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Tenants inked deals and foot traffic flowed this summer
Manhattan's office market experienced a 3.5 percent year-over-year increase in leasing volume from July to August, according to a new Colliers report. The year-to-date activity reached almost 21 million square feet in August, and if leasing continues at its current pace, Manhattan is on track to surpass 30 million square feet in volume for the first time since 2019. If demand continues at this pace for the rest of the year, Manhattan is on track to cross that 30 million square foot mark, which would be a significant milestone in terms of Manhattan's movement towards recovery. The number of visitors to Midtown office buildings is inching closer to 2019 levels, with the last three weeks of July having an average visitation rate of 78 percent, up one percentage point from June. July's overall visitation rate in July was up six percentage points year-over-year and was 71% of 2019 levels. In Midtown South, leasing volume jumped 45 percent month-over-month and 28 percent from last year, boosted by Yeshiva University's 160,000-square-foot condominium leasehold at JEMB's 1293 Broadway. The availability rate dropped slightly last month from last month to about 17.4%, and average asking rents dropped slightly year-over-year from $75.70 per square foot to $74.56.
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August was a strong month for Manhattan's office market, with companies leasing a significant amount of space despite the absence of a blockbuster deal. Firms leased about 2.6 million square feet of space last month, up 3.5% year over year but down almost one-third from July. The largest lease for August was the auction house Christie's renewing its lease for 373,000 square feet at Rockefeller Center. Manhattan's availability rate tightened slightly to 17.4%, and its average asking rent was $74.56 per square foot. The borough has about 94 million square feet of available office space. In Midtown, firms leased about 1.4 million square feet of space last month, less than half of July's leasing volume due to the absence of a Blackstone-sized lease. Christie's deal was the neighborhood's largest for August, followed by LVMH taking about 108,000 square feet at 590 Madison Ave. The neighborhood will have its strongest year since 2018, due to the number of massive deals this year. In Midtown South, companies leased about 990,000 square feet of space in August, with the largest leases being Yeshiva University and PubMatic. Downtown saw about 210,000 square feet of activity, up 12.2% from July but down 53.9% from August last year.
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Financial firm would anchor skyscraper, making long-awaited skyscraper feasible
American Express is in exclusive negotiations with developer Larry Silverstein to build a skyscraper at 2 World Trade Center. The financial services firm is weighing the expense of a new, state-of-the-art office building or renovate its current home at 200 Vesey Street, previously known as 3 World Financial Center. The tower, along with the closer-to-fruition 5 World Trade Center, would be the last major piece of the World Trade Center redevelopment, which has been a career-defining mission for Silverstein. The tower could be larger or smaller than the Foster rendering that was leaked in 2022. American Express has been close to finding a primary occupant before, with architects like Bjarke Ingels Group and Norman Foster guiding the decision-making process. The trade center gets discounted power from the state and there are no taxes on corporate build-outs.
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As Labor Day approaches, many office proponents are accepting that the end of summer won't convince employees to return to the office. Office buildings across the U.S. were about 63.7% as busy in July 2024 as they were in July 2019, up from 52.9% in July 2023. Most organizations have accepted hybrid working patterns as the new normal, with
64% of occupiers surveyed saying their office utilization patterns are steady. Zoom, an online meetings giant, has seen 64% of respondents implement a hybrid model, but pushing the envelope isn't as easy as it was before the pandemic. Post-pandemic office closures have led to a shift in lifestyles and home bases, with people moving away from urban cores and minimizing the relationship between office and work. Office vacancy rates have been elevated since the start of the pandemic, but office utilization has returned to 63.7%, the highest since February 2020. However, barriers to return to the office may include employees not understanding the need for office time or a mismatch between executive and lower-level attendance expectations. The return-to-office trend varies depending on industry and geography.
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Jordan Menashe, owner of Menashe Properties, is optimistic about the future of office buildings, despite stagnant occupancy rates. However, investors believe remote work is a fad and office work is likely to return. Fire sales of office buildings are becoming more common, with eight properties selling at discounts greater than $100M in the first half of 2024. New York City's office market is facing significant distress, with many properties being sold at a 70% discount or lower. Companies like GFP Real Estate and TPG have been acquiring office properties at a 70% discount, while Sigma Plastics Holdings and Seattle County Government have also made significant losses. Namdar Realty Group, which has been buying office properties for low rents, has attempted to replicate this strategy by acquiring struggling buildings. However, Namdar and Empire Capital Holdings have faced foreclosures, and some investors believe the deals are too good to pass up. Menashe Properties is betting on succeeding in the market, as busy streets, restaurants, and public transit make office spaces necessary.
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RFR Holding, a struggling landlord in the New York City office market, has been bought by SL Green Realty for $224M, backed by RFR's vacant 23-story office tower, 522 Fifth Ave. The company plans to renovate the property together and find a single tenant to take all 600K SF. The renovation work is scheduled to begin this month, and RFR remains enthusiastic about the project. The floating-rate loan was bought from Credit Suisse at a discount. RFR bought 522 Fifth Ave. from Morgan Stanley in 2020 for $350M. Credit Suisse began preforeclosure proceedings on the property in June, claiming RFR didn't pay off the mortgage when it matured. A Newmark team represented Credit Suisse in the deal. If RFR can turn around the property, it would be the second major win the company has scored this year as it reckons with billions in maturing loans. RFR has faced two lawsuits from Rialto Capital for loans totaling $22M, missed a balloon payment on a $180M CMBS loan covering 17 State St., and a foreclosure suit after Citibank and JPMorgan Chase filed to try and collect on a $180M loan linked to 475 Fifth Ave., a 275K SF office tower close to Bryant Park.
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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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Office-tower owners are falling behind on mortgage payments at the fastest rate since the global financial crisis, according to Fitch Ratings. Over $20 billion worth of office loans were non-performing in the first quarter, nearly double the amount in the prior-year period. The U.S. economy is in solid shape and unemployment is low, but office landlords are still struggling to adapt to the new world where work from home is a fact of life. The consequences of this correlation breakdown reverberate across Manhattan, with the Helmsley Building being 70% leased and Worldwide Plaza soaring in vacancy rates. The office vacancy rate is 14% nationwide, and in New York it was 15.3% in the second quarter. Banks heavily exposed to the office sector are facing challenges, as many have set aside reserves for office losses equal to 8% of their total loan exposure. Office values have fallen nearly 40% since 2019, but prices have not stabilized yet, partly due to the suspicion of even cheaper merchandise.
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Hospitality firm Convene has signed a significant deal in Manhattan's Hudson Yards, subleasing 72,000 square feet on the 24th floor of 30 Hudson Yards to serve as an events space for its clients. The firm is also taking 2,770 square feet on the building's ground floor, which will serve as a welcome center and showroom. Warner Bros. Discovery is listed as the tenant on the 24th floor, with office asking rents estimated to range from $135 to $165 per square foot. The Hudson Yards events space will be Convene's largest in the city and can accommodate almost 1,500 guests. The space will be divided into 10 spots, including a grand hall with room for up to 780 guests, and is slated to open next summer. The deal marks Convene's comeback after struggling during the pandemic, with the firm acquiring UK-based firm Etc.venues and adding more Midtown locations to its portfolio. The skyscraper at 30 Hudson Yards is completely leased up, with major tenants including KKR and Wells Fargo.
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Two large tenants are set to leave 101 Park Ave., a 48-story office building in Manhattan, posing a significant challenge for developer and longtime owner Peter Kalikow. The vacancy rate at the 1.3 million square-foot tower is expected to nearly triple after Tiger Management leaves this month and Morgan Stanley departs in December, according to bond-rating firm KBRA. The two tenants account for nearly a quarter of the building's base rental revenue, although Kalikow executives claim it is less than half that. The building is described as one of the highest-quality office buildings south of 42nd Street, with its large boardrooms, sculptures, granite floors, and dark-wood flourishes matching the style and spirit of prestigious towers lining Park Avenue. However, maintaining long-term relationships between landlords and tenants becomes harder due to the abundance of office space available. Tiger Management is vacating 53,000 square feet at 101 Park for $115 per square foot, while Morgan Stanley is moving out of 49,000 at $83 a square foot. The Tiger Foundation remains headquartered at 101 Park, and the tower is currently 5% vacant but is expected to rise to 14% after Tiger and Morgan Stanley leave. New tenants have leased 200,000 square feet since 2022, and the vacancy rate has dropped to 11% in just the past week.
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Abraham Talassazan’s firm also faces foreclosure lawsuit from Soros
Eretz Group has secured a 28-month extension and refinance on $34 million in CMBS debt backed by 252 West 37th Street, preventing foreclosure. The loan fell into special servicing in October. Wells Fargo sued the Eretz Group and its principals in April on behalf of CMBS bond holders, seeking to foreclose on the 1920s office building. The firm is now focusing on leasing out the gut-renovated building, which has a low occupancy rate of 62% as of September. The Eretz Group purchased the building in 2007 for $33.7 million and took out a mortgage for about the same amount. It refinanced in 2014 with a $41 million mortgage from Cantor Commercial Real Estate, which packaged it into a commercial mortgage-backed security. However, the firm is still facing trouble at a Midtown office building, where Soros Fund Management filed a foreclosure lawsuit against the Eretz Group in April.
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