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The 50 largest office leases in the city averaged 114,880 square feet in the first half of 2023, totaling more than 5.7 million square feet of space. Those figures represent an uptick from the first half of 2022, where the average size among the top 50 office leases was about 102,000 square feet, totaling 5.1 million. Most, 60%, of the leases on the list were in or near Midtown, with 12 in the Plaza District, nine in Midtown East, five in the Garment District and four in Times Square. Twelve of the largest leases are in the Financial District. The majority of the leases, 58%, were new, while 32% were renewals and 10% were an expansion of a lease renewal. The Department of Citywide Administrative Services signed the largest lease on the list, 110 William St., in June of this year. The space is 630,000 square feet. The next two largest leases were both signed by Citadel Enterprise Americas at 350 Park Ave. and 40 E. 52nd St. The leases are 585,460 and 384,142 square feet, respectively.
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New York's in-office occupancy exceeded 50% of pre-pandemic levels for the third time since March 2020, according to data from real estate technology firm Kastle Systems. The average in-person activity in the city was 50.1% for the seven-day period ending Sept. 13, a 7.5% increase from the week prior. Tuesday saw the most activity, with office swipes nearing 63% of pre-pandemic levels. The positive trend is likely reflected in the trend that employers are using the unofficial end of summer to put an end to full-time remote work. The positive trend is also consistent with increases at the end of summer last year, though the 2022 numbers peaked around 47%. However, New York continues to lag other major U.S. regions, including Houston, Chicago, and Los Angeles. The city reached 50% of its prepandemic in-office levels for the first time in early June, but remained within a few percentage points of that threshold until the Fourth of July holiday, which prompted a steep dip in daily badge swipes.
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Columbia Property Trust's 2.7 million SF office portfolio, which was defaulted on earlier this year, has been downgraded by Moody's Investors Service due to rent collection issues. The largest issue is 245-249 West 17th St., where X, formerly Twitter, hasn't paid rent since Elon Musk purchased the company for $44B last October. The property occupies 76% of the property and makes up 12.2% of the broader portfolio's base rent. First Republic Bank also had a lease in the Chelsea building, which has gone dark. The property, constructed in 1909 and recently renovated in 2014, is tied to a $125 million mezzanine loan. WeWork occupies 2.2% of the portfolio's net rentable area. Moody's estimates that the net cash flow from the properties has dipped by 16% or $81M in the 12 months since the security was sold to institutional investors. The B-piece of the debt is owned by Oaktree Capital, which also owns the $125 million mezzanine loan.
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More properties face foreclosure as landlords struggle to fill vacant offices
Office building debt in the U.S. is on the rise, with Chicago, Denver, Philadelphia, and San Francisco being the hardest hit. The rate of delinquent or specially serviced commercial mortgage-backed securities 2.0 loans rose to 6.8% in August, up from 4.5% in June last year. More properties face foreclosure as landlords struggle to fill vacant offices, and refinancing office towers becomes a tougher challenge. CMBS 2.0 conduit loans made after the Great Recession make up 13% of the $4.5 trillion commercial real estate debt market. The national office distress rate was 8.2%. The distress rate of commercial mortgage-backed security loans last month was 7.2% in the top 20 markets. Chicago tops the list for troubled loans at 22.7%, followed by Denver at 19.1%, Philadelphia at 14.2%, and San Francisco at 13.9%. The overall delinquency rate peaked at 10.2 in 2012 after the Great Recession, with office properties peaking at 10.5%.
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With equity wiped out, debtholders are fighting to save their own necks
Commercial real estate (CRE) is facing a high-stakes battle with Wall Street players and Elon Musk. Twitter's landlord, Columbia Property Trust, is in default on loans valued at $2.3 billion, which are held by Goldman Sachs, CitiBank, Deutsche Bank, and bondholders who own pieces packaged into commercial mortgage-backed securities. Howard Marks' Oaktree Capital, which is believed to hold the riskiest tranche of the CMBS, is in the driver's seat to oversee a loan workout. However, a new appraisal this June valued the Columbia portfolio at just $1.6 billion, potentially devaluing Oaktree's position so much that the company would lose its right to oversee the workout. Oaktree challenged that valuation and put forth a new one — $1.8 billion.
The servicer overseeing the loan plans to accept that figure, putting Oaktree back in control of what is shaping up to be one of CRE's biggest power struggles. CMBS debt is stacked like layers of a cake, called tranches. The last time wide-scale distress hit the CMBS market, following the Financial Crisis, the different classes of bondholders fought over control of upside-down deals in what became known as "tranche warfare." Attorney Neil Shapiro at Herrick Feinstein sees signs that things are headed that way, not hired muscle but notices of valuation changes.
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Paramount Group, a Manhattan office landlord, has agreed to award its CEO a $17 million bonus if the company's stock price returns to 2022 levels within 10 years. The company, which rents Class A office space in Manhattan and San Francisco, would grant the bonus if Paramount's stock reaches $8.96 a share, a level last seen in May 2022 and about 75% higher than the current price of about $5.25 a share. Paramount is exposed to two of the nation's most challenging office markets, including the San Francisco tower that served as the headquarters for First Republic Bank, which the FDIC closed in May as part of the 2023 banking crisis. The company forecasts that core funds from operations for 2023 would come in about 7% below prior guidance and 12% below last year. The bonus plan is meant to further incentivize executive officers while encouraging retention. A quarter of Paramount is owned by the heirs of German entrepreneur Werner Otto, who acquired Midtown's Paramount Building in 1976 for $84 million, or $32 per square foot.
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World’s No. 2 economy has a huge oversupply of unneeded office space, in latest sign of country’s weak growth
The office market in the US is dismal. In some ways it’s even worse in China with nearly 24% of office-tower space in 18 major Chinese cities unoccupied as of June. The real-estate services firm. The country's economy is facing its worst slowdown in years, and the office market is not suffering from a significant shift toward hybrid work patterns. Instead, China is facing a more basic real-estate problem: developers built too much supply, and the economy is too weak to absorb it. China's economy barely grew in the most recent quarter on a quarterly basis, and youth unemployment hit a record high in July.
Regulatory crackdowns on the private sector and weak investment by private firms have depressed demand for new leasing. A wave of new office towers will hit the market this year, adding to the market gloom. China's office market is smaller than the residential real-estate industry, which accounted for 20% or more of gross domestic product in China in recent years. Most office assets are owned by domestic investors, but some big foreign firms are in China's commercial property market, including BlackRock and U.S. developer Tishman Speyer. High office vacancies are indicative of a misfiring economy, and some investors are getting squeezed. Many smaller businesses, reeling from years of pandemic curbs, have given up office space.
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W.P. Carey, a real estate investment trust with 180 million square feet of commercial space across 1,500 buildings, is bidding farewell to office properties. The company plans to sell 87 office buildings by early next year and spin off another 59, containing 9.2 million square feet, into a new company. This move will lower the firm's rental income by 15%, or $220 million, and reset its dividend payout to as much as 75% of adjusted funds from operations, down from 80% last year. Office buildings accounted for 25% of the firm's portfolio in 2018 and 16% this past June. W.P. Carey's CEO Jason Fox said the announcement "vastly accelerates" the exit, and it is expected to be valued higher after removing office assets. The firm specializes in space critical to operations for tenants, such as JPMorgan Chase and FedEx, who pay rent, taxes, insurance, and other costs under net leases.