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Manhattan's office market experienced a quiet start to the year, with firms leasing about 2.3 million square feet of space and a 17.9% availability rate in January. However, leasing activity in January was down 30% compared to the 2016-2019 average of 3.2 million square feet. January 2023 saw five leases of more than 250,000 square feet, while January 2024 saw none of the top leases crack 200,000 square feet. The borough's average asking rent fell to $74.64 per square foot, and the total amount of available office space increased by 79.4% since March 2020. In Midtown, firms leased about 1.3 million square feet, down sharply from December and January 2023 but still higher than the five-year monthly average. Midtown South had its lowest leasing volume in six months at about 530,000 square feet, with no deals cracking six figures.
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Availability hits a record high for second straight month
Manhattan's office leasing market experienced a significant drop in January, with total activity at 2.25 million square feet, a 40% decrease from last January and a lagging demand. The report shows that availability has remained at 17.9% for two months, with leasing volume falling below the five-year monthly average of 2.35 million square feet. The drop in leasing was not surprising, as January often brings a drop in leasing after tenants rush to sign leases in December. The sublet market remained busy, with large blocks of space hitting and leaving the market. However, most of the damage was recovered, as sublet space was either leased or taken off the market. The office leasing market is fractured across Manhattan, with each neighborhood facing different demand. The average availability on Sixth Avenue and Park Avenue is around 11 to 12 percent, while Third Avenue is closer to 20 percent.
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Office buildings are experiencing short sales, where they are sold at significant markdowns, often for less than their loan value. Lenders are losing patience due to the failure of the office sector recovery and struggling asset owners finding it difficult to refinance debt. This has led to a wave of forced sales expected to dominate capital markets throughout the year. Economists estimate that 44% of office properties are underwater on their loans, with nearly a quarter of owners unable to pay down the debt. Banks are currently sitting on around $2.7T in aggregate loans across all commercial real estate sectors.
The four largest US banks, JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup, have increased their loss provisions by 40.7% year-over-year at the end of 2023. Moody's Analytics tracked $8.5B in CMBS office loans that matured in 2023, with only $3B fully paid off. Another $15B in office CMBS debt matures in 2024. More than half of office sales in 2024 are expected to be driven by distress, including lender-facilitated short sales, with activity concentrated in markets with a sluggish office recovery. Nearly 80% of CMBS office debt due in 2024 is already with a special servicer or facing lease rollover issues.
This trend is also seen in Chicago, where a 12-story building sold for $4M, an 89% decline from its $38M purchase price in 2012. The previous owner took out a $25M loan on the property, which Morgan Stanley packaged and sold to CMBS investors. In San Diego, Hammer Ventures sold the vacant Tower 180 for $61M, while in New York, Clarion Partners and MHP Real Estate Services listed their 41-story building for a discount.
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Deutsche Bank plans to cut 3,500 jobs after a 30% drop in fourth-quarter profit, including heavy losses in its US real estate holdings. The layoffs come after hiring 300 front-office staffers in the three-month period ended Dec. 31, though the headcount reduction will primarily impact back-office roles. Deutsche Bank's CEO Christian Sewing said cost discipline remains a top priority, and the bank would take more cost-saving measures if needed. The bank's net profits dropped 30% from the year-ago period, but the $1.4 billion generated easily beat analysts' expectations. Deutsche Bank's US-based portfolio took a $133 million hit, marking a more than 350% increase from the roughly $28.2 million it allotted for losses regarding its portfolio in 2022's fourth quarter. Deutsche Bank faces debts on its real estate, with assets like Blackstone defaulting on a Manhattan office tower and the building potentially eligible for an office-to-residential conversion.
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Rents at highest-end buildings fall and rate of leasing slows
High-quality office buildings have had better success navigating the industry's turmoil, but even premier towers are starting to wobble. Rents at the highest-end buildings have been falling, and the rate of leasing has been slowing. Tenants have become more sensitive to costs in a world of higher interest rates and lingering concerns about a possible economic slowdown. Owners of the most elite buildings escaped this fate by convincing the market they had created a new class of office tower, which they persuaded blue-chip tenants would return if only their offices sparkled with lush roof decks, fully loaded gyms, and food prepared by Michelin-starred chefs. However, this strategy is losing steam as more companies have accepted the reality of hybrid work schedules and have given up on compelling workers to be in the office five days a week.
New starts for office construction in the U.S. have essentially ground to a halt, and the share of leasing activity is also falling among the premier towers. The share of leasing activity is also falling among the premier towers, with new leases in five-star buildings being on average 43% smaller than 2019, reflecting how companies are becoming more efficient in their space use and tolerating some degree of work from home.
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A Canadian pension plan has sold its 29% stake in a vacant office building in the Flatiron District for just one dollar. The decision comes after the Canada Pension Plan Investment Board sold its share of 360 Park Ave. South back to Boston Properties. This is the second time in recent weeks that an investor has effectively given up on an older Midtown property. The sale of 360 Park Ave. South is a potentially ominous sign that the Canadian plan is reducing its real estate exposure. Real estate investment by pension funds and other big institutions dropped by nearly 60% in 2022, to $26 billion, according to Preqin. Boston Properties, owner of the GM Building and other prime Midtown towers, kept a 42% stake in 360 Park Ave. South after splitting the rest equally with the Canadian pension plan and another partner.
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But for Starwood, it’s a “remarkable” opportunity
Barry Sternlicht, the head of Starwood Capital Group, has warned of a trillion-dollar loss in office values in recent years. He blamed a shortage of office workers and Federal Reserve interest rate hikes for the crisis. Offices are now worth $1.8 trillion, and there are $1.2 trillion of losses for an asset class once worth $3 trillion. Sternlicht said that losses could top $1 trillion, but it's difficult to predict with certainty until more sales increase. Michael Comparato, head of commercial real estate at Benefit Street Partners, said it's impossible to value office buildings. Sternlicht suggested that the downturn may benefit Starwood, as tightening lending by banks creates opportunities for private credit.
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Company reaches agreements at Brooklyn Navy Yard, Union Square
WeWork has reached agreements with landlords at Dock 72 in Brooklyn Navy Yard and 71 Fifth Avenue in Manhattan's Union Square, allowing the company to continue operations at both locations. Dock 72 is Brooklyn's first ground-up office development in a decade, and WeWork occupies 200,000 square feet. The company has canceled over three dozen leases across the city and has a long battle ahead to remain afloat. WeWork is set to pay discounted rent at Dock 72 and hold a shorter lease term, though it appears it will hold on to all of its space. WeWork is not paying back rent accumulated during bankruptcy. At Madison Capital's 71 Fifth Avenue, WeWork is decreasing both its space and rent, with the company set to honor more than $600,000 in unpaid rent. The only other WeWork lease in the city to be restructured up until this point came at CIM Group and QSuper's 1440 Broadway in Times Square.
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Investors pulled more than $13 billion from Breit last year. Luring them back will take time.
Blackstone Real Estate Income Trust (Breit) faced a quiet fundraising period in 2023, as investors pulled over $13 billion out of the nontraded fund. The redemptions were equivalent to almost 20% of the fund's net asset value at the start of 2023. Breit's terms stipulate that no more than 2% of the fund's value can be redeemed each month, or 5% per quarter. Investors have wanted more cash back than Blackstone was obligated to give them for 14 consecutive months. Breit used its existing cash and sold at least $12 billion of real estate last year, most of it at prices above net asset value. It also received a $4.5 billion cash injection from UC Investments, although Breit had to guarantee the University of California's investment arm a beefy annual return of 11.25% for a set number of years to get its hands on the money.
Despite the upheaval, Breit trounced its rivals in terms of investment performance, with the Blackstone fund being the top U.S. nontraded real-estate investment trust of 2023, returning -0.5% including distributions. However, Breit's resilient valuations could make it hard to tempt investors back, as it has cut the value of its property portfolio by a net 1.2% over the past two years.
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Banks in the U.S., Japan and Switzerland announced losses tied to troubled real-estate lending
Banks are facing the pain from the downturn in commercial property, with lenders on three continents disclosing damage and two bank leaders resigning. Banks are big lenders to real-estate owners and developers, putting them on the front line of the downturn in office-building use and falling valuations. The risks are particularly acute for small and regional lenders, which have far higher chunks of their loan portfolios in commercial real estate than big banks do. The pain in commercial real estate has been slow to unfold, with changes in office habits and rates beginning rising two years ago. The biggest risks come at the maturity of loans, which tend to run five to 10 years in term. The warnings revived fears that troubles in the banking sector could resume after last March's banking crisis, though many investors remain sanguine that most banks have ample reserves to absorb losses. Falling interest rates could also help provide relief among stressed borrowers.