SL Green Realty stock tumbles after reducing dividend
SL Green Realty shares tumbled more than 6% Monday after the company announced it has reduced its dividend by 12.9% to $3.25 per share.The Manhattan office landlord company explained in its press release that it has reduced the dividend to match its current projection of funds available for distribution for 2023. SL Green's ordinary dividend will continue to be paid monthly, with the first monthly dividend of $0.2708 per share payable on January 17, 2023, to stockholders of record at the close of business on December 30.
"We endeavor to provide our shareholders with a meaningful, sustainable ordinary dividend that has a correlation to operating cash flow while furthering our initiative to maintain substantial liquidity and repay debt amid the backdrop of a rising rate environment," said SL Green Chief Executive Matt DiLiberto. At the time of writing, SL Green's share price is down 6.4% at $38 per share. In 2022 the stock is down over 49%.
Tech Sector Now a Key Driver of Sublease Space Increases
Although the tech sector has been the main driver of growth for office landlords, quickly changing dynamics are forcing many tech firms to return space in the form of subleases. It’s telling that New York City has slipped from third to sixth place for sublease availability among the major U.S. tech markets, even as its availability has increased since 2020 began. Even as the tech sector grew during the pandemic, many tech firms attempted to shed office space as they increasingly embraced remote work styles.
“This marked the first-ever decoupling of tech job growth and office demand growth. “More recently, economic volatility, high interest rates and earnings pressures have pushed the tech sector into cost cutting mode, and sublease inventory is again increasing in markets that are traditionally considered tech hubs at a time when the future office demand paradigm is still in flux.”
Silverstein Raising $1.5B Office-To-Residential Conversion Fund
Silverstein Properties is seeking to raise $1.5B to fund office conversions, hoping to acquire washed-up office towers in New York and other major cities and redevelop them into apartment buildings. Silverstein is targeting Manhattan office buildings where debts may be beginning to pile up or those with high vacancy rates. These properties are the sole focus for the developer’s acquisitions team. Silverstein is also looking beyond its home market to cities facing similar obstacles, such as Washington, D.C., Boston and the West Coast. Silverstein has already begun its foray, snagging a 30-story office tower at 55 Broad St. in Manhattan’s Financial District, in May this year. Its partner on the project, Metro Loft, is a leader in conversions in NYC, having built 5M SF of residential property from former commercial buildings, according to its website.
Together, Silverstein and Metro Loft plan to turn 55 Broad into market-rate housing, as Metro Loft has already done with multiple other FiDi buildings. Last year, Silverstein also acquired 116 John St., another former FiDi office-turned-residential property converted by Metro Loft that now features 416 units, according to StreetEasy. Appetite also exists for financing conversions: In late August, the Vanbarton Group scored a $272.5M construction loan from Brookfield Real Estate Financial Partners for its conversion of 160 Water St. Vanbarton plans to turn the 24-story office tower into a 30-story multifamily building. But office conversions are costly and can be difficult to execute, depending on a range of factors from the building’s floor plates to how its water pipes and electricity infrastructure is built into the building. Another obstacle that makes NY office conversions trickier is the state’s multiple dwelling law, which requires bedrooms to feature windows of a certain size that open out into the street.
New York’s ‘zombie’ office towers tier as interest rates rise
The world’s largest office market has of late endured the departure of big-spending Chinese investors, the rise of coronavirus-era remote working and the economic fallout from the Ukraine war. Now there is mounting concern that the dramatic rise in interest rates will be too much for many owners to sustain and that a long-awaited reckoning is drawing near. The industry is rife with talk of partnerships breaking up under duress, office buildings being converted for other uses and speculation about which developers may not make it to the other side. Meanwhile, opportunists are preparing for what they believe will be a bevy of distressed sales at knockdown prices, perhaps in the first quarter of the next year.
Since January, shares of SL Green and Vornado, two publicly traded REITs that are among New York’s biggest office owners, have fallen by half. Fresh signs of strain came this week. Blackstone, the private equity firm, told investors it would restrict redemptions in a $125bn commercial real estate fund. It also emerged that Meta, the parent company of Facebook, would be vacating about 250,000 square feet of space at the new Hudson Yards development to cut costs. It and other tech companies had been among the last sources of expansion in Manhattan’s pandemic-era office market. The small collection of offices such as Hudson Yards — with new construction and the finest amenities and locations — are still in high demand, according to Ruth Colp-Haber, who, as head of Wharton Properties, consults companies on leasing. Please use the sharing tools found via the share button at the top or side of articles.
Prognosticators have been forecasting doom for the office sector since the onset of the pandemic, which has accelerated a trend towards remote working and so decreased demand for space. According to Kastle Systems, the office security company, average weekday occupancy in New York City offices remains below 50 per cent. A particularly dire and oft-cited analysis by professors at Columbia and New York University estimated that the collective value of US office buildings could shrink by some $500bn — more than a quarter — by 2029.
Manhattan Office Leasing Down 50% In Typically Busy November
Tenants signed less than 1.5M SF worth of office leases last month, a 7% drop from October and a 50% drop from November 2021. Direct availability and sublease space both ticked upward as well. This time of year typically sees an increase in activity, as real estate players rush to close deals before the end of the year, but this year is playing out differently. The largest deals of the month were on the smaller end, with coworking provider Jay Suites’ 60K SF location at Arline Hannon-Weinmann’s 159 West 25th St. and PJT Partners’ expansion to 49K SF at 280 Park Ave. The activity in the market has instead been dominated by pullbacks from large companies.
Meta is reportedly returning over 250K SF at 30 and 35 Hudson Yards to Related Cos. Facebook's parent company, which laid off 11,000 workers last month, is declining the option to renew its lease on the two properties when its deal there ends in 2024. Average asking rents in Manhattan were at $75.19 per SF, a slight increase from November last year Availability across the borough is largely unchanged from last year at 17%. Sublet space has been steadily increasing, growing 11.7% from the end of last year and increasing again in November to hit a total of nearly 21M SF. While absorption was at negative 1.36M SF, Wallach said that demand for offices overall has gone up, with year-to-date leasing volume in 2022 nearly 25% higher than at this point in 2021.
The months of October and November saw the lowest levels of activity in Midtown’s office leasing market this year, but availability did tighten in the submarket to hit 15%. In Midtown South, leasing fell 25% between October and November, and more than 894K SF was added to the market with the renovation of Penn 2. Average rents in the neighborhood hit $82.53 per SF. Downtown’s leasing went up from the month before, but was down 44% from a year earlier. Lower Manhattan’s availability has more than doubled since March 2020 to now sit at 22M SF, a record high 20.6% of inventory.
SL Green Wants to Pivot from Offices
Office-using jobs are now at 104% of pre pandemic levels, meaning there are now more roles that need to be done in an office than before Covid hit. Trouble is, only 60% of workers have returned to offices owned by SL Green Realty. It's a challenging time for sales because some commercial real estate investors are heading for the exits. Manhattan’s downtown office market is “exceptionally slow,” Holliday said, with large blocks of space that can’t be leased at reasonable rents. 20 million square feet of obsolete office space could be ripe for conversion.
Holliday described office-to-residential conversions as “one of the most important topics that we will be championing over the coming months and years.” Getting there requires striking an agreement with the Hochul and Adams administrations.