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Weekly Market Report - July 17, 2023

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Two iconic properties intertwined by dispute


The Four Seasons hotel at 57 East 57th Street and the Plaza Hotel at 768 Fifth Avenue in Manhattan are both expected to reopen soon. The Four Seasons, which has been closed due to a dispute between owner Ty Warner and the Four Seasons brand, is moving towards an agreement that would allow the hotel to reopen. The Plaza Hotel, owned by Katara Hospitality, is considering the Four Seasons and Raffles Hotels & Resorts as finalists to manage the property. A change in leadership at Katara could impact the competition. Both hotels would require renovations before reopening, but the luxury hotel market in New York City is experiencing a strong rebound.



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According to Green Street, office property values experienced the largest drop among all property types, declining by 27% during the 12 months ending in June. In June 2023 alone, office assets lost 6% in value. The Green Street Commercial Property Price Index recorded an overall decrease of 11.6% compared to the previous year, with a monthly decline of 0.8% in June, primarily driven by the downward trajectory of office valuations. The decrease in office values was anticipated due to prolonged low usage and economic turmoil, which discouraged potential buyers from entering the market. Consequently, major property owners across the country are attempting to sell office properties, often incurring significant losses. Hotels were the only property type that did not experience a decline in valuation since June 2022, although values did not increase either. Valuations in the hotel sector remained unchanged in June.



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New York’s stranded legacy office space could be converted into accommodation if harsh zoning rules can be waived


The article discusses the potential impact of the commercial real estate (CRE) market on large American banks' earnings. The rise in interest rates and the shift to remote work during the COVID-19 pandemic have caused a decline in demand and values for urban office spaces. Non-bank lenders and regional banks with exposure to CRE loans are already facing difficulties. However, large banks, at least for now, seem to be less affected. The article highlights the need for investors to analyze the detailed composition of CRE portfolios and monitor the behavior of developers and city-level politicians. It suggests that properties and districts offering flexibility, such as hybrid spaces, are likely to retain value. The article encourages investors to demand transparency from banks regarding their portfolios and to advocate for relaxed permitting processes and the adoption of a hybrid environment in the real estate sector.



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Related Companies has struggled to unload its most expensive units at 35 Hudson Yards. Now the developer is offering deep discounts.


The Hudson Yards development in Manhattan, led by the Related Companies, has faced challenges in selling its condominiums. The 35 Hudson Yards tower has struggled to sell around 50% of its units, prompting Related to lower prices and offer incentives. Sales at 35 Hudson Yards have closed for an average of 30% less than the initial prices, and some units have been sold at discounts of over 40%. In contrast, the 15 Hudson Yards tower has performed relatively better, with about 90% of its units sold. However, some homeowners at 15 Hudson Yards are now listing their units for less than what they paid, reflecting a shifting market. Despite the difficulties, Related remains optimistic and has seen increased foot traffic and signed contracts at 35 Hudson Yards. The Hudson Yards development has received mixed reviews, with criticism aimed at its lack of a residential feel and negative press coverage related to suicides at the Vessel attraction. Overall, selling condominiums at Hudson Yards has proven challenging for Related due to market dynamics and location considerations.



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The multibillion-dollar ecosystem of businesses are having to pivot, shrink or worse


The slow return to the office is causing pain for industries dependent on thriving downtowns, such as architecture, construction, cleaning, brokerage, and furniture. Companies in these sectors are downsizing, laying off workers, or going out of business due to changes in office-space usage. For example, Henegan Construction has laid off over 50 workers, and Steelcase has reported a decline in revenue. The impact is also being felt by lawyers, financiers, and brokers who rely on office leasing and sales, with declines in transactions and commissions. Despite the challenges, the current situation is not as severe as previous downturns, but some businesses are exploring alternative sectors to mitigate the effects.



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Big-band mecca swings to Mack Real Estate Group


Bruce Flatt's Brookfield Asset Management has transferred control of the Brill Building in Midtown Manhattan to its lender, Mack Real Estate Group, in a transaction valued at $216.1 million. The deal involves the transfer of the LLC that owns the property, rather than the property itself. Brookfield had acquired the building in 2017 after foreclosing on a mezzanine loan. The Brill Building, with its rich history in music and pop culture, was an iconic hub for big band jazz composition in the 1930s and later became synonymous with the "Brill Building sound" in the 1950s. Today, the 11-story building is primarily a retail and office property, with CVS occupying the ground floor. Neither Brookfield nor Mack Real Estate Group provided comments on the transaction.



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TPG Real Estate Finance claims $129M owed at 300 Lafayette Street


Nightingale Properties' office building at 300 Lafayette Street in SoHo is facing foreclosure after the company fell behind on its loan payments. Lender TPG Real Estate Finance is claiming approximately $129 million owed. Despite granting extensions, TPG has scheduled an auction for August 29 to find a suitable bidder for the property. The building spans seven floors and is primarily occupied by Microsoft under a long-term lease. The foreclosure adds to the struggles in Manhattan's office market, which has seen a significant increase in availability in the second quarter.



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Commission approves changes to accelerate alterations


The Landmarks Preservation Commission (LPC) in New York has approved amendments to the review process for alterations to landmarked buildings, making it easier for property owners to address climate needs. The changes allow owners to bypass a full LPC vote for energy efficiency improvements, such as solar panel installations and HVAC system updates. Applicants will no longer need a sworn statement for a certificate of no effect, simplifying the permitting process. The amendments encourage owners to renovate historic properties instead of demolishing them, aligning with Mayor Eric Adams' goal of adding 500,000 homes in the city. The changes also help landmarked buildings comply with Local Law 97, avoiding potential fines for emissions non-compliance.



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Amid a frozen market for office sales, 875 Sixth Avenue sells with 35% of building empty


Kaufman Investments and Beacon Capital Partners have purchased 875 Sixth Avenue in Midtown South, Manhattan for $92.5 million. The building, currently only 65% occupied, will undergo renovations while remaining as an office property. The acquisition was motivated by the potential demand generated by the planned renovation of Penn Station and the development of the NoMad neighborhood. Despite uncertainties in the Manhattan office market, higher-end properties like this one have shown more resilience. The 25-story building, completed in 1927, features setbacks reminiscent of residential structures.



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Despite some positive signs in the Manhattan office market, such as SL Green's successful sale of a stake in 245 Park Ave and Tishman Speyer and Larry Silverstein's loan refinancing for their office tower at 11 W. 42nd Street, downtown Manhattan is facing significant challenges. With a near-30% office availability and no immediate relief in sight, the downtown market is suffering from high interest rates, remote work trends, outdated office stock, and problematic financing. While the World Trade Center and Brookfield Place have relatively low availabilities, the rest of downtown Manhattan is experiencing significantly higher rates. The lack of large deals, apart from renewals, below Chambers Street highlights the depth of the problem. The historically lower pricing in downtown Manhattan, which has traditionally served as a relief valve for midtown and midtown south, is no longer attractive to companies as prices soften citywide and high-end properties offer increasing concessions. The future prospects for downtown Manhattan's office market remain uncertain, and the impact of bankruptcies, such as MediaMath's potential release of 100,000 square feet at Four World Trade Center, further exacerbate the situation.



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Affinius Capital, a private equity firm specializing in debt for commercial real estate projects, is relocating its New York City offices from 350 Park Avenue to 277 Park Avenue. The firm has agreed to a 12-year lease for the entire 39th floor of 277 Park Avenue, which recently underwent a $120 million renovation. The asking rent for the 24,394 square feet space was $115 per square foot. Affinius, previously known as Square Mile Capital, rebranded after being acquired by USAA Real Estate earlier this year. The fate of Affinius's current office space at 350 Park Avenue, which is being redeveloped by Vornado Realty Trust, is unclear. Other companies, including M&T Bank, Intermediate Capital Group, and National Australia Bank, have also relocated to 277 Park Avenue in recent months.

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