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Weekly Market Report - May 15, 2023


New York is offering help to fund renovations of what it calls “underperforming” office property that the city said accounts for more than half of Manhattan’s inventory as the top U.S. commercial real estate market struggles with what CoStar data shows as record-high office vacancy rates. Building owners seeking overhauls of aging office buildings located south of 59th Street in Manhattan may get tax incentives including property tax abatement for up to 20 years and a tax exemption on construction materials through the new Manhattan Commercial Revitalization Program. The move also comes as hybrid work preferences coupled with rising interest rates have slowed investment in the office sector and created "immediate challenges facing New York City’s commercial business districts,"

Manhattan generates 58.5% of the citywide office and retail property tax revenues, and 45% of all jobs in the city. Some 13.6% of the city’s office space remains vacant with aging and outdated office buildings “increasingly struggling to retain tenants and to sign new leases” versus higher-quality office spaces. Leasing activities in the city and across the country have shown renovated or new office properties faring better in landing employers seeking to attract and keep talent and bring them back to the office. The program also involves incentivizing owners to undertake investments and retrofits that will make sure buildings comply with Local Law 97, which will subject most buildings over 25,000 gross square feet that exceed carbon emissions limits to annual fines beginning in 2025. Eligible buildings in the program, which is part of the city’s bid to turn commercial hubs into what it described as “vibrant 24/7 destinations,” also have to be at least 250,000 gross square feet in size and must have been built before the year 2000.


From 2019 to 2021, the median storefront rent per square foot increased 23 percent in Brooklyn, 14 percent in the Bronx and 9 percent in Queens. It was down 11 percent in Manhattan and flat on Staten Island. A jump in demand from entrepreneurs allowed landlords to hike rents well beyond that in certain areas, including 38 percent in the Rockaways and 33 percent in Bronx neighborhoods Concourse and High Bridge. Prior to the pandemic, annual rent increases of 3 percent were typical. The numbers come from Department of Finance data analyzed by the Association for Neighborhood and Housing Development. Commercial tenants don’t have the same protections as residential tenants, giving landlords more leverage to raise rents when the market picks up.

Many immigrant store owners operate on monthly lease agreements, which means landlords can quickly adjust depending on demand and their individual needs. The outer-borough retail rent boost came as former commuters to Manhattan began working from home and small businesses proliferated. Business applications rose 30 percent in the outer boroughs between 2019 and 2021, according to an analysis of U.S.

Chamber of Commerce data by the Center for an Urban Future, led by a 66 percent jump in the Bronx. Storefront rents increased disproportionately in communities of color, which made up 72 percent of the population in the districts where rent went up.


New Jersey-based Cross River Bank, an increasingly active lender to the city’s mid-market landlords, was flagged by the Federal Deposit Insurance Corporation for engaging in “unsafe or unsound banking practices” and “failing to establish and maintain internal controls,” according to a March consent order which predated that month’s bank failures but was only recently made public. The order requires Cross River to conduct a bevy of internal assessments and implement corrective actions on its lending practices by early next month, 90 days after the order was issued. Cross River has already complied with a number of the FDIC’s demand.Cross River holds $1.1 billion in real estate loans, including $400 million on multifamily properties, several of which were provided to well-known dealmakers in Brooklyn and mid-sized landlords across the city and in New Jersey.

Founded in 2008, Cross River emerged from the financial crisis as a key partner to fintech and later cryptocurrency companies as both sectors grew rapidly during the 2010s. But the venture-backed bank has faced substantial challenges of late from rising interest rates, cratering cryptocurrency prices and the expiration of the federal Paycheck Protection Program, under which the bank churned out tens of thousands of loans to small businesses during the pandemic. If Cross River pulls back on commercial real estate lending, it could push more multifamily borrowers toward larger banks like JPMorgan, exacerbating what one multifamily broker called a “gaping hole in the market” left by First Republic’s seizure and sale last month. While Cross River doesn’t have as large a presence in New York commercial real estate as Signature Bank did, it recently played a role in a number of high-profile deals in Brooklyn. While any suggestion about the bank’s future is purely speculative, Cross River’s crypto and fintech ties have clearly caused concern.


The real estate investment trust could come to the brink of default on $2.6 billion worth of loans, analysts at the investment bank warned, as rising interest costs and other expenses squeeze its debt buffer to a razor-thin margin. A whirlwind of rising interest costs, tenant departures and half a billion dollars in expenses tied to its massive redevelopment project surrounding Penn Station could bring the REIT’s debt coverage ratio dangerously close to its limit. If the coverage ratio were to drop below that limit, Vornado would breach its covenants and trigger a technical default on its corporate-level loans and line of credit. Coverage ratios on two of Vornado’s debt covenants declined by more than 70 basis points over the past year, according to Goldman. The main culprit was rising interest rates: The REIT’s weighted average rate went from 2.45 percent to 4.23 percent after the Federal Reserve began hiking rates last spring. That leaves a buffer of just 79 basis points before the company hits the limit on those coverage ratios.

Goldman’s analysts calculate that those buffers could narrow to a mere 10 and 20 basis points, respectively, if things continue the way they’re headed. In addition to rising interest payments, Vornado must contend with a significant amount of interest rate swaps and rate caps that are set to expire through 2024. The company has hedges on $2.4 billion worth of expiring mortgage debt, which could add an additional $73 million in interest rate expenses. The loss of two large office tenants will cost it another $68 million in revenue, according to the analysts, and Vornado still has to spend $500 million to complete its current Penn Station area projects, primarily the redevelopments of its Penn 1 and Penn 2 buildings. The Goldman analysts questioned whether Vornado’s declining coverage ratios were pressuring the firm to sell properties.

Vornado said last week that it plans to sell assets to pay down its debts and address other capital needs, like funding a stock buyback program. Vornado’s stock, which has fallen from a pre-pandemic level of nearly $68 a share to below $14 as of Thursday, was removed from the S&P 500 in January. The index said the company’s shares have become “more representative of the midcap market space.”


In one of the most closely watched deals of the year, Aby Rosen has negotiated an extension on his $1 billion mortgage on the Seagram Building. The office building loan is among the largest coming due this year, and its extension carries good and bad news about the state of the financing market: Rosen’s RFR Realty wasn’t able to refinance before the loan’s maturity date, despite the building’s good health, but was able to avoid distress. Details of the new deal weren’t immediately clear, though one source said it was a multi-year extension. Representatives for Midland Loan Servicing and Wells Fargo — the master and special servicers, respectively, on the $783 million securitized portion of the debt — did not immediately respond to requests for comment. RFR was in the market earlier this year seeking $1.1 billion to refinance the landmarked 38-story tower at 375 Park Avenue with a team at Eastdil Secured. It was the biggest CMBS office loan maturing this year and its fate was seen as an indicator of lender appetite for office properties as interest rates rise and the sector faces challenges from hybrid work.

The Seagram Building was facing significant vacancy after tenant Wells Fargo decamped for Hudson Yards, but it has since filled most or all of that space. RFR recently pumped $25 million into renovating the 860,000-square-foot tower, including repositioning the underground parking area into a 35,000-square-foot amenity space. Tishman Speyer has a $485 million CMBS loan maturing in August at 300 Park Avenue. The building was 84 percent occupied as of last year. Rather than seek a refinance, Tishman had the loan transferred to special servicing so it could request an extension.


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