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Mayor Eric Adams is implementing a controversial "mayoral priority" to reduce the city's office footprint to accommodate a smaller municipal workforce. The Department of Citywide Administrative Services has directed some agencies to identify underutilized office space they can give up in the cost-saving measure. This move is politically risky as the city's largely unionized municipal workforce of over 300,000 is a core part of the mayor's base. The "Citywide Space Savings Task Force" is a "mayoral priority" and is constantly evaluating the use of space to maximize effectiveness and cost-savings. The initiative reflects a city workforce that is not growing at pre-pandemic expectations and is a tacit acknowledgment from the Adams administration that it is unlikely to fill all its vacant positions. The City Council, which has an increasingly combative relationship with the mayor, has criticized the plan, stating that city agencies must have the support needed to fill vacancies and deliver essential services to New Yorkers. Office consolidation is expected to save the city at least $44 million across eight agencies through fiscal year 2028.
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Metro Loft Management and David Werner Real Estate Investments have secured $75 million in acquisition financing to develop New York City's largest office-to-residential conversion project at the former Pfizer headquarters building in Midtown Manhattan. Northwind Group provided the senior acquisition predevelopment loan on the sponsorship's 219 East 42nd Street property, which was formerly the global headquarters of Pfizer before the pharmaceutical giant relocated to Tishman Speyer's Spiral office tower at Hudson Yards in late 2022. Metro Loft and Werner plan to convert the adjacent office property at 235 East 42nd Street into residential housing for 1,500 combined rental units, surpassing Metro Loft's 1,300 units planned at 25 Water Street in Lower Manhattan. The conversion of the nine-story 219 East 42nd property will involve developing a 29-story residential tower with up to 660 apartments.
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Developers thought the pandemic era’s supercharged demand for life-science properties was sustainable, but they were wrong
Biotech and pharmaceutical buildings have become a hot investment in commercial property due to the pandemic, leading some developers to consider marketing the space for office use. In the Boston region, owners of at least 10 life-sciences locations are now offering those buildings for office use instead of lab space, despite facing a 30% haircut on their asking rents for life-sciences use. As the U.S. office market downsizes and works off its surplus nationwide, owners of life-sciences buildings in Boston, San Diego, and the Bay Area are also facing a glut of new life-sciences properties. Demand for life-sciences space has fallen sharply from its pandemic peaks, with many biotech, pharmaceutical, and other life-sciences companies losing their appetites for rapid expansion due to high interest rates, weak venture-capital financing, and an uncertain economy. The distress in life-sciences doesn't pose as much peril to the broader economy as the carnage in the office market.
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The developers hope to welcome the first residents to the property by the end of 2026
The Brodsky Organization, GFP Real Estate, and The Sorgente Group have filed an application to convert the Flatiron Building into 60 luxury condominium units. The joint venture aims to receive the city's green light by the end of the year to start interior renovations of the 21-story tower at 175 Fifth Avenue. The developers estimate the Flatiron Building could fit up to 100 apartments at an average of 1,998 square feet, bigger than other office-to-residential conversions due to the triangle-shaped property's unique floor plates. The developers plan to build up to 60 units across the second through 21st floors, all of which will be sold at market rate. The empty retail space on the ground floor will shrink slightly from 6,500 square feet to 4,807 square feet. The Flatiron Building's future has been uncertain since its main tenant, Macmillan, departed for 120 Broadway in 2019.
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RXR chief forecasts value and capital structure recalibration
Scott Rechler, the CEO of RXR, has warned that the commercial real estate industry is facing a "new paradigm" due to interest rate spikes and the Fed's expected rate cuts. In the multifamily sector, Rechler predicts that it will require writedowns and equity injections due to broken capital stacks caused by higher interest rates and stagnating rents. The industry is expected to experience waves of loans that mature and need to be recapitalized and restructured over a multiyear period. Rechler also noted that the broken capital structures in the multifamily sector could provide investor opportunities to buy into the sector. The Fed's expected rate cuts are seen as normalization, requiring recalibrating both values and capital structures. The first steps towards this reset could be coming this month, following the central bank's announcement in August to start lowering rates. Rechler has also criticized the office sector, calling commercial real estate a slow-moving train wreck.
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Brooklyn-based developer Pro-H Development has acquired 842 Sixth Ave., the site of the city's tallest modular hotel, for $30 million. The property, which was intended to be operated by Marriott, was originally planned to be 26 stories tall. However, the pandemic and subsequent foreclosure action led to the site's demise. The hotel developer, Robert Chun, had plans to demolish the building in 2019 but never built it. He also faced issues with lender Avana Capital and defaulted in August 2023. Chun and Avana settled their foreclosure case in August, likely clearing the way for the sale to Pro-H. Modular high-rises are rare in New York, with only one existing example being 461 Dean St., a 365-unit offering near Barclays Center. Pro-H Development, a 20-year-old firm, has completed projects such as 881 Lexington Ave. and 1042 Atlantic Ave., both of which received construction loans. Chun has previously built a Cambria-branded property in nearby 123 W. 28th St.
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Fed Chair Jerome Powell has voiced concern, saying that commercial real estate risk “will be with us for some time, probably for years.”
The office property market is facing challenges due to higher vacancy rates and high borrowing costs, leading to distressed sales. Congress is attempting to make it easier for developers to convert underused properties into housing, with a temporary 20% tax credit introduced. However, conversions take time and many office buildings are unsuitable candidates, making it difficult to save the market in the near term. The Federal Reserve is expected to cut interest rates for the first time in over four years, as approximately $930 billion in commercial real estate loans are due this year. Commercial mortgages are financed on shorter terms than residential mortgages, often with balloon payments or large lump sum payments due at maturity. Around 70% of bank-held commercial real estate mortgages sit on the balance sheets of regional and smaller lenders, putting extreme pressure on U.S. regional banks that are weighed down by loans for commercial buildings worth a fraction of their initial price, making them vulnerable to bankruptcy. The wave of debt coming due puts extreme pressure on U.S. regional banks, which are weighed down by loans for commercial buildings that are worth a fraction of their initial price, making them vulnerable to bankruptcy.
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Robert Horowitz, through Third Avenue Design Capital LLC, purchased a $121 million note/loan secured by the leasehold of an office building in Midtown South, Manhattan. The note, which consists of 449,437 square feet, was sold for $269 per square foot. The note was backed by Cohen Brothers Realty's leasehold on the office building. The transaction took place in Midtown South, Manhattan, and was led by Horowitz. The note was sold at a price of $121,000,000, with the total square footage of 449,437. The note was secured by Cohen Brothers Realty's leasehold on the office building.
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