***
Massive WeWork-Amazon lease at Vornado’s 330 West 34th Street boosts market
The Manhattan leasing market is experiencing a turnaround, with a significant new lease from WeWork on behalf of Amazon. The 304,000-square-foot lease at Vornado's 330 West 34th Street helped push office leasing volume past 30.4 million square feet in November, reaching the 30 million square foot mark for the first time since 2019. This is a critical milestone for the market, as leasing activity was typically in the low 30 million square feet before the pandemic. WeWork is working with Amazon to support its real estate strategy, and the space will feature world-class amenities designed to optimize productivity, encourage collaboration, and offer a seamless, flexible work experience.
Other large leases have also contributed to the month's leasing activity, pushing it more than 25% above the ten-year monthly average. If demand continues at this pace, Manhattan and Midtown South will have the strongest year of leasing volume since 2019. Midtown is on track for its best year since 2018. The availability rate has tightened to 16.7%, the lowest since September 2022, and office-to-residential conversions continue to play a role in availability, particularly in downtown areas.
***
Manhattan's Class B commercial buildings are being a major factor in the decision of midsize firms to move to the city, according to brokers, landlords, and company executives. Legal industry-focused software startups, music talent agencies, and coffee-machine vendors are now noticing that Class B properties are priced right, a major factor in their decision to move to Manhattan. A small but steady stream of midsize firms is packing up and relocating to neighborhoods such as the Garment District, NoMad, and Hudson Square, presenting a silver lining for a subsector often written off as obsolete.
Class B properties in Manhattan are experiencing a turnaround, with some tenants favoring them over Class A buildings. Wellcom's former Dumbo home was bought by Watermark Capital for $67 million, while others believe the zeal for redevelopment may be misplaced. Some companies prefer the more formal corporate presence of Manhattan, while others prefer Brooklyn's startup mode. However, the overall segment is weak, with Class B's availability rate at nearly 20% in the third quarter, and Class A's at 16%.
***
Signs sublease with Macy’s to add 61K sf at Vornado’s Penn 11
Apple has expanded its footprint at the Midtown South office building by 61,000 square feet, signing a sublease with Macy's. The company now occupies the fourth through 14th floors of the 26-story building, which remains Macy's headquarters. The new sublease extends Apple's space through the expiration of Macy's lease in 2035. The building's asking rents are $85 per foot, but subleases typically come at a discount. Apple first subleased 220,000 square feet from Macy's for six years in 2020, with the asking rent in the mid-$60s per square foot. Apple had previously sought a spot in Vornado's renovation of the Farley Building, which was taken over by Facebook. The building, designed by Starrett & Van Vleck and completed in 1923, has been renovated to achieve LEED Gold and has been a popular spot for food and entertainment. Glen Weiss and Jared Silverman of Vornado.
***
T.J. Maxx, PetSmart and others adapt to competition from e-commerce, as retail landlords point to shoppers’ love of the ‘treasure hunt’
Online shopping has reached a record high, with Americans buying $300 billion in retail goods online last quarter, accounting for 16.2% of all retail sales. Retail landlords now say the sector is stronger and more insulated from online competitors than even a few years ago. A sharp slowdown in retail construction is driving vacancy to near-record lows, and retailers are figuring out how to adapt to e-commerce's continued growth. Successful retailers offer experiences that customers can't find online, such as indoor rock climbing at Dick's House of Sport and eyebrow waxing at Sephora. Many retailers have learned from trial and error that integrating online and in-person shopping experiences is crucial to survival. E-commerce's impact on retail is undeniable, with Amazon.com on track to overtake Walmart as the country's biggest retailer in terms of revenue.
***
Office-to-residential conversions are gaining traction, helping revitalize depressed business districts
Developer efforts to convert empty office towers into residential buildings have largely gone nowhere, but the prospect of transforming unused office space into much-needed housing seems logical. With office vacancy reaching record levels, sellers are willing to take what they can, causing values to plunge for nothing-special buildings in second-rate locations. In the first six months of this year, half of the $1.12 billion in Manhattan office-building purchases were by developers planning conversion projects. Conversions are popping up in New York, Chicago, Washington, D.C., Cincinnati, Phoenix, Houston, and Dallas. City planners believe that conversions will play an important part in revitalizing depressed business districts, which have been hollowed out by weak return-to-office rates in many places. Developers are starting to find ways around longstanding obstacles in larger buildings, such as installing light wells in Manhattan office-conversion projects and implementing new subsidies, tax breaks, and other incentives to boost conversions.
***
Ropes & Gray, a law firm, is moving to RXR's 1285 Sixth Ave., expanding to 430,000 square feet. The firm's current lease for 300,000 square feet at 1211 Sixth Ave. expires in 2027, and it will move to 1285 Sixth Ave. in 2028 on a 20-year deal. The total footprint at 1285 Sixth Ave. could increase to over 535,000 square feet when including expansion opportunities. Bill Elder represented RXR in-house. Ropes & Gray has nearly doubled in size over the past decade and is taking over a sizable amount of fellow law firm Paul, Weiss' footprint. Paul, Weiss had inked a 550,000-square-foot lease at 1285 Sixth Ave. in 2009 but is now moving to 765,000 square feet at Fisher Bros.' 1345 Sixth Ave. on a 20-year deal. Other major tenants at 1285 Sixth Ave. include UBS and Omnicon Group. The Midtown building at 1211 Sixth Ave. is best-known as the longtime home of Fox and News Corp., which inked a 20-year extension for its roughly 1.2 million square feet of space in early 2023.
***
JPMorgan has warned that a second Trump administration may not be beneficial for the real estate sector, as a stronger economy could increase demand for commercial and residential space. The rising interest rates in the real estate sector, which have been steadily rising since the Federal Reserve cut short-term rates in mid-September, are a result of the market's belief that Trump's administration policies around tariffs and immigration will revive inflation. Tariffs could lead to higher costs for products like steel, deportations could drive out construction workers, and there is the possibility that big trading partners like Mexico or Canada will raise tariffs on U.S. goods.
The cost of material and supply chains is also a concern for starting new developments. Some major players see "green shoots" emerging in New York real estate, but higher risks are weighing on the sector. The MSCI U.S. REIT Index is flat since election day, while the S&P 500 added 5%. Vornado Realty Trust has fallen 10% in the last two weeks due to higher labor and material costs, which could drive up the price of developing a tower to house Citadel's new global headquarters starting in 2032. White House policy decisions could sway Vornado's favor, as the developer is a business partner of Donald Trump's.
***
The Garment District and Murray Hill are filled with older buildings with occupancy rates as low as 12%, making refinancing a risky endeavor. KeyBank would only provide $37.5 million in loans for the two properties that Bengualid acquired 18 years ago for $77 million. Banks are hesitant to lend to office buildings, especially older ones, as leasing activity is improving but demand remains to materially recover. However, signs suggest that the revival is starting to touch the long-ailing market for Class B Manhattan office space, thanks to tenants who like Midtown's public transit options and are fed up with Dumbo's steep rents.
Bengualid, a trial lawyer and real estate investor, has bet $19 million that recovery will continue. He recently invested $13 million in his two properties, including new elevators and lobbies, and put up a $6 million down payment for his new mortgage. The average office-vacancy rate is 25% for Class B space in Midtown South, but it's just 15% at his two buildings. Tenants include Therapists of New York, Empire Safe Co., and an "immersive event space" called Shift Midtown. Net operating income at the properties rose by 10% last year, to $5 million.
***
RFR Holding, a troubled building operator, has been ordered to hand over the Chrysler Building in Manhattan after falling behind on rent. However, the building landlord, Cooper Union, is now asking a judge to order RFR to "quit and surrender" the building and pay off the unpaid rent, interest, and other charges that have accumulated since its lease was terminated. Cooper Union owns the land below the Chrysler Building and terminated RFR's lease in September after the developer defaulted on $21 million worth of obligations. The judge did not evict RFR from the building, but Cooper Union is now asking her to order RFR to "quit and surrender" the building and pay off the unpaid rent, interest, and other charges. The Chrysler Building, a defining feature of Manhattan's skyline, is grappling with elevated vacancy rates and is viewed as in need of a refresh. Cooper Union has hired Cushman & Wakefield to run the building instead of RFR, and staffers have been cooperative about sharing business records and other information.
***
SL Green Realty Corp. is set to purchase the office portion of Manhattan's 500 Park Ave., the former headquarters of PepsiCo, from Morgan Stanley for around $130 million. The 11-story office condo, located at the corner of 59th Street, includes offices and retail space at the base and is connected to a residential condo tower. The property is considered a rare opportunity to own an iconic asset that hasn't traded in over 40 years. Park Avenue is the best-performing office market in New York City, with historic low vacancy, and 500 Park Ave. will continue to benefit from opportunities in this fortress corridor that attracts top tier tenants and triple-digit rents. Investors have been bullish on New York offices that are well-located, especially on Park Avenue. JPMorgan Chase & Co. recently agreed to buy 250 Park Ave., a building near the bank's upcoming headquarters, for over $300 million. The office portion of 500 Park Ave. is 94.5% leased to tenants including SLR Capital Partners and Vera Wang.
***
The IBM Building at 590 Madison Ave. in New York City is known for its 8,200 square-foot park-like atrium with a 65-foot high glass ceiling, offering a tree-filled conservatory and public living room. However, the building's tenants have been reducing its footprint, with IBM transferring staff to a new office two miles south. Morgan Stanley and law firm Crowell & Moring have also moved out of the building. As of June, the 42-story, 1 million square-foot Class A tower was 77% leased, with bond-rating firm KBRA rating its $650 million mortgage "underperform." The building matches the area's office vacancy rate of about 23%, indicating it isn't significantly different from nearby office towers.
The State Teachers Retirement System of Ohio is investing in amenities for tenants and guests, with new features to be unveiled in spring. 590 Madison is one of several Midtown office towers that provide privately owned public space (POPS), including the neighboring Trump Tower and Sony Building. These spaces exist thanks to a 1961 program that allowed developers to build taller buildings with publicly accessible plazas or arcades. However, the quality of public space has not been as impressive as expected. In September, luxury retailer LVMH agreed to lease about 100,000 square feet of office space at 590 Madison, which was previously occupied by IBM.
***
WeWork's lease with Amazon contributed to a strong November for Manhattan's office market, despite overall activity falling from its October peak. The company signed a 304,000-square-foot lease at Vornado's 330 W. 34th St., which will be used by its client Amazon. The space will be occupied by WeWork, which has made more news for hurting the city's office market than helping it in recent years. The company's bankruptcy protection in late 2023 led to tore up several of its leases throughout the city. In November, companies leased about 3.4 million square feet of office space in Manhattan, down 12.4% from October but up significantly year over year. Demand in 2024 remains on track to be the strongest since 2019, with just one month to go. The borough's availability rate tightened slightly to 16.7%, while the average asking rent stayed relatively flat at $74.15 per square foot.
***
Joe Sitt’s firm put the property on the market this summer for $150M
Joe Sitt has secured a buyer for his Amazon-leased warehouse in Brooklyn, with Terreno Realty set to sell it for around $157 million. The 312,000-square-foot distribution center, which was acquired in 2005 for $40 million, was initially planned as an office complex but was later built as the office market weakened. The deal was brokered by Adam Spies and Adam Doneger of Newmark. The property was listed for $150 million this summer. The buyer can assume a $73 million mortgage on the property, which has a 3.85 percent interest rate through 2028. Terreno Realty also acquired a portfolio of industrial properties in New York and New Jersey from Blackstone for $246 million earlier this year. Thor, known for retail properties in Manhattan, is now focusing on industrial real estate.
***
Action by previous owner lead to one of largest settlements of its kind in NYC
Blackstone has agreed to pay nearly $15 million to resolve claims of overcharging rents at Parker Towers in Forest Hills, New York. Some tenants will receive more than $100,000 in the settlement. The litigation commenced prior to Blackstone's ownership and Blackstone is pleased to have resolved it. Residents filed a class-action lawsuit against Jack Parker Corporation in 2018, which was later acquired for $500 million. Jack Parker received tax breaks through the city's J-51 program to renovate apartments, which requires units to remain rent-stabilized. Aaron Carr's Housing Rights Initiative investigated and found that rent increases exceeded the limits allowed by the Rent Guidelines Board.
Blackstone tried to settle shortly after its acquisition of the complex, but failed to do so, leading to protracted litigation. In 2019, it agreed to pay $1 million to current tenants who were allegedly overcharged. The latest settlement involves both past and present tenants and was approved by a judge in September. Blackstone acknowledged past overcharges but did not admit wrongdoing in the settlement. This is not the first time Blackstone has been involved in a controversy surrounding rent-stabilization in New York.
***
Blackstone makes $200M Soho play, tenants become landlords and occupancy hits a record
Blackstone, an investment group, is buying a Soho retail portfolio for $200 million from Maryland-based ASB Real Estate Investments, marking the largest investor-led Manhattan retail purchase in three years. The move reflects the positive outlook for retail landlords after a decade-long storm. Rents and occupancy rates have increased, with Soho being a bright spot for the sector. In the third quarter, average asking rents in Manhattan reached $716 per square foot, up 8% YoY. Rent growth in Soho's Spring Street corridor surged 43% YoY to $828 per square foot, while Broadway retail saw a 35% YoY increase to $679 per square foot.
Availability for retail spaces in Soho decreased by 55% compared to the same period last year, partly due to leases signed by New Balance, Princess Polly, and Urban Revivo. Legacy brands like Prada have also sought to become their own landlords, with Prada dropping $835 million on its Fifth Avenue flagship and buying a third Fifth Avenue address for $12.6 million in April. LVMH, owned by billionaire Bernard Arnault, is also rumored to be property shopping, with the firm exploring a purchase of 745 Fifth Avenue, the current home of Bergdorf Goodman's men's store.
***
And why it matters for the industry
Columbia University's Master of Science in Real Estate Development (MSRED) program, led by Patrice Derrington, has been removed from its head by GSAPP Dean Andres Jaque after nine years. Derrington, a licensed architect with a Harvard MBA and a Ph.D. in architecture and civil engineering, inherited the curriculum and finessed it to include finance, technology, and environmental sustainability. The program is considered the top of its kind in the industry. Students, alumni, and adjuncts blame the departure on an epidemic of woke-ism at college campuses.
Patrice Derrington, a rule-follower and teacher at Columbia University's MSRED program, has been criticized for her abrasive behavior and lack of respect for students. Derrington's goal was to establish best practices for an industry without many rules, where dealmaking is the language of dealmaking. Private equity firms like Blackstone, Brookfield, and KKR are taking a large share of New York real estate, seeking to recruit polite, trained college graduates. MSRED aims to provide students with a comprehensive understanding of finance, architecture, public policy, and construction. However, some students feel she has clashed with students and faculty.
***
Opaque ownership attracting fashion and arts tenants with short-term deals
The ownership of 175 Water Street is attempting to attract office tenants on discounted, short-term deals to attract higher-paying deals in the future. The property, also known as the WSA (Water Streets Associates) building, is connected to plastics billionaire Ken Dart. Gabriella Khalil, founder of the Palm Heights hotel on Grand Cayman island, is in charge of furnishing the building, which is designed to include production facilities, art galleries, restaurants, bars, and a four-level department store. FACT (fashion, arts, creative, and technology) tenants are being specifically targeted.
Many tenants are signing discounted two-year leases, with third-year options seeing rents double compared to the downtown average of $57.16 per square foot. The 31-story building is also buzzing with high-profile events, attracting celebrities like Emily Ratajkowski, Kendall Jenner, Bad Bunny, and Tim Cook. The financial situation of the property remains to be seen, with the ongoing renovation projected to cost $150 million and a $165 million mortgage taken out by the owner. However, the property's back pocket includes a $41.3 million tax incentive obtained through the M-CORE program and $39.8 million in additional tax breaks.
Comments