The Chetrit Group is finally severing ties with 850 Third Avenue and has offloaded the building to its lender, two years after struggling to keep the building out of foreclosure. Chetrit sold the building to HPS Investment Partners earlier this month for just under $266 million, a far cry from the $422 million it paid for the 617,000-square-foot Midtown East office building in early 2019. The sale follows Chetrit refinancing the property with a $342 million loan from HPS in October 2021, according to property records. A year after acquiring the building, Chetrit lost its top tenant, Discovery Inc., after a rent dispute. The property ended 2020 with only a 57 percent occupancy rate, a huge drop from the 91 percent rate it had in 2019.
By June 2021, the $177.2 million commercial mortgage-backed securities loan that was still owed was near default and on its way to special servicing. Chetrit saved the property from hitting a UCC foreclosure auction after securing the financing from HPS. The 21-story property between East 51st and East 52nd streets was previously owned by MHP Real Estate Services in partnership with ATCO Properties & Management and Chinese conglomerate HNA Group. Tenants in the building include Hall Capital Partners, which signed for 27,000 square feet near the top of the building in 2018 with a lease that expires in 2031.
The Federal Deposit Insurance Corp. plans to hire real estate services giant Newmark to sell about $60B in loans the failed Signature Bank had on its books. More than half of the total is commercial real estate loans, and such an influx of assets for sale will probably have a ripple effect on loan valuations not only in New York but nationwide as buyers look for deals. Specifically, a sale of this magnitude will probably help lower prices for commercial real estate loans, the WSJ reports. Even as downward pressure has come to bear on commercial loans, especially those associated with office properties, banks have been slow to mark down their valuations. Even multifamily-associated loans might feel the pinch, as buyers look for discounts among the Signature holdings, but also as rents decline nationwide.
Rents fell month-over-month 0.25% from January to February, marking the fifth monthly decline in the last six months. In greater New York, the slide has been even more pronounced, with rents down 2.2% from January to February. The Signature loans will probably be structured into pools for sale, but the size of the loan pools isn't clear. Not long after Signature failed earlier this month due to a run on deposits, the FDIC found a buyer, New York Community Bancorp subsidiary Flagstar Bank, for all of its deposits, but not its commercial real estate loan portfolio. New York-based Signature's loans are mostly concentrated in New York-area multifamily and office assets, whose values have generally fallen since the onset of the pandemic and the enactment of restrictive rent regulations in 2019.
Interesting and somewhat conflicting data is being shared about the volatile New York City office market, especially regarding Class A or trophy assets. The VTS Office Demand Index (VODI) for February showed that these higher-quality buildings had accounted for a growing share of tours while the amount of leased Class A office space in central business districts fell in Q4 for the first time since 2021. Nearly 19% of all high-end office space in Manhattan was available for lease in Q4 – a rate that was only slightly higher than the availability rate at Class B and Class C buildings. In early 2019, the Class A availability rate was 11.5%. To be sure, other statistics highlight the pull these higher-end buildings continue to have on office users.
Trophy properties, while only representing the top 10% of the Manhattan office market, accounted for 29.6% of leasing activity in Q1 2023. Top-tier products continue to receive an outsized share of demand. The continued demand for trophy assets has brought the availability rate for Trophy properties in Manhattan to 17.7% — 200 basis points lower than overall Manhattan. Although, much like overall Manhattan, the trophy availability rate has ballooned 390 basis points since the onset of the pandemic. But with demand concentrating in the high-end environment in recent quarters, the economic shocks of the past few weeks exacerbated an already softened market and more acutely impacted the Class A leasing environment.
In Q1 2023 to date, Orcutt said Class A leasing activity measured just shy of 2.5 million square feet, a 55% reduction from the prior quarter. Class B&C leasing, although still lagging behind the high-end market, captured 2.25 million square feet QTD, a marginal 2.1% decline from the same period. In Q4 2022, Class A leasing totaled 5.5 million square feet, lagging the 3-year (2017-2019) pre-pandemic quarterly average of 7.2 million square feet by 23.2%. Class B&C leasing totaled 2.3 million square feet, 37.9% below the pre-pandemic quarterly average of 3.7 million square feet.
In 2022, 6.9 million square feet of new Class A space was delivered, adding to an already abundant supply. February featured the highest percentage rate of Trophy and A office space tours in the market (81.6 percent) – up from 76 percent a year ago and the highest percentage over time since October.
The completed renovation of a prominent Fifth Avenue property has sounded a familiar refrain to many landlords: too much empty office space. Manhattan closed out the first quarter with a 16.1 percent office vacancy rate. The brokerage, which tracks 470 million square feet, found a mere 4.6 million square feet of office space was leased in the first quarter. Average asking rents also declined across office qualities, including trophy offices, Class A offices and Class B offices. Manhattan’s office vacancy rate was touted as a record high, but the report adds to a consistently dim picture, following higher vacancy rates.
The recent data highlights space that debuted on the market and kept the vacancy rate high in the first quarter, including the completion of Brookfield Properties’ renovation of 660 Fifth Avenue. The $400 million improvement project brought 1.5 million square feet online. Some of that space is already being leased. In August, asset manager 400 Capital Management signed a lease for 25,000 square feet and is expected to move in next year. Prior to that, Australian financial services company Macquarie Group became the revamped building’s first tenant, signing a lease for 220,000 square feet.