunch.”

Another sign from the data is that after several months of decline, U.S. office leasing has begun to rebound. Gross leasing volume is up 11.6 percent from this time last year, the fastest growth rate since mid-2021, according to the report.

Select industries have been driving office demand. Leasing by energy companies and utilities has grown nearly 40 percent year-over-year, the study found. Tech-oriented office districts are also seeing a much-needed pickup from artificial intelligence, as some workers fear missing opportunities during the AI craze.
Aside from employer mandates, remote-work fatigue and fear of missing out, some employees could be prompted by their children’s change in routine.
“There’s this shift where you say, ‘Okay, my kids are going back to school, I’m going back to work too,’” Boster said.

 

David Goldsmith

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Strong August office leasing volume comes with a catch​

Activity increased for fourth month to 2.5M sf, but RXR renewal claims lion’s share

At first glance, it appears Manhattan office landlords had something to celebrate in August. But not all is what it seems.
Companies leased 2.5 million square feet in the borough last month, Crain’s reported. The data comes courtesy of Colliers, which noted that August represented the fourth consecutive month of increased activity in the market.

That leasing volume doesn’t solely count new leases. More than a quarter of the activity stems from law firm Davis Polk & Wardwell’s extension at RXR Realty’s 450 Lexington Avenue. That renewal added up to more than 700,000 square feet, but only 30,000 of that space is new.
Leasing activity fell a whopping 25.6 percent year-over-year. The borough is on track to experience a 10.5 percent drop in leasing activity from 2022 to 2023. The vacancy rate remained tethered to the previous month’s 17.8 percent and 96 million square feet remain available in Manhattan.

Among the three neighborhoods Colliers tracked, Midtown experienced the strongest month of leasing with 1.3 million square feet taken, with more than half came from the deal at Scott Rechler’s property. Midtown South saw 771,000 square feet leased in August, while Downtown trailed behind at 445,000 square feet.

If there’s a positive takeaway from last month’s activity for office owners, it’s the steadying of asking rents. The average asking rent ticked upwards — albeit modestly — for the fifth consecutive month, hitting $75.70 per square foot. That’s the highest average since October 2020; Asking rent in Midtown South reached $82.78 per square foot, a record for the neighborhood.
That’s still not what landlords were asking for before the pandemic changed everything. In March 2020, the average asking rent was $79.47 per square foot, demonstrating the gulf that has grown in the last three years as supply and demand drastically veered off course.
 

David Goldsmith

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Clarion takes $100M haircut in Midtown South deal with Sovereign Partners​

Cyrus and Darius Sakhai land another bargainc

Cyrus and Darius Sakhai’s Sovereign Partners are sniping another New York office building.
The brothers are in contract to buy the 20-story office building at 100-104 Fifth Avenue in Midtown South for around $125 million, The Real Deal has learned. That’s close to half off the $230 million that seller Clarion Partners paid for the property a decade ago — another indicator of the deep pain being felt in the city’s office market.

Clarion, headed by CEO David Gilbert, had offered to help buyers by providing seller financing when it put the property up for sale. But Sovereign is buying the deal all-cash, according to a source.
Representatives for Sovereign and Clarion did not immediately respond to requests for comment.
A Newmark team led by Adam Spies and Doug Harmon brokered the sale. The brokers declined to comment.

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The deal works out to more than $450 per square foot for the 270,000-square-foot building, which dates back to the early 1900s. Clarion bought the property in 2013 at about $800 per square foot.
Apple is a major tenant at the property, and the upper floors could be converted into residential condos.
This is the second big discounted office buy for Sovereign this year.

In April the company paid $113 million to buy the 1980s-era Tower56 at 126 East 56th Street from Pearlmark Real Estate, which had trouble refinancing the building when its mortgage came due. It was one the first heavily discounted office buildings to trade after the Federal Reserve began hiking interest rates last year.

 

David Goldsmith

All Powerful Moderator
Staff member

Rudin’s 32 Sixth Avenue nearly 40% vacant​

Two major tenants downsized at Tribeca property and a third left last year

When Michael Rudin takes over his family firm’s office portfolio in January, 32 Sixth Avenue figures to be a high priority.
Vacancy has been climbing at Rudin Management’s Tribeca property as office tenants downsize or leave altogether, Crain’s reported. As of March, its occupancy rate was down to 62 percent, according to Fitch Ratings.

Time is of the essence. In 2015, Rudin borrowed $425 million to refinance the property with a CMBS-backed loan underwritten by JPMorgan Chase and Deutsche Bank. That loan is due to mature in 2025 and a credit downgrading for the property may be in the offing.
Still, a spokesperson for Rudin said the building is in “solid financial shape.”

“We recently secured approximately 150,000 square feet of lease extensions with prominent telecom and data center companies,” the spokesperson said. “We are in discussions with a number of prospects about taking space in the building and are actively pursuing additional investments to enhance the building’s amenity program and experience at street level.”
In 2021, Rudin partnered with flex-office provider Industrious on a 52,000-square-foot space on the property’s 13th floor. The space includes nine private suites that can host up to 50 people each.
But that partnership was replacing one of the largest tenants at the building, CenturyLink Communications, which downsized significantly. Another major tenant, Dentsu Holdings USA, downsized that year. Last year, iHeartMedia division AMFM Operating left the property when its lease expired.

While half of the 1932-built property is office space, the other half is used for telecommunications infrastructure.

Rudin purchased the 1.2 million-square-foot, 27-story New York Global Connectivity Center from AT&T for $150 million in 1999. Rudin has since invested $100 million in renovations, according to Moody’s. The company has proposed a triangular extension on the ground floor, but has faced opposition from the community board.
The burden of figuring out next steps for the building belongs to Michael Rudin, who will soon be ascending to the role of co-CEO alongside Samantha Rudin Earls as their father Bill gives up his role. Samantha will be in charge of the company’s apartment portfolio.
 
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