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Weekly Market Report - April 9, 2024

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Foot traffic in 25 Manhattan buildings that signed at least three leases for $100 per SF or more last year is approximately 10% higher than the rest of Manhattan's office stock, according to an analysis by Placer.ai. The desire to find an office space that employees will want to use has drawn more companies to the most expensive buildings, with 196 Manhattan office leases signed last year at $100 per SF or more, an all-time high. The new foot traffic data validates the flight-to-quality narrative that brokers have repeated since the onset of the pandemic. As companies rightsize their space and adjust to the prevalence of remote work, some have upgraded to new, amenity-rich buildings, many of which have come to the market in recent years.


The finance industry, in which companies are also aggressively calling workers back to the office, has dominated leasing in the last year, with hedge funds and private equity firms being the types of companies that dominated the list of triple-digit leases signed. Foot traffic in pricey buildings is also helped by the fact that many of the leases are for small spaces, fewer desks sit empty, and employees don't feel like they're sitting in a cold, empty office.



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The retail sector in New York City has seen a better start to 2024 than before the pandemic, with an average availability rate of 15.4% for the first quarter of the year, below the peak of 28% in 2021 and 21% in 2019. The Meatpacking District saw a 6% year-over-year increase in availability, while Upper Fifth Avenue and Times Square experienced the most expensive asking rents in the borough. The Meatpacking District's overall availability rate rose to 30.6%, the second-highest rate in Manhattan for the first quarter. Major retail leases for the quarter included Wegmans taking 58,874 square feet at 1932 Broadway on the Upper West Side and Bedford Stuyvesant New Beginnings Charter School taking 51,498 square feet at 217 N. 10th St. in Williamsburg through Norman Bobrow & Co, Inc. Retail has experienced a smoother recovery from the pandemic than expected, despite issues like theft and unlicensed marijuana stores. This contrasts with Manhattan's office market, which had a record-high availability rate of 18.1% during the first quarter.



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BREIT failed to generate enough cash to cover its dividend


Blackstone's real estate investment trust, Blackstone Real Estate Income Trust, has failed to generate enough cash to cover its dividend for the first time in its brief history. The REIT generated $2.7 billion in cash flow last year, primarily from rent collections across its diverse portfolio, but paid out $2.8 billion in distributions, raising concerns for investors who prefer payouts to exceed cash flows. REITs typically distribute 90% of income, and when they distribute more than 100%, it could force them to take on more debt, issue new shares, or offload assets.


Private property trusts managed by Starwood Capital and Brookfield also did not generate enough cash flow to meet distributions. Cash flow from operating activities covered 95% of BREIT's payout last year, but cash flow declined from operating activities due to property sales and the need to keep cash in liquid investments. Since its creation in 2017, BREIT's cumulative cash flow from operations has covered 103% of its payout.



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Office owner connects with Nathan Berman’s Metro Loft Management


InterVest Capital Partners is in talks to convert 111 Wall Street, one of Manhattan's largest office buildings, into residential units. The 1.2 million-square-foot building could be converted into around 1,300 units. InterVest has partnered with Metro Loft Management to oversee the project. However, financing is a major challenge. InterVest secured a $500 million debt package from lenders in 2021 to renovate the building into modern office space. To use the funding for a residential conversion, InterVest would need approval from those lenders. The company is trying to get creative with a building that has faced difficulties, including remote work and interest rates rising. Office-to-residential conversions are gaining traction, with Berman converting 25 Wall Street into 1,300 apartments and Pfizer's former headquarters into 1,500 rentals.



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Abraham Talassazan’s firm failed to repay $41M loan by maturity date


Wells Fargo is suing the Eretz Group and principal Abraham Talassazan for defaulting on a loan in a 1920s office building in the Garment District. The lawsuit alleges that Talassazan failed to pay the principal and interest on the loan when it matured. The occupancy rate at the building has dropped to 62% over the last decade, and the 140,000-square-foot building has an outstanding debt of $34.5 million.


The Eretz Group purchased the building in 2007 for $33.7 million and took out a mortgage in 2014, which was refinanced in 2014 with a $41 million mortgage from Cantor Commercial Real Estate. The outstanding debt was transferred to a special servicer in October, and the borrower was unable to get financing before the maturity date.



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Vacancy rate inches closer to 20%: Moody’s


The office leasing market has reached a new low, with the vacancy rate of offices across the US rising to 19.8% in the first quarter, according to Bloomberg. This is the highest recorded national level vacancy rate since Moody's began tracking office leasing. The issue is familiar four years after the pandemic, as companies are changing work habits and more people are leaving office space to work remotely or in a hybrid environment. Tenants no longer need to spend as much on leases. However, recent economic indicators remain positive, which may have helped avoid the worst for the market. San Francisco has a record 36.6 percent vacancy rate in the first quarter, with the tech industry leading the shift towards remote work. Amazon is also looking to cut down on its own office vacancies by passing on lease renewals, terminating some early, and reducing its use of empty floors.



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Debt backed by Times Square building was sent to special servicing in 2021


Jeff Sutton's entity, 1551 Broadway Owner LLC, has secured an extension on a $180 million loan for a Midtown retail property. The loan was originated by Citigroup in 2011 and packaged into a commercial mortgage-backed security. The loan matured in July 2021, and Sutton went into forbearance to refinance the loan and mezzanine debt. Sutton defaulted on the loan four months later and went into special servicing. Deutsche Bank filed a foreclosure action in 2022, alleging that Sutton defaulted on the loan. Sutton bought 1551 and 1555 Broadway in a joint venture with SL Green in 2005, which led to the demolition of buildings and the construction of new retail. The retail property has a net operating income of almost $22 million and is currently in special servicing. A Newmark team negotiated the loan extension, and Sutton and special servicer LNR Partners could not be reached for comment.



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Firm will blend AI with old-school approach to dealmaking


Bob Knakal, a veteran dealmaker, is launching a new company, BK Real Estate Advisors, which will use AI to help sell property. Knakal said that the company will blend traditional paper and old-school methods with AI to take advantage of what AI can deliver today. AI will help with personalized voice messages during the prospecting phase and data analytics. He has hired an AI-backed chief operating officer to get things off the ground. Knakal's new venture comes after his sudden departure from JLL in February and nearly a decade since he sold his former company Massey Knakal Realty Services to Cushman & Wakefield for a reported $100 million in 2015.


Knakal was fired from JLL after a public slight made a passing reference to JLL in a lengthy article in the New York Times. He believes that product specialization is a better way to achieve this in today's environment. Knakal's new venture will focus on investment sales, debt, and equity, unlike his former company's territory system, which assigned brokers to be experts in particular neighborhoods.



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Douglas Eisenberg’s firm launches lending platform


Signature Bank's former head of commercial real estate lending, Joseph Fingerman, is joining Douglas Eisenberg's A&E Real Estate to launch a lending platform, A&E Real Estate Finance. The platform will lend to multifamily properties in New York City, joining other established real estate developers like Silverstein and Naftali. A&E plans to launch the lending venture in the next few months, focusing on first mortgage loans. The firm will support its lending business with existing capital and money from institutional investors. The company aims to start with smaller mortgages in New York City before expanding beyond the five boroughs.


A&E, which has over 20,000 units under management, has the ability to buy distressed loans and take over the properties backing them, but this is not the firm's strategy. The asset management and lending side will be two distinct entities, with one having nothing to do with the other. The firm is open to lending to rent-stabilized properties, which many lenders have backed away from due to changes to New York's rent laws in 2019.



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The Federal Reserve's Michael Barr has warned that banks will continue to face stress from the struggling commercial real estate sector for an extended period. Despite the overall banking system being "sound and resilient" and not facing the same pressures as in March 2023, empty office space remains an area of stress. The Fed has urged banks to take a sharper look at their exposures to debt on office buildings and other types of commercial real estate. The pandemic has also stressed New York's commercial real estate markets as office employees worked remotely. The Fed is focusing on lenders with exposure to office space in areas where significant price declines are expected. Refinancing deals will likely take some time.



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Bankrupt coworking company WeWork is nearly finished shrinking its real estate portfolio and could leave court protection by the end of next month. The company will save over $8 billion in future rent by abandoning about 150 locations and negotiating with landlords to rewrite leases on 150 others. The key to reorganizing has been reducing its real estate footprint, with the firm having finished negotiations on 90% of its portfolio. WeWork announced its progress at a critical time, as co-founder Adam Neumann renewed his effort to buy back his company, offering more than $500 million. This proposal is at odds with a months-old deal the company cut last year at the start of its restructuring case with SoftBank Group and existing creditors. WeWork has struck deals with landlords that allow it to manage the downside of its risk, such as rent reduction or reducing the size of its offices.



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Office landlord Paramount Group doubled CEO Albert Behler's total pay to about $20 million last year, despite the company's stock price falling from about $6 a share to $5. The company had fully written down two San Francisco properties and may hand them over to lenders due to insufficient cash flows to cover debt obligations. The landlord also faces challenges filling the 330,000 square feet space at 31 W. 52nd St. that law firm Clifford Chance is expected to vacate in June.


The Paramount board substantially raised Behler's total compensation by awarding him new shares to replace older grants rendered worthless by the two-thirds decline in the stock price since early 2020. The decline in the company's stock price has significantly impacted the value of previously-awarded equity compensation, impairing the strength of retention and contributing to significantly higher rates of employee turnover. The company's largest shareholders, with a 15% stake, are the heirs of German businessman Werner Otto, who acquired the Paramount Building at 1633 Broadway in 1976 for $84 million.



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Manhattan’s market is still heading for the bottom, albeit very slowly


The US office market reached a record high of 19.8% vacancy in Q3, with Manhattan's availability rate at 18.1% in March. The pandemic has significantly impacted the market, with vacancies soaring and leasing activity plummeting. Over the last four years, available supply has increased by 81.6%, reaching nearly 98 million square feet. However, the number could be worse if the millions of square feet of Manhattan office were earmarked for residential conversion. Office availability on Third Avenue improved by almost 5% in the fourth quarter, largely due to SL Green taking 750 Third off the market. Amazon and other tech companies are expected to downsize their office footprints this year. A city report from 2023 predicted that New York's office market wouldn't reach sub-19% vacancy until 2026, suggesting the bottom may be about two years away.

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