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Nation’s Largest REITs Point to Leasing, Lending To Propel Results
Office real estate firms in the US are showing signs of a turnaround in demand for space, despite facing record vacancies, sublease surges, and pandemic-induced challenges. A recent boost in leasing activity and more confidence among tenants in their return-to-office plans support the notion that the remote work shift hasn't left the national office market for dead. The lack of new construction is further proof that the demand for top-tier office space will continue to climb as tenants compete for a dwindling pool of desirable space. However, many of the pandemic-era challenges still exist, and much of the optimism among office landlords is concentrated for those with portfolios at the highest end of the quality spectrum.
Tech companies are reevaluating their portfolios and realizing they need office space for growth plans. While the financing climate and uncertainty have sidelined institutional investors, capital markets are beginning to loosen as interested buyers widen. Developers are focusing on high-quality options, while office landlords anticipate a shortage of new construction due to elevated borrowing costs and extended work-from-home policies. The office market is expected to see a sharp drop in new construction.
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Christie's auction house has extended its lease at Rockefeller Center for another 25 years, a significant win for an older office complex that has struggled to retain tenants. The American headquarters spans nearly 400,000 square feet and includes public galleries, salerooms, warehouses, and corporate office space. The renewal was announced by landlord Tishman Speyer, who believes it validates its decision to invest millions of dollars into a redevelopment of the Rockefeller Center campus. The improvements include restoring the complex's Channel Gardens and skating rink to its original state by opening up below-ground passageways. Tishman Speyer has invited in new, Gen Z-friendly retail tenants like Catbird, McNally Jackson, and Todd Snyder. Christie's Americas president Bonnie Brennan called the Rockefeller Center space "unmatched" and said the renewal would ensure "our entire staff is available in one place." The transaction counterpoints the slumping demand for older office buildings, as Manhattan office leases reached 3.9 million square feet in July, while the availability rate fell to 17.6%, the steepest monthly drop since September 2022.
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After pouring $120M into building, landlord triples down on refi
Five years ago, a friend of mine bought baseball cards for Keston Hiura, hoping he would become a star. He financed the purchases with credit cards, and prospective buyers offered substantial sums but far less than his friend had paid. The friend turned down all the offers, hoping that Hiura would still blossom. This is known as the sunken costs fallacy, which economists call the series of irrational decisions that follow. This is similar to 277 Park Avenue, a Class A office building owned by the Stahl Organization. The organization couldn't refinance its 10-year loan without agreeing to spend a huge sum — one-third of the loan's value — on improvements. Stahl's refi closed this month at $750 million, but the landlord had to kick in $250 million to boost the building's value and keep it viable.
The sunken cost fallacy suggests that the previous investment made it more difficult to walk away. In total, Stahl is putting at least $370 million into the building with no guarantee that the property, Park Avenue corridor, or office sector will hold its value or prosper before the new loan matures in 2029. At the highest levels of real estate, the mental challenge of not letting sunk costs interfere with decisions is well known. Stahl may have swallowed its bitter pill and soldiered on, but investors with no attachment to 277 Park Avenue would likely bid for a Keston Hiura rookie card.
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Worst-case scenario: refi fail rate of 35%
The London Stock Exchange Group has identified three scenarios for the Federal Reserve's future trajectory, which could impact about half of the CMBS loans due over the next two years, totaling $89 billion. The best-case scenario is a "more normal rate-cutting cycle," with the Fed cutting rates by 50 basis points each quarter. In the second quarter of 2025, rates would fall to 3.75 percent, and 1.75 percent a year later. This would be a rosy outcome for borrowers, as many properties cannot meet the debt service coverage ratio required to refinance. However, if rates drop 325 basis points in the next two years, the fail rate for refinancings falls to 13%. The worst-case scenario is if the Fed holds to its "higher-for-longer" strategy, with rates pared to 4.5% in mid-2025 and 3.5% by mid-2026. If the economy experiences a shock, cuts as high as 100 basis points per quarter could be plausible, reducing the Fed funds rate to 0.25 percent by the second quarter of 2026.
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Starwood provides loan for office development above art deco building
Tishman Speyer has secured a $301 million refinancing deal for its project at the historic Macy's building in Downtown Brooklyn, where it redeveloped the property into an office building called the Wheeler. Starwood Property Trust provided the financing for the development, which incorporates the original cast-iron facade into an office building called the Wheeler. St. Francis College is the only tenant of the fifth, sixth, and seventh floors of the building. The refi replaces a 2021 loan from the same lender for the same amount. Tishman purchased the upper floors of the 838,000-square-foot building in 2015 for $270 million, which helped fund a proposed $100 million renovation of the store. Bank of the Ozarks provided a $194 million construction loan in 2017. Tishman is seeking $60 million in EB-5 financing for its planned renovation and is seeking $491 million for the project. Abraham & Straus, the reigning queen of Brooklyn department stores, grew to become the fourth largest department store in America.
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Brutal week for Aby Rosen, CIM Group, Savanna
Office distress in New York is increasing, with delinquency rates for CMBS office loans reaching 8% in July. Special servicing rates were up 2.6 percentage points from last year, with at least $700 million in debt backed by office assets owned by major companies like RFR flagged for transfers to special servicing. Landlords continue to bleed tenants and face-plant when loans mature. Savanna's Grand Central tower's $242 million loan was the largest to land in special servicing, and RFR Holding's Seagram Building, 285 Madison Avenue, and Union Square properties have all landed with mediaries in recent years. 17 State Street's $180 million loan transferred this month after RFR failed to refinance the debt at maturity. The property's financial soundness is a concern, with occupancy in the mid-90s and cash flow 3.5 times greater than debt service. CIM Group's Montague-Court Building is on the precipice, with upcoming lease expirations likely impairing its ability to pay its debt. 1166 Sixth Avenue's International Paper Building is bracing for the loss of its top tenant, D.E. Shaw, and fintech firm Arcesium.
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In 2022, New York City experienced a significant increase in visitors, with 56.7 million visitors, up from 32.9 million in 2021. The city is forecasted to grow to 63.3 million in 2023 and surpass 2019 levels by 2024. Domestic travel has recovered rapidly, reaching 89% of the 2019 benchmark. International visitation rebounded to 8.9 million visitors, more than triple the 2021 volume and 69% of the 2019 benchmark. Business travel, the hardest hit sector during the pandemic, is recovering at a slower pace, with 8.9 million business visitors accounting for 16% of NYC trips in 2022. The international outlook is positive, with Western European markets rebounding and South American travel improving, particularly Brazil and Colombia. APAC markets are returning at a slower pace due to distance, economic, and access concerns. Canada and Mexico were the first markets to recover due to their proximity to the US, with Canada reclaiming its place as the second largest international market.
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