Luck And Guts Might Not Be Enough To Ride This Real Estate Cycle
When Monday Properties paid $740M for the Helmsley Building in 2010, the company’s CEO, Anthony Westreich, was expecting a win, but he didn’t realize just how good his timing was. Five years later, the company sold the office tower at 230 Park Ave. for $1.2B. Within a year of that sale, Manhattan-based Monday Properties had sold all 6M SF of its New York holdings, opting to chase office and multifamily deals in Northern Virginia. Westreich said the firm looked at some New York deals in the years since but didn't pull the trigger, and that is now a source of great relief. The company is now back on the prowl, Westreich said, underwriting potential deals in the market to see if it can snap up a bargain — and potentially repeat its Helmsley Building success.
As commercial real estate values drop in New York, loans come due and uncertainty hangs over the market, a new crop of real estate winners and losers is set to sprout from the turmoil. The last time there was such widespread distress was the Global Financial Crisis, and many of the big winners of that are still reaping the benefits of their good timing, good luck and foresight. But real estate players who made winning bets in 2009, 2010 and 2011 said this moment is unlike any other. While some parallels to the recession might provide some guideposts for investors, accurately predicting this cycle is turning out to be far more difficult. Those who took the biggest bites out of New York City real estate in the immediate aftermath of the GFC range from private firms like Monday Properties and RXR Realty to REITs like Equity Residential and UDR and institutions like TIAA and the Canada Pension Plan. Over the last decade, an average of 35% of total sales volume in commercial real estate in Manhattan south of 96th Street had gone into multifamily assets, Shkury said. But last year, 52% of the investment dollars changing hands in that area were in multifamily assets. RXR is reportedly shopping. 1330 Sixth Ave., hoping to bring in more than $350M with the sale. It paid $400M for it in 2010. Blackstone, which last year handed back the keys on an office building it owned at 1740 Broadway, bought a 50% stake in 1330 Sixth, along with five other RXR office buildings, in 2015.
Manhattan projects dominate office construction pipeline
The New York City borough boasts the five largest office developments expected to be delivered this year, according to a report from CommercialCafe. The report is based on CommercialEdge data compiled towards the end of January. The largest project is Brookfield’s Two Manhattan West, which is expected to deliver 2 million square feet in the fourth quarter. The 58-story property on the Far West Side already has numerous tenants lined up and is 80 percent leased to tenants including law firm Crowell & Moring, which signed in December for 71,000 square feet. Second place among expected deliveries this year is Vornado Realty Trust’s 2 Penn, also anticipated for the fourth quarter. A quarter of the 1.6 million-square-foot redevelopment will be occupied by MSG Entertainment, which signed a 428,000-square-foot lease to keep its corporate headquarters in place.The fourth quarter is also expected to bring completion of the 1.4 million-square-foot One Madison Avenue. The SL Green development recently landed chef Daniel Boulud to spearhead spaces at the Midtown South tower, which occupies a full-block site between Park and Madison Avenues, plus East 23rd and East 24th Streets. The “Googleplex” at 550 Washington Street is expected to arrive in the second quarter, even as the company evaluates its office needs. The tech giant plunked down $2.1 billion to buy the site in 2021 and is building it out to 1.3 million square feet. Rounding out the top five is the Terminal Warehouse development in West Chelsea.L&L Holding Company and Columbia Property Trust secured a $1.25 billion construction loan in 2021 for the 1.3 million-square-foot project, which is expected to be delivered in the third quarter. The project at 424 Fifth Avenue in Manhattan also ranked in the top 20. Overall, 13 million square feet of office construction is taking place in the first quarter in Manhattan — the most among top markets, narrowly outpacing Boston and Atlanta. Across 25 major markets, the sector has 135 million square feet under construction.
Green Street: Falling Commercial Property Prices Are At Or Near Bottom
Green Street’s Commercial Property Price Index, which tracks all sectors of CRE, is down 14% from its peak reached last March, falling 0.6% from December to January. Core sectors — office, industrial, multifamily and retail — are down 17% from their peak, per Green Street's latest report, released Monday. The index monitors price points of sale negotiations and contracts in order to track property values. When it comes to asset types, apartment values have taken the biggest hit — down 20% in the last year, the index shows, with a 1% fall in the last month. Malls are also down 20% in the last 12 months, with a 2% month-over-month drop. Office prices are down 17% from their March peak, but their price decline is accelerating with a 4% fall in the last month. Industrial prices are down 15% but haven't fallen at all in the last month.
Rising interest rates have brought sales to a screeching halt. National investment sales were down 63% year-over-year in the fourth quarter. In the country's largest commercial real estate market, Manhattan sales volume in the fourth quarter was $3.3B across 75 sales, representing drops of 12% and 32% from the trailing four-quarter average. Average cap rates rose to 4.97% while the average price per SF on properties is down 11%. Meanwhile, there is significant loan volume maturing in the city, largely in the office market. In total, more than $16B in CMBS loans backed by New York City commercial real estate will mature through 2023.
Bond Collective locked out of Flatiron location by city marshal
Members at coworking firm Bond Collective’s Flatiron District location showed up to work Thursday to find themselves locked out by a city marshal. A notice posted by the marshal’s office stated that the landlord at 115 East 23rd Street had retaken possession of the space, and members scrambled to try and get their belongings. Court records show that a state judge ordered the lockout after the landlord, First Pioneer Realty, sued Bond Collective last February, claiming the coworking firm had not paid its rent. Bond Collective owed $2.8 million on the space as of November, according to court documents. The location, where space rented for upwards of $300 a month, failed to recover from the financial hit it took during the pandemic. Court records show that Bond Collective had asked its landlord for more time to help its members get out in an orderly fashion, but Silber said the two sides weren’t able to come to an agreement. Silber said he was working with members to move them to other Bond Collective locations in the city, and in some instances tried to help them cut deals with some of his competitors. Bond Collective signed the lease on the 23rd Street location in 2013 and it was set to run through 2025. It’s not the only location the company has struggled with. In Gowanus, landlord Samson Management sued Bond Collective last March, claiming the company owed $4 million in back rent on its space at 68-80 Third Street. In May, the judge in that case issued Bond Collective an order to vacate the space. In the Financial District, Harbor Group International also sued Bond Collective in March, saying it owed $3.6 million. The two sides settled in December. Bond Collective has other spaces in Greenpoint, Gowanus, Buwshick and a new location coming in Vinegar Hill.