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Weekly Market Report - February 27, 2024

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Cushman & Wakefield, a brokerage firm, reported a net loss for 2023. CEO Michelle MacKay expressed optimism about the possibility of interest rate cuts this year, as reduced rates could help revive capital markets business and reduce interest expenses. The company spent a net $281.1M on interest in 2023, a 46% increase from the $193.1M it paid in 2022. The company's debt is expected to mature next year, with the rest due in 2028. Restructuring and impairment charges for Cushman & Wakefield rose to $38.1M for 2023, up from $8.9M the previous year.


Despite challenges, Cushman posted quarterly earnings per share of 45 cents, above analyst expectations. Other green shoots included a 3% gain in property management revenues and smaller losses tied to the company's investment in WeWork, which filed for bankruptcy in November. Cushman expects only stable to moderate growth in leasing in 2024, supported by lease expirations. The company launched an asset optimization group at the end of 2023 to capitalize on distressed assets.



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Firm among private equity funds “awash in dry powder” with pipeline up to $15B


Private equity firm KKR is forecasting a rise in commercial real estate financing this year among cash-flush investors due to a vacuum in the commercial lending world. The issuance of commercial mortgage-backed securities is expected to increase by nearly a third this year compared to 2023. KKR's head of real estate credit, Matt Salem, predicted private equity funds are "awash in dry powder" after cautiously moving in the last 18 months. The firm's real estate credit pipeline averaged between $10 billion and $12 billion last year but has since jumped to $15 billion. KKR is bringing multiple deals to its equity investment committee each week, and its hesitance to issue loans was felt in the first half of last year. However, some investors are ready to jump at the opportunity to make deals at bargain rates, as commercial real estate valuations dropped an average of 42% last year.



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Jeffrey Wu sells 100K sf commercial building to creditor


Jeffrey Wu, the owner of a mini real estate empire, is selling a critical asset to Madison Realty Capital for $80 million. The Flushing Landmark Realty purchased 41-60 Main Street in Flushing, Queens, for the same price as his Flushing Landmark Realty. The property, which includes a 100,000-square-foot office and retail building, was covered by mezzanine loans taken out by Wu, who also goes by Myint Kyaw. Madison Realty signed off on a $66 million bridge loan in 2014 for Wu to refinance two properties in Flushing, including the Main Street commercial building. Wu missed an opportunity to sell the property twice before, listing it twice for $88 million and $92 million, respectively. Madison Realty is facing the threat of foreclosure on the retail portion of the Williamsburgh Savings Bank Tower in Brooklyn after an alleged default.



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Empire State Realty Trust properties, owner of the Empire State Building, leased approximately 164,000 square feet of commercial space across 19 sites in Q4 2023, closing out the year with over 950,000 square feet leased. The company signed about 135,000 square feet over 14 leases within its Manhattan office portfolio. The occupancy rate for Manhattan offices and commercial spaces overall remains up compared to the fourth quarter of 2022, indicating a positive indicator for the year ahead. The bulk of the company's commercial leasing activity in 2023 came from the firm's Manhattan office portfolio, with 862,000 square feet leased in 2023.


Notable Manhattan office leases include a new 17-year agreement with Greater New York Mutual Insurance Co. and a 10-year, full-floor office lease with Hanover Street Capital. The Empire State Building is just shy of 92% leased. The company has about 190,000 square feet of additional leases in negotiation, most of which are within its Manhattan office portfolio.



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Sternlicht: ‘We’re going to take some losses’ but ‘going to be okay’


Starwood Property Trust (REIT) reported higher loss reserves and an increase in assets taken back by the lender, largely due to the deteriorating office market. CEO Barry Sternlicht acknowledged the strain in the real estate markets and said that he would take some losses. However, Starwood plans to push in where regional banks have pulled back, launching a middle-market lending arm. The company reported a $28 million jump in current expected credit loss reserves, reaching $307 million in the quarter. The REIT's dollar volume of REO assets grew by $101 million to a total of $172 million. The firm also noted planned sales of foreclosed assets that had not panned out, such as a vacant Downtown Los Angeles office property and another office building in Houston.


Starwood CEO Jeffrey Dishner said that the firm would be able to cover its dividend even with no cash flow. The company also categorized a $124 million loan backing an office property outside of Washington, D.C. as non-accruing in the quarter. Sternlicht named regional banks as a "victim" of the Fed's policy, stating that they cannot stay solvent with current interest rates.



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Bidding opens at $18M for units bought for about $113M seven years ago


The Carlyle Group's office condominium units at 866 United Nations Plaza in New York City are set to be auctioned this spring. The opening bid for the 177,000 square feet of offices is $18 million, with TenX handling the auction. The 33 units, acquired in 2017 by Carlyle, are located in a Class A tower at East 49th Street. The remaining space could fetch $113 million if the remaining space sells for the same price. The property has already sold off about 132,000 square feet. The auction is expected to generate more activity due to the market's current state. The units range from 3,400 square feet to 99,000 square feet, with some units having long-standing tenants. The building is home to many foreign government offices and nonprofits, which don't pay property taxes on units they own.



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Thanks to archaic laws, the Big Apple is filled with sidewalk sheds that stay for years


New York City has over 8,300 sidewalk sheds covering 360 miles of the city's sidewalks, according to permit data from the New York City Department of Buildings. The buildup is a result of insufficient oversight by regulators, supply bottlenecks, and financial struggles at low-income buildings. The biggest factor is the arcane local rules requiring sidewalk sheds for pedestrian protection during construction and demolition, facade work, and other exterior maintenance. The rules stem from the death of a Barnard College student killed by a falling piece of masonry in 1979. Critics argue that the facade inspection and safety rules are rigid and out of step with how buildings age.


The city has made limited progress implementing the audit's recommendations, and the Department of Buildings has stepped up its efforts to take building owners to court over longstanding sheds. The scaffolding scourge is worst in Manhattan, where it is almost impossible to walk any distance without encountering one of the borough's roughly 3,800 sidewalk sheds.

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