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Purchase from AEW paves way for tower one block south of new HQ
Jamie Dimon is set to buy a Manhattan office tower at 250 Park Avenue in partnership with Hines for over $300 million, according to Bloomberg. The deal was brokered by Newmark Group's Adam Spies and Doug Harmon. AEW Capital Management is the seller, and the sale has not closed. The bank is replacing its previous headquarters with a 1,388-foot-tall tower, which will consolidate employees from various properties across the city. The century-old building on the next block, which AEW completed renovations in 2021, could be razed and built a much larger space of up to 950,000 square feet due to the Midtown East rezoning. AEW is the real estate arm of French investment manager Natixis, while Hines owns and operates $93 billion in assets across various property types.
Stronger-than-expected demand along the ritzy corridor, where tenants pay $140 per square foot or more, drove robust quarterly results at SL Green, the city’s largest commercial landlord. JPMorgan analyst Anthony Paolone said the firm’s improving performance demonstrates “a relatively better office market than we’ve seen in a while.”
SL Green leased 421,000 square feet in the quarter ending June 30 but got a big lift thanks to 367,000 square feet leased in the last few weeks. Financial firm Ares Management agreed to take 132,000 square feet in addition to the 175,000 it already has at 245 Park Ave. Activist hedge fund Elliot Management leased 150,000 square feet at 280 Park.
SL Green, which has 90% of its 30 million square-foot portfolio in Manhattan, said its occupancy rate in the borough rose to 86.7% from 85.9% in the first quarter. It reported $2.05 a share in second-quarter funds from operations, up from $1.43 in the prior year, and raised its 2024 FFO forecast by a dime, to as much as $7.75 a share. The stock was little changed in early trading, at $62 a share, although its price has nearly doubled in the last 12 months.
Tempering the good news was the fact that not all its properties are on Park Avenue and buildings such as the Graybar at 420 Lexington Ave. saw vacancies continue to creep up. Quarterly rental revenue fell by nearly 5% while operating expenses increased by 4%. Tenant improvement costs rose by 4%, eroding some of the 11% increase in average lease rates, excluding 1 Vanderbilt Ave. and 1 Madison Ave. Average terms, excluding those two new buildings, rose to 7.5 years from 7.2. Free-rent concessions held steady at 6.9 months.
SL Green lowered its $11 billion debt burden by $400 million thanks to sales of 625 Madison Ave. and smaller properties. It also used its clout to persuade lenders to accept just $32 million to retire a $50 million mortgage for 719 Seventh Ave. And it paid off 280 Park’s $125 million mezzanine loan for just $62.5 million.
“SL Green continues to play to its strengths,” said Piper Sandler analyst Alexander Goldfarb.
Office property sales surpassed the billion-dollar mark between April and June, a more active period than the quarter and year prior, as buyers pounced on deals. This is creating opportunity for end users, family offices, private buyers, and high net worth individuals, according to Avison Young data. Office sales totaled $873M across 10 transactions during the most recent quarter, with nearly $1.2B coming from acquisitions of three office properties destined for residential conversions. Bloomberg Philanthropies' $560M acquisition of 980 Madison Ave. was emblematic of a pattern that has dominated in recent quarters. The uptick in activity is still far from the office market's peak, with family offices and high net worth individuals being most active. The next move to watch is when those projects actually get built, as anything sold for $200 per SF or less is more likely to be developed sooner.
RXR Realty is exploring a partial conversion of the historic Helmsley Building on Park Avenue to rescue it from its debt distress. The firm, run by Scott Rechler, was provided a 90-day forbearance to further explore the conversion potential of the 34-story office building. As of May 17, the building was 84% leased. The Office Conversion Accelerator program in New York City has received interest from 64 office landlords considering conversions. Most office-to-residential plans in the works have been in the Financial District, with nearly 3,000 residential units in the pipeline for the Lower Manhattan neighborhood, many of which are conversions from office buildings. The largest conversion in the city's pipeline is the conversion of 973K SF of former Pfizer headquarters space into 1,500 apartments. Conversions will likely spread depending on the city's passage of City of Yes legislation, which would lift restrictions to make it easier to convert older office buildings and other nonresidential buildings to housing.
Key real estate lender touts’ health amid bank failure fears
M&T Bank has made progress on its at-risk commercial real estate loans, with workouts or payoffs of $987 million in debt in the second quarter. However, office properties remained a harder target, with the dollar volume of criticized loans increasing 5% from the previous quarter. The bank reported less than a 1% quarterly decline in criticized CRE loans as a share of the total CRE debt pie. Over one quarter of the bank's commercial real estate loan book remains criticized. S&P Global Ratings cut its outlook on M&T and four other lenders to negative from stable in March due to their heightened exposure to CRE, particularly office properties. M&T reported $134 billion in loans in Q2, a 1% increase from the same period last year, and shrunk its CRE portfolio by 10% in the same period.
Owners failed to pay off $164M loan in July, now negotiating extension
Jeffrey Feil, the head of the Feil Organization at the Queens Atrium, has been struggling with a $164 million fixed-rate loan backed by 30-30 Thomson Avenue. The loan, which was backed by the Chiclets factory, landed in special servicing in July and Feil failed to refinance at maturity. The property is 100% leased and the firm is in negotiations to extend the loan. The rise in rates, which Feil was paying just 4% when the loan matured, could be unfeasible for office owners. The property's debt service coverage ratio (DSCR) is closely monitored by loan servicers, and a higher rate would pressure the loan's DSCR, which is often on a watchlist.
Mitchell Modell's sporting goods chain, which filed for bankruptcy in March 2020, is set to sell a 70,000 square-foot office building at 22 W. 38th St. at auction after lenders foreclosed on the property. The building, acquired in 2019 for $61 million, was acquired by Modell and a partner and was previously occupied by office co-working firm Knotel. Modell's retail business, which had a "Gotta go to Mo's" jingle, closed all 141 stores. In June 2019, Modell partnered with BEB Capital to acquire the property. The building was 100% occupied, with half the space leased to office co-working firm Knotel. Modell defaulted on the $35 million mortgage in February 2023, and foreclosure proceedings began last July. Moody's downgraded a security holding the mortgage for 22 W. 38th St. on Tuesday.
Many investors have been burned by department stores; Richard Baker wants more of them
Richard Baker, the owner of Saks Fifth Avenue, is buying the luxury retailer for $2.65 billion, following a plan he formed in 2005 to acquire retailers with valuable real estate. Baker, who is the CEO and executive chairman of HBC, believes big chains often underutilize their property and that investors with real-estate expertise may not know how to run a retailer. He has considered building a casino on Saks's Manhattan store but has decided not to proceed. Baker, a retail executive, is known for his constant stream of ideas, some of which have been successful. He has 36 channels going in his head at any given time, and his goal is to fail small and fast but to win big. Baker's private-equity firm, NRDC Equity Partners, made its first acquisition in 2006 when it bought Lord & Taylor for $1.2 billion. Baker also purchased Saks for $2.9 billion in 2013 and split its e-commerce business from its physical stores in 2021. He is now trying to motivate Saks employees to run the best business they could run.
Manhattan landlord SL Green has been one of the top-performing property stocks this year despite stiff competition for tenants
New York's office market is facing a significant challenge, with real estate giants like SL Green facing years of hard scramble. Despite a strong second-quarter performance, SL Green is on track to lease 2 million square feet of space in 2024 and has already found tenants for 1.4 million square feet. The company expects its occupancy rate to recover to around 91.5% this year. However, finding tenants remains a challenge, as Manhattan has been flooded with an additional 42.8 million square feet of office space since March 2020. The office availability rate in Manhattan has dropped to 17.9% by the end of June, down from the 18.1% all-time-high recorded in the first quarter. Class A buildings are capturing more leasing activity, but landlords need to offer sweeteners to fill even their finest buildings. Some areas are more resilient, with Class A buildings built since 2000 having a lower-than-average 13% availability rate.
Defaults in a corner of the commercial real-estate debt market are surging, triggering losses
The commercial real-estate meltdown is causing a surge in defaults in Wall Street mortgage-bond investments, raising concerns about the future of offices and malls in cities across the U.S. There are about $260 billion of single-asset, single-borrower bonds held by investors such as banks, insurers, pensions, and mutual funds. Landlords, often private-equity firms, used that money to purchase skyscrapers, shopping centers, and other properties. The rate of loans at or near default has nearly tripled over two years, reaching 8.7% in 2024. The losses are particularly jarring for investors because credit-rating firms initially gave many of the bonds triple-A ratings—higher than even U.S. Treasury bonds. The financial models behind the ratings never forecast property prices falling below the value of the debt. The steep price drops leave highly regulated lenders with two unpalatable choices: selling the bonds forces them to take a loss immediately and holding on to them requires banks and insurers to reserve more capital against the bonds because they are viewed as riskier.
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