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Weekly Market Report - January 28, 2025

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Lots of carnage for real estate, few conclusions for businesses


As the five-year anniversary of remote work approaches, the real estate industry faces challenges in determining whether it is better or worse for businesses. Ghost workers, or employees who work remotely, are more prevalent in home settings, with 14% of software engineers working remotely doing "almost no work." This could be due to tech companies being aggressive in requiring staff to come in, boosting office landlords. Despite the advantages, remote work has undeniable advantages, as people work more productively at home than at the office.


The Bureau of Labor Statistics shows that most U.S. industries with large increases in remote work had substantial increases in output from 2019 to 2022. However, the long-term effects of work location are harder to measure, as company culture affects in-office workers more than in-office workers. Remote work policies also affect retention and recruiting, with firms offering flexibility having easier times hiring and retaining talent. Real estate firms generally had more employees at their desks during the pandemic than other white-collar businesses. The bigger question for real estate is what office tenants will do and will do in the coming years, as investors bet on companies that will continue signing leases and outcompete rivals that don't.


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Mexican banking scion and art collector Moisés Cosío Espinosa has four months to decide whether to keep his Art Deco masterpiece, 500 Fifth Ave., a 59-story office tower overlooking Bryant Park. The building, developed in 1931 by the same architect as the Empire State Building, has a nearly 20% vacancy rate and needs millions of dollars worth of work. Lenders have extended the property's $200 million mortgage by two years on the condition that Cosío invests $10.6 million in the building by April. The 3.6% interest rate attached to the loan was not extended as the loan came due last October.


Cosío, whose grandfather co-owned two of Mexico's biggest banks, can likely come up with the cash. The building requires massive investment to stay competitive and requires massive renovation and upgrades. The building is one of several Midtown towers struggling with falling cash flow and rising vacancies. Manhattan's office vacancy at the end of 2024 was 23.3%, up from 22.8% the previous year. The tower at 500 Fifth has an unbeatable location at the corner of West 42nd Street, across from the New York Public Library and a short walk from Grand Central Terminal.


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SL Green, a Manhattan developer, has made a significant profit by retiring the mortgage at 690 Madison Ave., a building that houses jeweler Van Cleef & Arpels. The lender, Bank of China, agreed to accept just $32 million to settle the $61 million loan. The transaction, revealed in SL Green's fourth-quarter earnings report, generated more than $200 million in gains last year. Debt-extinguishment gains accounted for nearly 40% of SL Green's $570 million in funds from operations, a key performance metric for real estate owners. SL Green also reported a strong quarter on leasing, with IBM agreeing to take another floor at 1 Madison Ave. and the newly redeveloped tower is now 72% leased.


SL Green's 30 million square feet of Manhattan property is now 92.5% leased, up from 90.1% in the previous quarter. SL Green has bought and sold dozens of buildings over the last 45 years, including 690 Madison, which it acquired in 2021 for $74 million after filing a foreclosure action against former owner Ben Ashkenazy. The company also paid off $125 million in mezzanine debt for $62 million and repaid the $50 million mortgage on 719 Seventh Ave. for $32 million.


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Jeffrey Gural, a commercial landlord in New York City, has introduced a new amenity to attract office tenants: discounted child care. Anyone working in one of his 57 buildings is eligible for 50% off tuition at a West Village preschool, Buckle My Shoe. The preschool, which offers a Reggio Emilia-inspired play-based educational program, is open to children from infancy through pre-K. Gural believes this is a game-changer for working families and hopes other commercial landlords will follow his lead. The issue of finding affordable child care is a major reason why parents work from home. More than 80% of families with children under five cannot afford child care in New York City. The existing tax credit for landlords who convert vacant commercial property into child care centers is too small to nudge property owners to create more space. Gural created the preschool discount after concluding his mostly pre-war office buildings are too small to set aside space for gyms, restaurants, and other new-fangled amenities.


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BHI provided financing for luxury condos at 95 Madison Avenue


Sunlight Development and investment firm NuVerse have secured a $99 million construction loan for the conversion of a historic NoMad office building into luxury condominiums. The project, which includes 65 condo units, was bought out of bankruptcy by Sunlight in June from the Sklar family. The building, known as the Emmet Building, was built as the penthouse home of prominent Manhattan gynecologist Thomas Addis Emmet and was designated a landmark in 2018. The construction loan was provided by BHI, the U.S. division of Bank Hapoalim, and two other financial firms. The building will also feature 17,000 square feet of retail and 3,400 square feet of office space. Demolition has already begun.


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Paramount Group has sold a 45 percent interest in the Midtown East office building, 900 Third Avenue, after years of near or hoped-for deals. The real estate investment trust did not name a buyer for the minority interest, which was valued at $210 million. Paramount remains the majority owner with a 55 percent interest and will continue leasing the 36-story asset. The property has been owned since 1999, when it was bought from a JMB Realty partnership for $164.8 million. In 2017, Paramount was hunting for a sale of a minority interest, shooting for a deal that could value the property at as much as $500 million. In February 2020, Aby Rosen's RFR Realty was in late-stage talks to buy the entire property for around $400 million. However, the pandemic and rising remote work have led to a drop in the valuation by more than half of what Paramount once believed it could be worth less than 10 years ago. The REIT and its lenders are currently in talks to sell a $402 million loan backed by a two-building complex in the Bay Area.


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Partners spend $76M to acquire 1370 Broadway


Sentry Realty and 60 Guilders have acquired 1370 Broadway in Midtown South for $75.5 million, marking a $100 million discount from Invesco Real Estate's $186 million acquisition in 2014. The property was sold by Fortress Investment Group, with Newmark's Jordy Roeschlaub and Nick Scribani negotiating the financing. Two tenants signed deals for 75,000 square feet at the property before the sale closed, with 119,000 square feet leased. Sentry and 60 Guilders are familiar partners, having previously bought a 26-story Art Deco office building at 292 Madison Avenue for $90 million. American Exchange, a fashion manufacturing company, has made a presence in commercial real estate recently, closing on an acquisition of 1375 Broadway. Savanna, the seller in the deal, is continuing to operate the 27-story, 465,000-square-foot property.


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Chelsea property features 292 rooms, three restaurants


IHG Hotels & Resorts' luxury Kimpton brand is expanding in Manhattan, with Blackstone purchasing the Kimpton Hotel Eventi in Chelsea for $175 million. The property, which opened in 2010, is close to Madison Square Park, Penn Station, and the Empire State Building. The hotel has 292 rooms and features three restaurants, a 450-spot parking garage, and 45,000 square feet of meeting space. Blackstone managing director Michelle Gelshteyn cited the market's fundamentals, stating that hotel demand is picking up to pre-Covid levels and no construction permits have been filed in the sector for several years. This has led to notable sales in New York City's hotel market in the last year.


Host Hotels & Resorts purchased 1 Hotel Central Park from Starwood Capital Group for $265 million, while Gencom paid $308 million to acquire the 42-story, 587-key Thompson Central Park Hotel. Kimpton partnered with Gary Barnett's Extell Development last year on a 529-key project by Rockefeller Center, which is expected to open this year. Blackstone is facing foreclosure on a $275 million hotel portfolio as bondholders target assets in Chicago, San Francisco, Boston, and Philadelphia after the alternative asset manager failed to pay off the balance of a loan backed by four properties under the Club Quarters brand.


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Owners recapitalize office space with $180M


Scott Rechler has added an equity partner to his 475,000-square-foot office property in Midtown Manhattan, Sagehall. The firm, run by Lanee Yung and Extell Development veteran Sush Torgalkar, is aiming to capitalize on the recovery in the office market and the appeal of the Grand Central submarket. The partners are injecting $70 million of capital into the property and taking out a five-year, $110 million loan facility from ING Capital. They plan to reposition and upgrade the asset. The property is the flagship location of flex space provider Convene, which occupies 116,000 square feet.


Approximately 78,000 square feet of leases have been signed at the property in the last two years. The office building is 85 percent occupied. There is also a retail condo at the address, which Joe Sitt's Thor Equities bought into the space partnership with General Growth Properties for $595 million. Thor later reduced its ownership to about 10% by selling the rest to General Growth in a complex deal to repay the loan it received from its partner to buy its half stake.


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“Buildings will sell for 30 cents on the dollar. There will be a dramatic reset on property values.”


The Trump administration is considering selling two-thirds of the government's office stock to the private sector, potentially putting over 200 million square feet on the market. The General Services Administration, overseeing 370 million square feet across the country, is at risk of canceling leases with the private sector, particularly in Washington, D.C. Developer Don Peebles estimates that approximately three-quarters of the government's 70 million square feet being leased in Washington, D.C. could be canceled by the Trump administration.


The Trump administration has been working to reduce the federal government's underutilized spaces for years, but the timing is unusual as the mandate for most federal employees to return to their offices is expected to drive employees to exit their jobs. The big loser in a massive property selloff and lease capsizing would be D.C. landlords, who need to go through a specific process to offload properties, which could lead to them selling for next to nothing. This could drive down property values for commercial real estate across the district. "Buildings will sell for 30 cents on the dollar," Peebles said.


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BLDG Management head failed to secure extension on $217M loan


Lloyd Goldman's luxury resort on Montauk Beach, a beacon of hope during the pandemic, has been in special servicing after failing to repay, refinance, or extend the $218 million loan tied to the hotel. The $218 million loan landed in special servicing last month after Goldman failed to repay, refinance, or extend the mortgage before maturity. The resort's performance fell off one of Montauk's cliffs, with revenue covering less than half of monthly mortgage payments on the floating-rate loan, compared to 2.6 times debt service when the loan was made in 2021.


The question of what went wrong may come down to post-pandemic hospitality trends and the bi-annual seachange in Montauk's allure. As travel restrictions loosened in late 2021, pent-up demand for fly-to vacations drove a pop in airline travel, resulting in lighter demand for local destinations. Occupancy rates at Gurney's Montauk slipped from 71% in 2021 to 61% in 2022 and 59% in 2023. The resort's short season likely played a role, as crowds dwindle after Labor Day until Memorial Day's start to the season. The $217 million loan has two one-year extension options left, but Goldman would need to buy a $4.6 million interest-rate cap to secure one, which would have been a hefty pill to swallow, given the property's cash flow.


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$7.8B transacted in the borough last year: report


Brooklyn's investment sales market experienced a strong year in 2024, with $7.8 billion worth of sales recorded. TerraCRG, a commercial real estate brokerage, reported that the year's transaction dollar volume was the third-highest on record. There were 1,198 transactions, a 12% increase from 2023, and $2.7 billion in dollar volume transacted in Downtown Brooklyn. The average transaction size by dollar amount was $6.5 million, a record for the borough. The 485x tax abatement played a significant role in attracting residential development.


The Federal Reserve's interest rate cuts and New York City's passage of "City of Yes" also contributed to the increase in transaction volume and dollar volume. Top deals of the year included Camber Property Group's acquisition of Linden Plaza and lender Silverstein Capital Partners' takeover of Brooklyn Tower. Brooklyn still has a long way to go before reaching its investment sales peak, with nearly 1,500 transactions in 2022. However, the market has emerged from the Covid-addled trough of 2020, with fewer than 800 deals made. TerraCRG expects a robust 2025 and possibly beyond after a strong year.

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