Weekly Market Report - April 29, 2025
- Broker Support
- May 2
- 10 min read
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Slashed valuations, high interest rates to blame
A fickle economy is causing distress in office properties backed by CMBS loans, with around 5% of the 2,000 properties nationwide with 85% occupancy rates experiencing distress. This is not a normal market occurrence, as properties with low vacancy rates and steady rental incomes are not affected. The drop in valuations since the pandemic has led to half of the 100 properties trying to refinance matured loans, with lenders doingledging out less cash. Higher interest rates also play a role, as seen in Metro Loft's office-to-resi conversion at 180 Water Street and 20 Broad Street, which failed to pay off a $265 million CMBS loan at its November 2024 maturity despite being 98 percent occupied five months earlier. Some buildings have accrued years of unpaid interest over multiple workouts and restructurings, such as RFR's 285 Madison, which was recently seized by one of its lenders after landing in special.
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Manhattan's largest office landlord, SL Green, is suing Tennor Holding B.V. for $15M in unpaid rent and compensation for the space it occupies in One Vanderbilt. Tennor has been a tenant in the fully leased office tower since 2022. The global investment holding company signed a full-floor, 25K SF deal in January 2022 and a temporary 7K SF lease on the 54th floor in January 2022. Tennor defaulted on the rent for the temporary space in September 2022, and the two reached a settlement.
Tennor later defaulted on both spaces and hasn't paid rent since August 2023. SL Green terminated Tennor's lease in January 2024 but now owes $13.8M plus $1.7M in additional rent. Space in Manhattan's trophy office buildings is becoming harder to come by, with availability below 12% at the end of the first quarter. One Vanderbilt reached 100% leased in September when it signed a 6K SF lease at $265 per SF. SL Green's Manhattan office portfolio is 92.5% leased, according to its annual report for 2024.
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The 44-story, 1.6-million square foot office tower at 1166 Sixth Ave. has two owners: landlord Edward Minskoff and insurance broker Marsh & McLennan. Fitch Ratings estimates that the market value for floors two through six at 1166 Sixth has fallen 75%, indicating limited demand for offices without attractive views. The lower floors were valued at $205 million in 2017 when bankers originated $130 million in mortgage and mezzanine debt for the building. Minskoff, who owns or manages 4 million square feet of commercial space, didn't return a call.
Problems began last year when D.E. Shaw & Co. and fund-services provider Arcesium moved out of the fourth, five, and sixth floors. The floors Shaw left behind at 1166 Sixth remain vacant, estimated to rent for $75 a square foot, below the average of $84 for comparable space on Sixth Avenue. The office vacancy rate along Sixth Avenue is 17.5%, down from 18.4% a year ago. Fitch said the five lower floors at 1166 Sixth are capable of producing $4 million in annual net cash flow over the long-term, 39% below pre-pandemic levels. Minskoff has proposed a modification for 1166 Sixth's mortgage, which carries a 5.3% interest rate and matures in 2027.
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Korean insurance firms, represented by Daol Asset Management, have taken over RFR Holding's 285 Madison Ave. property at a UCC foreclosure auction. Daol owned $205M of mezzanine debt tied to the building, which fell into maturity default in late 2022. When it matured again in December and RFR defaulted again, Daol brought in management firm Ocean West Capital Partners and initiated foreclosure proceedings less than six weeks later. The mezzanine lender concluded that its strongest course of action was to exercise its foreclosure rights and invest new capital to take control of the property.
RFR's representative said that the landlord elected not to bid on the property due to its write-down of the property value driven by today's capital markets environment. The 25-story Grand Central office tower was appraised at $610M in 2017 and last year, its valuation was slashed in half to $300M. Ocean West said that 285 Madison is the latest in more than $2B of New York City assets it has either acquired or advised upon for Korean institutional investors in the past 12 months.
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In 2019, Brooklyn was aiming to become an office hub for the coolest tenants, with developers building over 6 million SF of new office space in the borough over three years. However, the pandemic-induced remote work led to a slump in the office market. However, this year could mark another turning point, as the office sector just wrapped one of its best quarters since the onset of the pandemic. Brooklyn's market has shifted to being hyperlocal, focusing on tenants whose customers and occupants come from close by. In the first quarter of the year, 570K SF of office space was leased in the borough, quadruple the amount signed in Brooklyn during the prior quarter.
The education sector has led the way, with four of the five largest leases signed by schools. Brooklyn added nearly 25,000 residents, boosting the population by 1% between July 2023 and 2024 alone. However, such use can be costly for landlords, requiring a substantial build-out and often packaged into the rent. Industry City, Sunset Park’s 6M SF campus, signed 333K SF of leases in 2024 and another 70K SF in Q1. Brooklyn has lots of competition with all of the vacant space across the river.
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New York City's office market is experiencing strong fundamentals, with investors worldwide recognizing the health of the market. The market had its strongest leasing quarter since 2019, and it now appears on solid long-term footing. South Korean, Japanese, and Singaporean investors are seeking out NYC office opportunities, with a view that a full-time return to office is inevitable. The consistency of bids from both domestic and international investors is indicative of the strength of NYC real estate.
Investor appetite and tenant demand are strong, and the leasing pipeline for NYC's biggest owner of office space is deeper than it was four weeks ago. However, tariffs are impacting the market, changing underwriting and pausing deals. The danger that tariffs pose to NYC's office market is their potential to spiral out of control and drag the U.S. economy into a recession, which could have a knock-on effect on occupancy, leasing, and rental growth.
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Retailers are hesitant to commit to leases due to the impact of sweeping new tariffs, as President Donald Trump announced the most aggressive tariff regime in nearly a century of U.S. trade policy. The tariffs and broader economic concerns are making would-be tenants hesitant to commit to leases. Retail leasing negotiations have slowed since March, with Trump's announcement of a 10% across-the-board tariff for most countries and a 145% tariff on goods from China.
The National Retail Federation estimates that a universal tariff between 10% and 20%, plus an additional 60% to 100% tariff on China, would result in American consumers losing between $46B and $78B in spending power. Retailers are warning that extra costs will be passed on to customers, and some are pushing ahead as planned or planning pivots. Retail vacancy rose by 20 basis points to 5.5% at the end of the first quarter, but average asking rents increased by 2.3% year-over-year.
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Vornado Realty Trust has taken out a $450 million loan against a debt-free Times Square property, bolstering the developer's bank account by 40%. The move comes amid market turmoil, with investors fearing a slowing economy will cool demand for office space. The Federal Reserve reported modest economic activity in New York over the past month, which could complicate Vornado's plans to lease up PENN 2, a $750 million redevelopment tower. In 2025, Vornado had nearly $1 billion in cash, but that amount was $300 million lower than the prior year due to decreased cash flow due to sagging rental income and rising expenses.
To bolster its coffers, the developer opted to borrow $450 million for five years at a 6.3% interest rate. Collateral was 100,000 square feet of retail space at 1535 Broadway, which included the Marquis Theater, stores, and a six-story billboard. Vornado will pocket $425 million in proceeds after closing costs and other items. The owner of the Marriott Marquis Hotel, Host Hotels & Resorts, recently filed to raise up to $600 million by selling shares. Tourism activity in New York City remains steady, with ticket sales at Broadway theaters being "solid" and hotel rates and occupancy slightly rising over last year.
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SL Green CEO Marc Holliday was awarded $20.7 million in total compensation last year, more than previous paychecks that some shareholders deemed too high. His 2024 pay consisted of $1.25 million in salary and a $2.5 million bonus, with the balance in shares. His pay package was $2 million higher than the prior year. SL Green, New York's biggest commercial landlord, had a strong year in 2024 with occupancy rates rising to 92.5% and a 58% jump in its stock price. The developer sold a piece of 1 Vanderbilt Ave. that valued its tower at $4.7 billion.
However, SL Green shares remained about 20% below pre-pandemic levels, and Holliday's new pay package may not satisfy critics. Over the past three years, his average pay has been 50% higher than Vornado Realty Trust's Steven Roth, even though Vornado's revenue is double that of SL Green. In response to "stockholder feedback," SL Green has eliminated awards for the CEO based on short-term performance and replaced them with longer-term incentives. SL Green also stopped paying for Holliday's car.
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Asset management giant BlackRock has reduced its exposure to the Empire State Building, offloading nearly 2 million shares in the owner of the iconic tower over the past two weeks. BlackRock remains a large shareholder with 15 million shares, or an 8.9% stake in Empire State Realty Trust. The sale of shares was disclosed in a regulatory filing Thursday. Empire State Realty said that these types of positions may fluctuate based on index rebalancing. If BlackRock has concerns with the investment, it may center on the tower's observatory, which is some of New York's most valuable real estate.
Tourists pay a standard admission price of $44 to access the 86th floor, while getting to the 102nd costs $79. Last year the observatory produced $100 million in earnings on $136 million in revenue, for an extraordinary 75% profit margin. The rest of the 3 million square-foot tower is 96% leased to commercial tenants including LinkedIn and Coty. BMO Capital Markets analyst John Kim estimated that the Empire State Building saw a 2.9% decline in first-quarter visitors, with almost two-thirds of visitors coming from overseas. Empire State Realty's stock price has fallen by 10% since the start of the month and has lost 33% of its value since early January.
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Demand for Class A has heightened demand for upper-tier Class B digs
Class B Manhattan offices are becoming scarce and hot, as the demand for premium Class A offices has boosted the demand for upper-tier Class B buildings across Manhattan. This has led to a diminished pool of Class B buildings as conversions occur and some buildings whose financial circumstances don't allow them to transact. The borough's overall office availability was 18 percent on April 1, with the Manhattan market having 600 million square feet of offices in total as of last spring.
Class B leasing totals for last quarter and the third quarter topped 2 million feet, the first time since the start of the pandemic that Class B exceeded 2 million feet two out of three consecutive quarters. The volume of offices available for sublease had eight straight quarters of decline, reaching 3.33 million feet, the lowest since July 2020. CBRE broker Mary Ann Tighe said last year that space is getting scarcer and sweetheart pandemic deals are off the table. In December, WeWork signed a Class B lease for 303,700 square feet at 330 West 34th Street on behalf of Amazon.com, which was described as "the canary" for renewed Class B strength.
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Hotel lobby urges city officials to cut occupancy tax by nearly half
New York City hotel owners are advocating against a city tax to address the decline in tourists following President Donald Trump's trade tariffs. The Hotel Association of New York City has proposed a 3% reduction in the occupancy tax rate, from 5.875 percent. The current rate, set in 2008, generated $238 million in the last quarter. The hotel industry is still struggling due to the pandemic, with 6,000 rooms lost since 2019, half of them in Manhattan. A special development permit enacted in 2021 also hampered hotel growth. Travel from Canada, the biggest source of tourists to the U.S., fell by 12.5% in February and 18% in March due to Trump's tariffs on foreign goods and a threat to turn Canada into a 51st state. International flights into all three New York area airports have fallen. The hotel industry launched a "StayNYC" campaign to highlight the economic value of hospitality and the impact of a "whopping" occupancy rate.
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Insurance increases, special assessments and limited financing options have elevated costs beyond what many can bear
Florida is grappling with a condo crisis due to rising costs due to insurance hikes and special assessments. Condo prices in the state have dipped, especially for older properties needing structural repairs. Lenders are wary, and many condos are blacklisted, complicating financing for buyers. The selloff is particularly concentrated in older properties, with prices for buildings 30 years or older depreciating 22% in the past 24 months. The collapse in the value of older buildings reflects new requirements for making sure they are structurally sound after the partial collapse of a Miami building in 2021. Florida is home to about 20% of all U.S. condominiums, and more than half of them were at least 30 years old as of 2022. Florida's legislature is trying to find a way to bring down costs, with a state Senate bill extending some deadlines and ensuring buildings aren't hit with costs unrelated to their structural integrity.
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