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Weekly Market Report - February 20, 2024

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Google has opened a new office building in Hudson Square, New York, showcasing cutting-edge, hybrid-work technology and native plants. The 12-story building, called St. John's Terminal, is part of a larger site purchased in 2022 and redeveloped over the past few years. The building is large, at 1.3 million square feet, and allocates more than 400 square feet of space for each of its 3,000 workers. The average space-to-worker ratio for years has been a lean 150 square feet. Google's recent corporate strategy seems to frown on large, new office buildings, with the company spending $1.8 billion on "exit charges" in 2023. The company's "Project Starline" screen technology allows employees to work from home two days a week. The development also includes amenity spaces and common areas, such as a ground-floor coffee bar, a store selling Google merchandise, and a central staircase. Google's real estate strategy has been consistent, with the company leasing parts of buildings to keep rent increases at bay.



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Outdoor apparel company taking nearly 13K sf at 600 Fifth Avenue


Arc'teryx, a Canadian outdoor apparel and equipment company, has signed a lease for nearly 13,000 square feet at 600 Fifth Avenue in Midtown Manhattan, filling the space occupied by Aritzia, which has yet to relocate its flagship store. Aritzia signed a deal in 2022 to relocate its flagship location to 608 Fifth Avenue, planning to expand from 13,000 square feet to 33,000 square feet. Alo Yoga also opened a flagship store at 600 Fifth Avenue in 2022, signing a lease for 9,400 square feet to replace Ann Taylor. The Fifth Avenue retail corridor, which experienced struggles during the pandemic, has since been bolstered by luxury shoppers, with rents on the strip topped $2,000 per square foot and surpassed $2,5000 per square foot last year. Luxury retail conglomerates have also made significant deals on Fifth Avenue, such as Kering, Prada, and LVMH, who recently bought the retail section of 715-717 Fifth Avenue for $963 million.



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Deutsche Bank plans to cut 3,500 jobs after a 30% drop in fourth-quarter profit, including heavy losses in its US real estate holdings. The layoffs come after hiring 300 front-office staffers in the three-month period ended Dec. 31, though the headcount reduction will primarily impact back-office roles. Deutsche Bank's CEO Christian Sewing said cost discipline remains a top priority, and the bank would take more cost-saving measures if needed. The bank's net profits dropped 30% from the year-ago period, but the $1.4 billion generated easily beat analysts' expectations.


Deutsche Bank's US-based portfolio took a $133 million hit, marking a more than 350% increase from the roughly $28.2 million it allotted for losses regarding its portfolio in 2022's fourth quarter. Deutsche Bank faces debts on its real estate, with assets like Blackstone defaulting on a Manhattan office tower and the building potentially eligible for an office-to-residential conversion.


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Developer Vornado Realty Trust is considering building an interim-use recreational space on the site of the Hotel Pennsylvania, which was demolished last year. The company had initially planned to build a 56-story, 2.7 million-square-foot office tower on the site, but the post-COVID age of hybrid work has led to slow recovery in demand for commercial office space. The company has released renderings that suggest turning the site into an 80,000-square-foot pavilion, which could be used for temporary tennis courts, basketball courts, Fashion Week tents, and a digital billboard. The company is mulling "a number of potential interim options" for the site. The state's approval for these alternatives is subject to approval. The commercial real estate market is facing a reckoning, with demand for space in the Big Apple rising nearly 40% in 2023.



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Pakistan's government has signed an agreement to market the Roosevelt Hotel in New York City, a property that will be replaced by a multi-use mega-tower. The hotel's owner, the Pakistani government, has hired JLL to evaluate the property's potential as a mixed-use project combining retail, offices, a new hotel, condo apartments, and event space in a single building. The hotel stands between Madison and Vanderbilt avenues and between East 45th and East 46th streets. The hotel could have four separate entrances for various uses, and JLL's marketing team includes New York senior managing director Andrew Scandalios and managing director Sheheryar Hafeez. However, there is no rush to put out a formal request for proposals. The city leased the Roosevelt from Pakistan last June for $220 million for three years to serve as a migrant shelter. The market is poised for a turnaround, and the sale price is uncertain due to the rising elevator prices.



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Banking has gone digital, but JPMorgan is building bricks-and-mortar branches

 

JPMorgan Chase plans to build 500 new branches in the next three years, confirming an earlier report in The Wall Street Journal. The multibillion-dollar investment will fill out cities it has recently entered, such as Boston, Philadelphia, and Charlotte, N.C. JPMorgan has more than $2 trillion in deposits, nearly double what it had a decade ago. Executives say the payout has exceeded expectations, and they have a target of gathering 20% of the entire country's deposits, up from 12% today. Both JPMorgan and Bank of America are also shutting down storefronts, especially older locations, and combining those they deem too close to each other.


Bank of America and JPMorgan are expanding their branches to attract wealthy clients. Bank of America focuses on areas with high homeownership rates and income growth, while JPMorgan focuses on wealth management and direct deposits. Both banks aim to put 70% of the US population within a 10-minute drive of a branch, while Bank of America aims for 80%. Both banks are learning new ways to capture customers at various income levels.



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Hong Kong’s superluxury homes have lost more than a quarter of their value. Prices haven’t hit the bottom yet.


China's economic slowdown is causing a significant decline in Hong Kong's luxury property market, with the most expensive homes being sold at steep discounts. Chinese property tycoons are forced sellers due to the collapse of their business empires, and bank lenders are seizing properties after luxury homeowners miss loan payments. The average selling price of superluxury homes has fallen by over a quarter since mid-2022, and it is expected to fall further this year as sellers accept reduced prices to cash out quickly. The real-estate slowdown in China is particularly painful, as the country's big-spending property magnates were behind some of Hong Kong's biggest luxury-property deals in recent years.


Hong Kong's property market has also been squeezed by rising interest rates in the U.S., with the Hong Kong dollar pegged to the U.S. dollar and the city's de facto central bank matching Federal Reserve interest-rate increases. The luxury homes up for grabs in Hong Kong include three mansions linked to collapsed real-estate company China Evergrande, which have been seized by creditors. The new breed of luxury-home buyers in Hong Kong is cash-rich and less likely to load up on debt.



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The $20 trillion US commercial real estate market is facing a shakeout due to uncertainty about property value and the lack of interest rates. As deals pick up, concerns about losses are growing, potentially impacting the global financial system. The Federal Reserve's end of interest-rate hikes is providing clarity to investors on borrowing costs, with over $1 trillion in commercial real estate loans set to mature by the end of next year. As more transactions increase transparency, investors will need to recapitalize loans to reflect lower values. Lenders have been using the "extend-and-pretend" strategy to prolong loan terms during times of turmoil, ignoring short-term valuations. This strategy worked well during the pandemic, but has been exacerbated by inflation and interest rate hikes, leading to a plummeting paper value of buildings. The office sector has not recovered from record vacancies, particularly in the Americas, where return-to-office metrics are lower than in Europe and Asia. As more loans near maturity dates, lenders worldwide will have to stockpile more reserves to deal with possible losses.



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US banks with portfolios of commercial real estate loans are facing greater scrutiny by federal regulators, indicating they may face pressure from authorities to bolster reserves. The Federal Reserve, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency have indicated they will focus on banks whose portfolios of commercial real estate loans are more than triple their capital. Firms whose loans crossed these thresholds include Valley National Bancorp, WaFd, and Axos Financial. Shares of these banks have declined since late January as investors become wary of commercial-property exposures.


Bank mergers can significantly impact growth rates in Fed filings, but public guidance regulators issued last year doesn't specify how they may view this math. Using pro-forma figures generally lowers growth rates below 50%, but regulators focus on rapidly expanding commercial-property portfolios to give credit to management teams with experience dealing with large piles of loans. New York Community Bancorp is the only U.S. lender with more than $100 billion of total assets with commercial real estate loans amounting to more than 300% of capital. problem.”



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The owner of an office building in New York City is in discussions with the city government to sign a three-year lease to convert it into a migrant shelter. The building, which was abandoned by WeWork last year, was previously leased to Walter & Samuels, who defaulted on a $77M CMBS loan in 2018. The building also has approximately 8K SF of retail space and sits below eight stories of residential condominiums. The building's value has decreased by 66% since its initial appraisal in 2018, and it is currently 3% occupied as of May 2023.


WeWork has leased space at five NYC buildings owned by Walter & Samuels, including 315 W. 36th St., 130 Madison Ave., and 419 Park Ave. S. The city is increasingly looking to convert vacant office buildings into shelters, with plans to open a 1,000-bed shelter at the warehouse-turned-office building at 4711 Austell Place in Long Island City. More than 100,000 migrants have entered the city since spring 2022. The special servicer Midland Loan Servicer has been pursuing foreclosure and the appointment of a receiver to take over the building from Walter & Samuels since September.

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