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Federal Reserve could have handled inflation less painfully, experts say
The Federal Reserve's recent rate hikes have caused significant pain to real estate investors, as the industry relies heavily on debt. Some experts argue that the Fed should have raised rates less, reduced them sooner, and employed more targeted measures to fight inflation. Real estate players who use debt can grow faster and outcompete those who don't, so for most, it's not a choice. Borrowers could have hedged against the Fed's rate hikes by buying rate caps or locking in long-term loans. The Fed should have known that people would drown when it raised the federal funds rate by 525 basis points in less than 18 months.
The Fed also began selling mortgage-backed securities in June 2022, which drove up mortgage rates specifically. Jen Harris, a former senior director of international economics on the National Security Council and National Economic Council, argued that interest rates are not the best tool to reduce inflation. She suggested that the Fed should have attacked drivers of inflation with targeted policies rather than relying on broad rate hikes. The end of the pandemic and easing of supply-chain problems, not the Fed's actions, may have been the main reason inflation fell.
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Japanese clothier Uniqlo has acquired a part of its U.S. flagship store for $350 million from co-owner Vornado Realty Trust, making it the latest large retailer to conclude it's better to own on Fifth Avenue than to rent. The purchase of 17,000 square feet of space at 666 Fifth Ave. will save Uniqlo $27 million in annual rent, analysts said. The retailer has also agreed to acquire an additional 75,000 square feet at the store from a separate landlord, Brookfield, for an undisclosed price.
A spokesman said Uniqlo parent Fast Retailing Co. would pay for the purchases by drawing from its cash reserves of 1.1 trillion yen, or $7.6 billion at current exchange rates. Uniqlo agreed to pay Vornado $20,000 per square foot for its store, well above the $8,400 per square foot paid earlier this year by Gucci’s parent to buy retail space three blocks north at 717 Fifth Ave. It’s nearly double the $12,000 a square foot paid last year by real estate investor James Dyson for retail space at 747 Madison Ave., according to Cushman & Wakefield.
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Class B office property traded for $250 psf
Co-working firm Jay Suites has bought a Class B Midtown office building for $35 million, with the building at 8 West 38th Street being 80% occupied. The Felder family, who had owned the building for eight decades, was attracted to the location across from the new Amazon offices and close to major transportation hubs. The company will use the vacant third floor for its conference-room leasing business, Jay Conferences, and will continue to lease out the rest of the 12-story building. The sale was first reported by Crain's. Jay Suites, a New York-based firm with 11 flex office locations, has seen an increase in demand from companies that have ditched the office but still need a place to gather for occasional events and get-togethers.
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Deal comes after Meta shrunk its space in the office building
Vornado Realty Trust has reached a long-term masterlease deal with an unidentified user for its 770 Broadway building, following Meta's shrinking of its space. The deal will cover over 1 million square feet of office space. The company will retain Wegman's space in the Greenwich Village building, which was leased to the grocery chain in 2021. Meta's lease expired in June, and the company still owns 500,000 square feet of the building. The company reported 1.3 million square feet of office leasing activity in New York during the quarter, at an initial asking rent of $131.37 per square foot. Vornado also sold a portion of 666 Fifth Avenue to Uniqlo for $350 million, with a 52 percent interest in the joint venture. The sale is expected to close in the first quarter of 2025. The company still owns five assets on Fifth Avenue and believes this won't be the last user purchase on Fifth Avenue.
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Two-year-old 799 Broadway has $270M mortgage
Columbia Property Trust is reportedly seeking to sell a new office building in Greenwich Village in a short sale, testing a market where troubled properties have recently traded at significant discounts. The 12-story property at 799 Broadway, completed in 2022, is priced at $250 million, below the $270 million debt after Columbia refinanced the building with Blackstone Mortgage Trust two years ago. Blackstone is offering a pre-arranged financing package to potential bidders to help smooth the process. The building, completed in 2022, is 71% occupied and is expected to provide investors with future rent upside and a strong contractual income stream. If the company meets its pricing expectations, the deal would work out to $1,400 per square foot for the 178,000-square-foot building.
This pricing is significantly lower than recent deals that have traded at low valuations. Columbia entered into a joint venture in 2018 to develop the building with Normandy Real Estate Partners, which Columbia acquired in 2020. The deal was partially financed by a $1.7 billion CMBS loan that became one of the pandemic era's biggest defaults when Columbia fell behind on the debt last year.
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City assessed values up $2.5 billion as vacancies climb to 25%
Manhattan landlords are not losing money on vacant offices, as assessed market values on them have increased, boosting the city's tax revenue. The overall tax-assessed value of the city's towers has increased by $2.5 billion over the past four years, from $202.3 billion in July 2020 to a current $204.8 billion. However, building owners are not enjoying similar gains on the value of their assets. Property taxes are the largest revenue source for the city's police, fire, and sanitation services. The city will collect $7.6 billion in building property taxes over the next fiscal year compared to $5.8 billion in 2020. Office vacancy rates reflect work-from-home policies that arose during the pandemic, leading to many companies reducing their footprints. The number of office-type jobs in the city is back to pre-pandemic levels of 1.5 million. However, the demand for office space has not bounced back, with more employees working in hybrid roles creating the highest percentage of vacant space the city has had in decades.
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Isaac Tshuva’s firm pays $72M to buy 419 Park Avenue South
Elad Group, led by Isaac Tshuva, is set to convert a 200,000-square-foot office building in Midtown South into condos. The developer paid $72 million to buy the property from Walter & Samuels. The sale was a rare opportunity to develop a large new condo product in a highly sought-after submarket in Nomad. Elad is planning around 100 units, with completion expected in 2026. The developer has experience in such conversions, having previously converted the Plaza Hotel and the former New York Criminal Court building in Tribeca. WeWork had previously occupied the building until it was abandoned through bankruptcy proceedings.
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After a busy first half, firm looks to scoop up more discounted assets
TPG, a real estate investment firm, invested $1.2 billion in the second quarter, acquiring two Manhattan office buildings for residential conversion. The firm purchased 222 Broadway for $150 million, partnering with Jeff Gural's GFP Real Estate, and 101 Franklin Street for over $100 million. Both properties suffered significant losses in value and were bought at substantial discounts compared to their previous trades. TPG plans to focus on more resilient sectors, like student housing and industrial properties, while slow playing office investments. The firm will continue to invest in high-quality assets and seek strategic partners to maximize returns. TPG plans to take the same approach as in the first half of the year, following its $2.7 billion acquisition of Angelo Gordon. Crow Holdings, led by CEO Michael Levy, has raised a $3.1 billion fund and is targeting value-add real estate investments across the U.S., with over 25% of the fund deployed already.
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