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Weekly Market Report - May 7, 2024


Tenants inked more deals in all three major NYC m

Manhattan's office market showed signs of life last month, with increased leasing velocity in all three major markets – Midtown, Midtown South, and Downtown – according to a new Colliers report. Year-to-date activity reached 9.08 million square feet in April, ahead of the 8.85 square-foot volume during the same time period last year. Leasing demand grew more than 50% to 2.75 million square feet, almost double that of a year ago. The availability rate held steady at around 18 percent.

The month's biggest transactions were American Eagle's new 338,000-square-foot lease at 63 Madison Avenue, Palantir's 140,000 square-foot renewal at 620 Sixth Avenue, and TD Bank's 80,000 square-foot lease at 22 Vanderbilt. Midtown South accounted for the largest share of demand, with leasing velocity growing by almost 78 percent since March and more than tripled since last April.



WeWork's bankruptcy hearing revealed that property management software provider Yardi Systems will become the majority owner of the coworking giant. Under the proposed financing deal, senior lenders agreed to inject WeWork with $50M to keep it running until it emerges from bankruptcy on May 31, then an additional $400M to cover the cost of exit restructuring. Yardi will take a 60% stake in a private WeWork after agreeing to contribute $337M of the $450M needed to exit bankruptcy. SoftBank, WeWork's largest lender and investor, would have roughly 16.5% of the equity upon emergence from bankruptcy, while other lenders would contribute roughly $112M in new money to keep WeWork alive. WeWork also reached agreements with landlords as the company established an $8.5M pot of settlement payments for a group of unsecured creditors. Judge John Sherwood pushed the WeWork plan with Yardi forward and denied exiled co-founder Adam Neumann's request that WeWork consider his bid more seriously.



Boston Properties, the largest publicly traded owner of office buildings, has reduced its earnings guidance due to higher interest expenses on office properties. The REIT adjusted its expected funds from operations for Q2 and the full year down 6 cents per diluted share, from between $1.70 and $1.72 for Q2 and between $6.98 and $7.10 for the full year. The Federal Open Market Committee left its benchmark interest rate unchanged at 5.25% to 5.5%, citing high interest rates as the biggest earnings challenge. More than half of the REIT's interest expense increase was from elevated debt payments on two properties, 901 New York Ave. NW in D.C. and Santa Monica Business Park in Southern California.

BXP executives expect improvement in the second half of the year due to increased income, rising occupancy at its office properties, and fewer expenses. The REIT is continuing to take an aggressive approach to the office market, acquiring assets from lenders with highly leveraged assets and institutional owners seeking to diversify from the office asset class.



New law pushing land prices up as developers scramble for properties

Governor Kathy Hochul has revived a near-death development market by adding five years to the completion deadline for projects vested under the expired 421a tax abatement and creating a new program for rental development, 485x. The extension gives new life to stalled 421a projects and kickstarts project filings, which have fallen precipitously since 421a expired in June 2022. Both policies are a "much needed lifeline" and take the ambiguity out of the market. The question now is how much the new laws will raise the price of development sites. Brokers say that valuations can't be assessed in broad strokes, as each program has its own gradations. However, The Real Deal has found that land values have risen from ashes, with some developers moving to condo projects, which still enjoyed a property tax break. However, owners of sites zoned for mandatory inclusionary housing have seen their land values decline.



Potential defaults, foreclosures at highest levels since 2012

Office owners in the US are facing distress as over $38 billion worth of buildings are at risk of default, foreclosure, or other forms of distress. The sector has faced the most distress since the fourth quarter of 2012, following the financial crisis. Owners struggle to pay off loans, with only 35% of office loans converted into commercial mortgage-backed securities paid off in 2021. Interest rates remain high due to inflation, and demand for office space is waning due to remote work. In the coming months, $18 billion of office loans will come due, with nearly three-quarters difficult to refinance due to income, debt levels, vacancies, and lease expirations.



Deal includes 19 properties, more than 10K beds

Blackstone has sold a portfolio of over 10,000 student housing beds to KKR for $1.6 billion, with the 19-building portfolio expected to close in the third quarter. The portfolio, which last traded hands in 2018, was acquired in partnership with Greystar Real Estate Partners. The deal for BREIT represents a 7 percent premium to net asset value, but it doesn't reflect a waning belief in the student housing sector. BREIT has sold $20 billion worth of real estate assets at a premium to net asset value since 2022, including a recent deal to sell $1 billion worth of warehouses in California.

Blackstone has also been on a deal-seeking spree under the hope of real estate values bottoming, acquiring Apartment Income REIT for $10 billion and Tricon Residential for $3.5 billion. Student housing investments have been surging due to increasing demand and limited supply on campuses, with the top 25 student housing owners having just under 660,000 beds across 1,142 properties.






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