The bank shut down a discussion on an internal website about a five-day return to office policy after dozens of employees criticized the move
JPMorgan Chase has announced a return-to-office policy, forcing all of its 300,000 employees to work full time from the office starting in March. The move is primarily impacting back-office roles, such as call-center workers who had been able to work remotely two days a week. Many employees have criticized the move and suggested that affected employees should unionize to fight for a hybrid-work schedule. The bank posted the policy change on an internal company website, where employees can post comments that include their first and last names. Many employees shared concerns such as increased commuting costs, child-care challenges, and the impact on work-life balance.
One person suggested that they should consider unionizing to fight for a hybrid-work schedule. JPMorgan Chase executives said that affected employees would receive a 30-day notice before they are expected to return to the office full time. They also said there will be a limited number of teams that can work remotely or on a hybrid basis if their "work can be easily and clearly measured." The bank believes that now is the right time to solidify its full-time in-office approach and that it is the best way to run the company. Last year, JPMorgan CEO Jamie Dimon said that employees should be back in the office five days a week, but he said, "There are some jobs where taking a day or two at home is fine." Other companies, including Amazon.com, are calling employees back to the office five days a week after years of more flexible policies following the pandemic.
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Investor eyes conversion of 340K-sf office to residential
David Werner has agreed to buy a 340,000-square-foot office building on Third Avenue from the Durst Organization for over $100 million. The property, which stands at the corner of 42nd Street and Third Avenue, was put up for sale in the fall as a potential office-to-residential conversion. Werner is currently working on the city's largest conversion project at the former Pfizer headquarters in Midtown. However, 675 Third Avenue is about two-thirds occupied by tenants with "sticky" leases, making it difficult to clear the way for a conversion. Werner has had talks with Nathan Berman at Metro Loft Management, his partner on the Pfizer project. Office-to-residential conversions are growing due to the Adams administration's City of Yes legislation, which expanded the crop of buildings that could be converted from those constructed before 1961 to ones built before 1991. Berman is also teaming up with Israeli billionaire Idan Ofer's Quantum Pacific to convert the office building at 767 Third Avenue.
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RXR and TF Cornerstone are seeking over $4.8B in federal loans to build 175 Park Ave., their proposed supertall in Midtown Manhattan. They aim to tap two transportation-related federal lending programs through the Biden administration’s 2021 Infrastructure Investment and Jobs Act. The project would replace the Hyatt Grand Central New York hotel with a 1,575-foot-tall office and hotel tower, which would be North America's tallest by roof height and dwarf NYC landmarks like the Empire State Building. At an estimated $6.5B, it would also be the most expensive tower ever built in NYC.
The project is eligible for the Transportation Infrastructure Finance and Innovation Act and Railroad Rehabilitation and Improvement Financing program due to its proximity to Grand Central Terminal and plans to spend around $550M on transit improvements. The U.S. Department of Transportation programs can provide low-cost financing for private developments within a half-mile of commuter and intercity rail stations, but RRIF and TIFIA are largely untapped, with around $30B in unused funds in RRIF alone. Scott Rechler, CEO and chair of RXR, believes Trump will be supportive of the project, but questions remain over whether the incoming administration would approve the loan. Rechler is a prominent donor to Democratic political candidates, including Joe Biden's 2020 presidential campaign against Trump.
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The Empire State Building observatory in New York City has seen a 10% increase in its market value over the past year, according to data from the city Department of Finance. This increase is part of a broader recovery in Manhattan office buildings, which may help alleviate fears of a "doom loop" that could financially damage the city. Average market values for office properties rose by 2.7% last year, and assessed values rose by 2%, according to tentative data released by the Finance Department. Property taxes are the city's biggest source of revenue, and commercial buildings account for 40% of that. However, not all office towers are experiencing the same good times.
The Chrysler Building's estimated market value fell by 5% last year due to elevated vacancies and litigation between landlord Cooper Union and tower operator RFR Holding. CBS recently moved out of its longtime home at 51 W. 52nd St., and the building, known as Black Rock, saw a 3% decline in its market and assessed value. The MetLife Building's value rose by 5% after a new tenant filled much of the tower's vacant space. Valuations for tax purposes are reached using a complex formula based on a property's net operating income and tend to adjust slowly, often no more than a percentage point per year. This system protects New York from the "doom loop" scenario where falling property tax revenues destroy the city's quality of life and drive out residents.
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Office-landlord misery in the office sector has increased, with 15% of commercial mortgages tracked by KBRA not paid off at maturity last year, a steep increase from 2023's 6%. About 40% of office loans in the pool were not paid off, twice the rate of 2023. Moreover, fewer maturing mortgages were granted extensions, which lenders prefer to handle the problem when feasible. The data shows that stress is quietly building in the office sector, particularly in the office sector, as property owners face the daunting task of refinancing loans at higher rates while cash flows and rent rolls sag.
Borrowers who can't refinance or restructure their defaulted loans face losing their properties via foreclosure. This state of affairs could linger over the sector for years, as between now and 2029 $3 trillion worth of commercial mortgages come due. Lower interest would give borrowers and lenders more breathing room, but the odds of that took at least a short-term hit after the government reported unexpectedly strong monthly employment data. The market is starting to believe the Federal Reserve won't cut again any time soon, which would be particularly bad news for commercial landlords. Mortgage rates are tethered to the 10-year bond, whose yield rose Friday to its highest in more than a year, at 4.8%.
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Developers are planning new office projects to meet the demand for high-quality workspace
The US office industry is facing a shortage of top-shelf workspace in some business districts, with office vacancy levels near record levels in many cities. This glut of unwanted and aging workspace is keeping rents and depressing office values. Decades of overbuilding made the U.S. office market vulnerable during the pandemic and remote work flourished. Large tenants in technology, finance, transportation, and entertainment companies are telling their employees they need to be in the office more often, in some cases five days a week. Landlords are increasingly finding slim pickings, especially for hot spots like New York City's Park Avenue, Miami's Brickell district, and Century City in Los Angeles. However, even some tenants in cities hardest hit by the glut of space, such as Washington, D.C., and Chicago, are shocked by the few choices on the top shelf.
The financial outlook for the business remains grim, with the national office-vacancy rate for primary markets ending 2024 at a record 20.4%. The delinquency rate of debt backed by office buildings converted into securities hit 11.01%, the highest since data firm Trepp began tracking it in 2000. Some once-highflying markets continue to struggle, with BXP keeping mothballed a Silicon Valley office development that it halted during the pandemic and sites in San Francisco that it is moving toward converting and expects the U.S. vacancy rate of prime office space to return to the prepandemic level of 8.2% within two years.
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Kohl's and Macy's are set to close nearly a hundred stores combined in the coming months, with Kohl's closing 27 stores across the country by the end of April and Macy's announcing the locations of 66 stores it plans to shutter during the first quarter. The closures are part of the company's long-term strategy to return to profitability by focusing on its best-performing stores and online sales. Last year, Kohl's planned to cut its footprint by around 150 stores by 2026, leaving it with a total of 350 locations nationwide. Macy's owns many of its stores and has sold off some of its prime real estate as it has shuttered locations. It projected that it would generate around $275M of revenue from real estate sales in 2024, up from previous expectations of $150M.
Both department store companies have struggled in recent years with slumping sales and battles with activist investors over the direction of the companies. Kohl's was pressured by activist hedge fund Vision One Management Partners last February to sell itself, while Macy's is facing fire from Barington Capital and Thor Equities to reconsider and maximize the value of its real estate. California is bearing the brunt of Kohl's closures, with 10 locations listed in the release. The closures include its San Bernardino e-commerce fulfillment center, which the department store chain plans to shutter in May when its lease runs out. Kohl's CEO Tom Kingsbury said that "we always take these decisions very seriously" and that "it is important that we also take difficult but necessary actions to support the health and future of our business for our customers and our teams."
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A Herald Square tower, 1293 Broadway, has refinanced its overdue mortgage after securing a $300 million loan to replace the $245 million mortgage that matured 12 months ago. The property, also known as Herald Center, will be used to renovate the 250,000 square-foot property at West 34th Street to accommodate Yeshiva University, which last summer agreed to lease 160,000 square feet for 32 years. JEMB Realty, which owns more than 6 million square feet of commercial space, is expected to use the proceeds to renovate the property. The building, developed in 1902 as a department store, faced hard times in 2022 when anchor tenant ASA College moved out. The mortgage was sent to special servicing a year ago, and an appraiser cut the property's value in half from $572 million.
Credit-rating agency Morningstar DBRS estimated loan investors faced a 15% loss. However, 1293 Broadway was not in danger of being abandoned like some nearby older buildings due to its attractive location. The building generated $22 million in net cash flow over the 12-month period ending last August, or nearly twice the amount needed to cover mortgage payments and other costs. The property's refinancing illustrates the increased level of risk associated with commercial loans. The old mortgage came due in 10 years, while the new one is due in three years.
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Developer, after default on $90M loan, says taxes from forced sale would crush him
Harry Macklowe is suing Israel Discount Bank of New York to prevent the redemption of $20 million worth of Operating Partnership units, which would trigger "hundreds of millions" in capital gains taxes. The lawsuit alleges that Macklowe pledged the units as collateral for $89.5 million in loans from the bank, which are now in default. The disposition of the collateral would be "so draconian and financially devastating — beyond the mere value of the collateral itself — that equity cannot permit it," the suit says. The bank alleged that Macklowe first defaulted on the loan in March 2023, and the parties entered into a forbearance period through December 2023 that was later extended by a year.
Macklowe was attempting to repay some of the debt by selling his East Hampton estate, but the sale has been hampered by unpaid fines and legal issues stemming from work Macklowe did at the property. The bank threatened to redeem the collateral unless the debt was repaid by Jan. 13. The lawsuit calls the threat "rash and disastrous" and accuses the bank of pursuing this course out of vindictiveness rather than in a good faith effort to achieve the greatest return. If the sale goes ahead, Macklowe may never recover from the financial consequences.
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Bank pruned at-risk CRE loan book, alluded inflation could impede further cuts
M&T Bank has reported solid progress in reducing its at-risk commercial real estate (CRE) debt, with Chief Financial Officer Daryl Bible predicting modest growth in CRE balances through the second half of the year. This could signal a shift in CRE lending after banks scrambled to curb their exposure to CRE debt last year. In 2024, M&T cut its concentration of CRE loans to 16% from 183% of total debts, while total loans and leases remained relatively flat. The bank also trimmed its troubled debts to about $1.7 billion by the end of 2024, 22 less than it reported a year prior. The decline was largely driven by full payoffs of at-risk CRE loans, partial paydowns, net charge-offs, and debt written off as unlikely to be paid back.
M&T reported an 8% increase in net charge-offs in the fourth quarter compared to the previous year, but also cut its provision for credit losses or loss reserves by 38%, signaling less pain to come. Over the last two years, office deals have been the bane of M&T's books, with about 20% of its $5.1 billion office loan book in questionable shape at the end of 2022. The bank's ability to shrink its share of criticized loans depends heavily on how the yield curve slopes. The Fed's cuts in the back half of 2024 drove a flatter yield curve in August and September, allowing borrowers to refinance.
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Building is still about 25% vacant after large American Eagle lease
The owners of 63 Madison Avenue are seeking a new investor to fill a large block of empty space in the office building. The joint venture between George Comfort & Sons, Jamestown, and Loeb Partners Realty is looking to sell a stake in the 1960s-era building, valued at around $400 million. The owners signed one of 2024's largest office leases with American Eagle Outfitters,for 337,000 square feet. The 15-story building is 76 percent leased. The mid-rise office building was developed in 1962 as an annex for New York Life Insurance. In 2016, George Comfort and Loeb Partners sold a 49 percent stake in both buildings, which valued them at $1.15 billion or roughly $710 per square foot.
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Lenders say Dynamic Star, Namdar defaulted on $55M loan
Blackstone, a joint venture of Blackstone and Rialto Capital, has filed a preforeclosure action in New York State Supreme Court, alleging that developers Dynamic Star and Namdar Realty Group defaulted on a $55 million loan secured by a series of parcels in the Bronx. The lawsuit, first reported by PincusCo, is seeking a receiver to oversee the site while pursuing a forced sale. The parcels securing the loan include 2444 Exterior Street, 2371 Exterior Street, 2391 Exterior Street, and 2401 Exterior Street. The parcels are part of the second phase of Fordham Landing, a $2.5 billion development aimed at transforming the borough along the Harlem River. The phase requires a rezoning to redevelop, complicating the process. Fordham Landing South, the first phase of the megaproject, is expected to break ground in the first quarter, with delivery anticipated for early 2027. Blackstone and Rialto came into possession of the loan in 2023 as part of its $1.2 billion winning bid for a stake in Signature Bank's $17 billion commercial real estate loan pool.
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CRE comeback gains momentum as KnitWell Group expands to 246K sf on 20-year lease
Boston Properties has secured a 20-year lease extension with KnitWell Group, a prominent fashion and apparel company in Times Square, for 246,000 square feet at 7 Times Square. The lease adds 55,000 square feet to KnitWell's existing 191,000-square-foot space and will occupy two additional floors at the 1.3-million-square-foot building. The asking rent for the property is not disclosed, but the Commercial Observer has previously pegged an asking rent of $80 per square foot. Other tenants at 7 Times Square include Japanese trading firm GSI Exim America, law firm Friedman Kaplan, and private plane renters Flewber. The American Strategic Investment Company recently sold 9 Times Square for $63.5 million, which features both office and retail space. Manhattan's office leasing market has seen a turnaround last year, with office leasing volume exceeding 30 million square feet for the year in November, the first time that benchmark was hit since 2019. The availability rate in November tightened to 16.7%, the lowest since September 2022, and sublet supply hit 18.3 million square feet, the lowest since January 2022.
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Borough office market struggling with oversupply of new Class A construction
Brooklyn office landlords are struggling to fill the glut of new buildings built over the last two decades, with leasing activity dropping almost 50% in December from the previous quarter. The borough's full-year leasing volume totaled 930,000 square feet, a 31% drop year-over-year. The lower leasing volume is a reflection of the smaller tenant pool that the Brooklyn office market has been able to pull from compared to the Manhattan market. The ongoing flight-to-quality trend in Manhattan's office sector has landed in Brooklyn, but the borough has an oversupply of new Class A construction that started even before the pandemic. About 18% of Brooklyn's 47 million square feet of office space was built in the past two decades, with an availability rate of 37.5% compared to an overall availability of 21 percent. The average asking rent for post-2000 buildings has dropped for three consecutive quarters, to $63 per square foot. Brooklyn's overall average rent is about $50 per square foot. The market is still dominated by small and mid-sized tenants from the healthcare, education, nonprofit, and government sectors. The nonprofit Rising Ground inked the largest lease deal of the last quarter for 27,000 square feet at 111 Livingston Street.
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FDIC signs lease for 148K sf at 1166 Sixth Avenue
Edward J. Minskoff Equities has secured a 148,000 square foot lease from the Federal Deposit Insurance Corporation (FDIC) for its office tower at 1166 Sixth Avenue in Midtown Manhattan. The FDIC will be relocating from the Empire State Building, where it occupied 119,000 square feet. The lease is for 10 years and starts at $80s per square foot. The FDIC will occupy part of the seventh floor, as well as the entirety of the eighth, ninth, and tenth floors. JLL's team represented the landlord, while Colliers' Connor Faught and Sheena Gohil represented the tenant. Minskoff recently modified the debt backing the 44-story office tower, with Wells Fargo extending maturity dates and tweaking interest rates for three loans totaling $235 million. The landlord is working on developing a fitness center and lounge to pair with a new 12,000-square-foot conference center. Other recent leases include deals with insurance writer CNA Insurance and insurance firm Axis Insurance.
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Union Square building has attracted tech and VC firms
Taconic Partners is selling its office tower at 817 Broadway, located south of Union Square, for sale or recapitalization. The building, which is 92% leased, has attracted several technology and venture capital firms. Tenants include Inspired Capital and SDC Capital Partners. The building underwent a $40 million capital program, including modernization of the lobby and rooftop amenity space. Taconic acquired the property in 2016 for $109 million and secured a $125 million refinancing in 2021. The building, designed in 1895 by George B. Post, was built for Meyer Jonasson & Company. The firm was part of a group that sold office condos at Essex Crossing in the Lower East Side for $221.6 million in December.
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A steep cutback in new construction leaves tenants facing continued high rents after rates soared during the pandemic
Warehouse tenants are facing sticker shock as they renew leases signed at high premiums during the pandemic. The high-cost leases are starting to expire, but prices for industrial real estate remain elevated due to developers' brakes on new construction, constraining new supply. Tenants looking to renew deals struck in 2020 and 2021 are "staring at a giant increase," with rents in some cases up maybe two or three times than they were five years ago. Average asking rent across the U.S. rose to $10.13 per square foot in the fourth quarter, up 4.5% from a year earlier and 61% from the fourth quarter of 2019. Industrial real-estate tenants typically sign leases that span three to five years or longer, with annual rent increases of roughly 3% on average.
Many leases signed in 2020 and 2021, when fierce competition for warehouse space sent asking rents soaring, are on track to expire this year and next. Competition for space has cooled off over the past two years, with the average warehouse vacancy rate across the U.S. increasing to 6.7% in the fourth quarter, more than twice the 3% vacancy rate in late 2022. Higher vacancy rates normally would lead to lower rents, but prices haven't receded because of the particular dynamics of the industrial real-estate market, where warehouse operators and their customers often base their leasing decisions on long-term prospects rather than short-term market conditions.
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With the off-price sector outperforming again, Burlington takes aim at Ross Stores and TJX
Burlington Clothing Store, a one-year-old store in Connecticut, is transforming from an overstuffed discounter to a more nimble, broad-based purveyor of off-price apparel. The company is aggressively expanding, targeting larger competitors like Ross Stores and TJX, which own T.J. Maxx and Marshalls. Burlington's transformation is based on an overhaul of its real estate, which is getting smaller even as the company works to open 400 net new stores over the next four years. Retail availability has fallen to record-low levels since the pandemic, thanks in part to a dearth in new store construction.
Off-price retail has gained momentum since the pandemic, with a "virtuous circle" of growing customer demand convincing more brands to sell their inventory to discount stores, fueling more customer demand. Burlington's gradual downsizing accelerated under the leadership of current CEO Michael O'Sullivan, who joined the company in 2019 after 16 years at Ross. Burlington is now opening mostly 25,000-square-foot stores, nearly 70% smaller than its prior big-box locations. Renovating the company's merchandise mix and supply chain was critical to boosting sales in a smaller footprint. Burlington has reduced its inventory by about a third since 2019, and outerwear now accounts for less than 5% of annual sales. The company plans to open about 100 net new locations and relocate a couple dozen annually through 2029, believing it can eventually grow to 2,000 total stores.
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