top of page

Weekly Market Report - April 21, 2023

***


SL Green posts worst occupancy drop since pandemic


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. 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.


***


NYU buys Noho office building for $98M


New York University purchased a Noho office building for just under $100 million in the school’s latest expansion around its Greenwich Village campus. NYU paid $97.5 million for the 120,000-square-foot building at 400 Lafayette Street, property records filed Thursday show. A spokesperson for the university said that for now, the building will be used as swing space for faculty and administrative offices. But long term, the space will be used “to shrink our footprint of leased spaces, reducing costs and providing long-term stability,” the spokesperson said. The seller is Alvin Flaster’s Sand Associates, which has owned the property since at least 1980. NYU’s purchase is one of the few investment sales to close in this slow market, and it’s notable that the property was picked up by an owner-operator.


Nonprofits and companies often take advantage of down markets to buy real estate when they don’t have to compete with professional buyers who view properties as investments. Bary Diller’s media conglomerate IAC recently paid $80 million for the land beneath its West Chelsea corporate headquarters when it came up for sale.


Earlier this year, Hyundai paid Vanbarton Group $275 million for a Tribeca office building, which the automaker plans to use for offices and a showroom. NYU has eyed expansion over the years and picked up numerous properties around its campuses. The school paid $134 million in 2010 for the 733-bed Founders Hall dormitory at 120 East 12th Street. Last year, it paid $122 million to buy an office building at Downtown Brooklyn’s MetroTech Center.



***


The Rush To Convert To Multifamily: Why Hotel Deals Are On The Rise, But Offices Are Lagging Behind


To meet the staggering demand for rental housing, the U.S. needs to build 4.3 million multifamily units by 2035. Add to that the fact that the National Low Income Housing Coalition estimates that the country currently needs 6.8 million more affordable units for families in need, and it would seem as though the time to start building more multi-family homes was yesterday. Vacant and underperforming hotels have long been touted as a possible solution to this problem. Today, as many companies have transitioned to work-from-home models, some cities are exploring the idea of converting underused office buildings into multifamily units. However, making this switch is easier said than done, which among its many services, advises clients, including real estate lenders, on the legal issues surrounding asset conversion projects.


There has been a lot of talk about office conversions, but the cost can be a prohibitive factor — the floor plates are often too large, the plumbing is different, necessary systems are not in place, the list goes on. For these reasons, from a financing perspective, many traditional lenders right now are only considering the worth of the land in their underwriting, not what the worth might be after a conversion. Older, historic office buildings may be physically easier to convert to residential, particularly to less traditional residential concepts, like 'dorm-style' living, which we are starting to see. It may, however, be harder to accurately predict construction costs for older, historical buildings because of unknown conditions.


If a lender is not considering the stabilized value after conversion and just treating the conversion as ground-up construction, office conversions often won’t pencil out when you factor in the significant improvement costs that come with those conversions. Potential cost savings, like tax credits and affordable housing programs, can make a conversion easier to pencil out by offsetting costs. Hotels and assisted living facilities, however, are already set up for residential occupancy so these conversions are much more financeable.



***



The newest season of the Flatiron Building drama drops May 23. The iconic property is hitting the auction block for the second time, weeks after a surprise bidder won an auction for it with a $190 million bid, then flopped on a required deposit to close the deal. The vacant building will be auctioned off again on May 23 at 2:30 p.m. on the steps of the New York County courthouse in Lower Manhattan. At the last auction in March, Jacob Garlick outbid a group led by longtime owner Jeffrey Gural, but failed to produce the required $19 million deposit. Gural’s group then declined an option to acquire the building at their last bid price of $189.5 million, leaving its fate in question. Garlick was able to enter last month’s auction in part because it did not require any upfront deposit, something industry insiders described as unusual. Few guardrails appear to be in place to prevent a similar fiasco this time around. The new auction will not require participants to make a deposit either. Instead, the terms require the winning bidder to put down just $100,000 to the court-appointed referee.


The auctioneer, Matthew Mannion of Mannion Auctions, said a winning bidder will be required to produce a certified check at the auction. It’s unclear whether Garlick, a millennial from Northern Virginia with no known experience in big ticket real estate, will be able to participate in this round of bidding. Sources confirmed to The Real Deal last week that Garlick was angling to get back into the mix to acquire the building and has been scrambling to show he has the funds to do so. He still may be liable for the $19 million deposit, according to Gural. The building went up for auction because of a partnership dispute between its owners.


Sorgente Group, Gural and ABS Real Estate Partners, who together controlled a 75 percent stake, could not see eye-to-eye with the remaining 25 percent owner, Nathan Silverstein. In the auction, the owners were able to use their existing interests to bid on the property, positioning the Gural-led group as the clear favorite. Silverstein confirmed to TRD that he is a distant relative of Garlick’s, but claims they have only met once.



***



For the past two decades Brooklyn has developed and emerged as a super borough; an alternative for institutional capital in New York City, and in some metrics, topping the undefeated borough of Manhattan. The following major factors have contributed to this trend:


No longer second class. Brooklyn has become the first choice for residents, businesses and investors. The borough accounts for 23% of New York City’s land area and includes 31% of the city’s population, resulting in a densely populated 39,438 residents per square mile.


Diversity of products and locations. Brooklyn offers quality assets available for institutional investment. For example: multifamily, office and development assets located Downtown; industrial/warehouse in Red Hook and East New York; development in newly rezoned, up and coming areas like Gowanus and previously rezoned neighborhoods like Williamsburg; and affordable housing-driven locations in multiple neighborhoods. This diversity attracts different buckets of institutional capital such as: opportunistic, core, core plus and mission driven.


Brooklyn Investment Sales 2017-2022









Brooklyn Saw Record Dollar Volume and Nearly Half of NYC’s Transactions in 2022

The desirability of Brooklyn as a destination for capital was evident in last year’s numbers when total investment sales exceeded $10 billion for the first time ever, surpassing the previous record of $9.19 billion from 2015, which is a remarkable milestone, highlighted in Ariel’s 2022 Brooklyn Year-End Commercial Real Estate Trends. The borough also accounted for 45% of New York City’s 2,716 transactions, and 25% of the city’s $38.4 billion in dollar volume.


Brooklyn Investment Sales Volume 2022 vs 2021







***



New York may be contending with myriad issues including record-high office vacancy rates, but its appeal for global commercial real estate investors remains: The city won back the No. 1 spot as the most favored U.S. market, according to a new survey. New York moved up from ranking fifth in 2022, beating Atlanta, Austin and Boston, the previous top three cities from the past several years, according to a poll of investors conducted in December and January by the Association of Foreign Investors in Real Estate.


The last time New York held the top ranking was in early 2020, before the pandemic, Worldwide, London remains the top global city for investment, followed by New York, according to the group. London may be the favorite global city for investors, but the United States overall is the preferred destination for investment with a 6% increase in investment allocations from 2022, compared with a 5% decline in allocations for European investment. As higher interest rates have seized up lending and market activities, some 97% of the respondents in the survey said “the availability and pricing of debt” is hurting transactions while 70% anticipate “meaningful distressed acquisition opportunities in the next six months.”


Among property types, with the pandemic making remote working and hybrid schedules prevalent, global investors in the survey ranked office as the least attractive for U.S. investment, and the most difficult property type for securing financing. Multifamily and industrial properties, on the other hand, were investor favorites. Some 94% of the respondents said they planned to increase U.S. multifamily holdings. The future of office was just one burning issue on the minds of investors. As increased borrowing costs are “evident across all asset classes,” getting “reasonable financing” is another investor watchpoint, as are so-called environmental, sustainability and governance issues.

Kommentarer


bottom of page