***
First quarter office activity increased 48%: Savills
Law firms have seen a significant increase in leasing activity, with a jump of 47.6% from last year's first quarter. This has led to a big year for law firms and office activity, with the quarterly average of leasing activity by law firms being 2 million square feet since the start of last year. The trend of law firms making real estate decisions has remained similar to pre-pandemic years, with top tier firms like Cushman & Wakefield prioritizing new and high-quality spaces. However, some law firms are cutting down on office space, with Finnegan, Henderson, Farabow, Garrett & Dunner downsizing by 38,000 square feet from its previous deal. Additionally, relocations among law firms have slowed, with 54.1 percent of leases signed being for law firms changing homes, down from 66.1 percent in 2022 and over 57% in each of the two years before the pandemic.
***
WeWork is moving its corporate operations to 18 W. 18th St. as it nears the end of its Chapter 11 restructuring process. The bankrupt coworking firm signed a lease at the 11-story building in 2018, occupying the entire office portion. WeWork committed to keeping the office in March, reaching a deal with the landlord to reduce rent, space size, lease length, and guaranty at 18 West 18th. The company's corporate headquarters were previously housed at Tower 49 in Midtown Manhattan. WeWork recently announced its plan to exit bankruptcy, with property management software provider Yardi Systems becoming its majority owner. The plan is expected to be decided at a hearing on May 30, potentially allowing WeWork to emerge from bankruptcy.
***
Vornado Realty Trust shareholders have voted against CEO Steven Roth's proposal to double his annual payment to $19.7 million. The vote, which is a departure from the 92% average shareholder support for CEO pay packages on the Russell 3000 index, is due to "unmitigated pay-for-performance misalignment." Roth's compensation consists mainly of shares and stock options, but also includes a $3.7 million cash bonus. Last year, 23% of shareholders voted against Roth's compensation. The REIT has struggled as its portfolio occupancy has dipped, with a net loss of $9 million in the first quarter after a $5.2 million profit last year. Vornado recently cut its dividend payout by 68% due to falling earnings and suspended dividend payouts to common shareholders for most of 2023. The company's SEC filing states that bonuses will be made episodically due to the large scale and duration of development projects.
***
The Vanbarton Group has defaulted on a loan covering 292 Madison Ave., a 26-story office building near Bryant Park, which it has owned since 2016. The investment company had to pay off an $87.5M loan from Deutsche Bank but has failed to make the necessary payments. The property, acquired for $180M and renovated in 2018, has three one-year extension options. Deutsche Bank came close to a restructuring deal with the landlord but has now hired Newmark to sell the nonperforming loan. The Midtown East office tower serves as the Vanbarton Group's headquarters and is roughly 70% occupied. The company has been one of the earliest landlords in New York City to convert commercial buildings into housing due to the office market's lack of demand.
***
Developer tapped into Tel Aviv Stock Exchange to pay off JPMorgan Chase loan
Property & Building Corporation (PBC) has raised $385 million from JP Morgan Chase to pay off its Bryant Park office tower. The bond raise is a rare occurrence in commercial real estate, as it allows PBC more time to reposition the property, which was previously known as the HSBC tower. The building has secured two new leases, bringing its occupancy to 99 percent. PBC's bond raise is a rarity in commercial real estate, as U.S. developers have not been able to raise hundreds of millions in Israel in recent years. The deal also demonstrates that financing is still available for select Class A office properties. Despite the negative headwinds about offices and lenders pulling out of the market, some owners are still finding financing. PBC recently inked a new lease with San Francisco-based green infrastructure investor Generate Capital to relocate from 461 Fifth Avenue to occupy 32,421 square feet across the entire 26th and 27th floors of 10 Bryant.
***
Yardi, a property management software firm, will run the company
A US bankruptcy judge has approved WeWork's bankruptcy plan, allowing the company to exit bankruptcy under the ownership of its senior lenders. The company will shed $4 billion in debt and receive $450 million in new financing to exit bankruptcy. Yardi Systems, a Santa Barbara-based property management software firm, will run WeWork. The restructuring will reduce the company's rent expenses by about $12 billion, or more than 50%. The company has never turned a profit and has been able to exit or renegotiate many of its deals after declaring bankruptcy. WeWork expects to exit bankruptcy in mid-June. The new funding will come from Yardi and bondholders.
***
14K sf of property is fully leased on this stretch of Broadway
Three new tenants, Spear physical therapy, Grape Stomper Cannabis House, and Wells Fargo, have signed lease deals in an Upper West retail property, marking a citywide increase in retail rents. The leases, which are for 10 to 12 years, will replace Nexa Fitness, Mattress Firm, and Santander Bank on 82nd Street. Retail asking rents in Manhattan have increased year-over-year in 2023's second half across 12 of the 17 corridors tracked by the Real Estate Board of New York. However, the average asking rent remains below pre-Covid levels in most areas, with 20-30% lower than four years ago. Activity is also on the rise in Times Square, Upper Fifth Avenue, and Midtown East. Manhattan's retail availability rate was 14.1 percent at the start of the first quarter, the lowest it's been in nearly a decade.
***
A new Partnership for New York City survey shows that 56% of Manhattan office workers are in the office on average weekday, down from 58% last September. This decline is statistically insignificant, and shares in office landlords SL Green and Vornado Realty Trust were down by about 2% in early trading on Wednesday. A February 2023 survey showed 52% of Manhattan office workers were at their workplace on an average weekday, up from 49% in September 2022. Today, one-third of Manhattan office workers go to the office twice a week or less, and 7% are fully remote.
The percentage of employees in media who do so has dropped in half since 2020, to 45%, and the percentage of technology workers who go to the office has fallen to 59% from 73%. The best news for office owners is that employers who plan to lease less office space have mostly done that already. Only 11% expect to decrease their real estate presence while 20% expect their footprint to grow. Additionally, 71% of tech companies and 69% of law firms expect to increase headcount over the next year. The Partnership's data is similar to that from Kastle Systems, which shows about 52% of New York office workers have returned.
***
Available retail locations are near record lows, making it easy for landlords to replace departing tenants
Red Lobster has entered bankruptcy, marking the latest national chain to do so. Kimco Realty, which owns one of the marked restaurants, is now fielding inquiries about the space outside Tampa, Fla., including from Raising Cane’s, Dutch Bros, and Fifth Third Bank. Retailer bankruptcies rose to 26 last year, the highest number since 2020, according to Morgan Stanley. More than a dozen retailers have said they would close stores after entering bankruptcy proceedings so far in 2024, including Express, Rue21, and Ted Baker.
The closures leave gaping holes in malls and shopping centers as more companies succumb to online competition, inflation, and changing consumer tastes. However, landlords are mostly unfazed, as years of little construction have helped push retail availability to near record lows, making it easier than ever to replace departing tenants. Retail vacancy has fallen to a near-record low of 4.1%, and retail construction fell sharply between 2008 and 2010 due to the financial crisis. Retail vacancy is expected to increase close to 35% to justify a wave of new supply. However, there are areas of weakness, particularly low-end enclosed malls, and high interest rates and inflation are also weighing on the retail sector.
***
The Manhattan office tower has lost tenants and has a big mortgage bill coming due next year
Donald Trump's Manhattan office tower at 40 Wall St. is facing challenges due to weakening office demand and a rising vacancy rate. The tower's vacancy rate has risen to 21%, compared to 5% in 2015. Trump faces a bigger reckoning next year when its $120.5 million mortgage matures in July, and he may have to refinance it at considerably more than what he is paying now.
Bond-ratings firms have taken notice, with Fitch Ratings downgrading four tranches of a commercial-mortgage-backed-securities issue that includes the debt on 40 Wall. Trump Organization executives have said that 40 Wall is not in financial peril, noting that it is current on its mortgage payments. However, the office meltdown is reaching new heights as defaults and other signs of distress reach historic levels. The downtown Manhattan availability rate increased to 21.3% in the first quarter, compared with 10.3% in early 2020. The value of 40 Wall is critical to Trump's ability to refinance its $120 million in debt next year.
***
How Online Shopping Is Saving the Bricks-and-Mortar Store
Retailers are increasingly relying on their shops as fulfillment hubs
Store owners once saw e-commerce as a threat to their survival, but more brick-and-mortar stores are thriving after integrating their properties with the online shopping experience. Nearly 42% of e-commerce orders last year involved stores, up from 27% in 2015. Retailers are increasingly relying on their stores as fulfillment hubs, shipping items ordered online from store stockrooms and warehouses. The pandemic has accelerated the integration of online and in-store shopping, with many customers preferring to return items directly to stores. Online sales accounted for 15.4% of total retail sales last year, up from 14.7% in 2022 and 6% in 2014. However, the return of items bought online in store can artificially depress locations' total sales, making it difficult for landlords to set rent rates or collect percentage-of-rent proceeds.
***
Competition to buy the world’s most exclusive stores is intense despite modest rent growth. Even Blackstone is ogling the market.
Luxury shopping streets like Rodeo Drive in Beverly Hills and New York's Fifth Avenue are experiencing high rent yields, with luxury brands investing heavily in real estate. Compagnie Financière Richemont, the Swiss owner of Cartier, recently bought a property on London's Bond Street at a low 2.2% rent yield. Luxury rents are resilient, but they aren't rising fast enough to justify the high prices. Luxury retail properties offer scarcity, with only two-thirds of London's Bond Street considered posh enough to attract the world's most expensive brands. Luxury brands have spent over $9 billion buying boutiques since the start of 2023, controlling increasingly larger tracts of major shopping districts. Luxury brands also need to avoid being kicked out of a property by a rival-turned-landlord, which is happening more often.
Most luxury stores are still in the hands of sovereign-wealth funds or rich families who might have owned the buildings for decades. Landlords from Hong Kong and entities owned by Jeff Sutton, real-estate investor and founder of Wharton Properties, have also sold properties to Kering and Prada at very high prices. Luxury brands made huge amounts of money during the pandemic, and real estate might be the next-best thing to pour their riches into. Property deals on the world's most expensive streets will continue to operate in their own twilight zone, no matter what central bankers do next.
Comments