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Weekly Market Report - July 14, 2022

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Manhattan offices continue struggle as downtown hits new low


Manhattan’s office market continued its struggle into the summer, hovering around record vacancies. Leasing volume fell 3.9 percent in the second quarter to roughly 7.3 million square feet of office space. The vacancy rate in Manhattan for the second quarter was 17.2 percent, a slight improvement from the previous period. It was an increase year over year, however, and not far off from February’s record 17.4 percent vacancy rate. As more companies embrace the reality of remote work, demand for office space simply isn’t meeting supply, which has surged 72.2 percent since the start of the pandemic. There are positive signs if you look for them. Leasing activity is up from 2021; 15 million square feet have been leased in the first half of the year, compared to 9.1 million square feet in the first half of 2021. Net absorption was 530,000 square feet in the second quarter, putting a small dent in the negative 38.9 million square feet of absorption since Covid came. Additionally, landlords are snagging slightly more bang for their buck in recent months.


The average asking rent rose for the third straight quarter, hitting $75.61 per square foot and seeing increases in three straight quarters for the first time since 2019. Still, the average asking rent is down nearly 5 percent from the start of the pandemic. The struggling office market is being felt the most downtown. The vacancy rate in the submarket has increased for nine straight quarters and reached a record 20.1 percent in the second quarter. On the other side of the spectrum, the Midtown vacancy rate had its biggest quarterly drop since 2018, falling to 16.4 percent.


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Some Companies Are Going Remote - and Upgrading to New Offices


Medical software provider CentralReach decided last year to allow all 373 of its employees to work remotely on a permanent basis. Then the company signed a lease for a splashy new office. CentralReach’s office deal is the latest sign that even companies embracing remote and hybrid work may still want new work spaces, betting that employee collaboration would benefit from regular office use.


The company is relocating to the Bell Works development in Holmdel, N.J., in September. CentralReach will occupy 25,000 square feet of space, the largest office footprint ever for the 10-year-old company. Its current office is in an aging building in nearby Matawan, N.J., and it has sat mostly empty during the pandemic. CentralReach’s modern headquarters is a way to entice employees back to the office without having to force them. CentralReach’s new home offers some encouraging news for office-building owners, who have worried that the rise of remote work might lead some companies to cut costs by dumping most or all work space. Many companies are finding they prefer a mix. But CentralReach’s new headquarters signals other challenges for property owners.


Companies are largely shunning older buildings and usually need less space overall. Even though CentralReach’s new office will be larger than the one it is leaving, the company is hiring more staff and anticipates it will ultimately have less space per employee. Companies say they can have a smaller office footprint under a hybrid approach. If all employees were to come in five days a week, CentralReach would have leased two to three times as much space. Instead, he expects only about a quarter of the company’s local workforce to be in the office on a typical day. This consolidation is helping to drive up vacancy rates. About 17.5% of U.S. office space wasn’t leased or was available for sublease at the end of June.


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Revlon trying to escape pricey leases at 200 Park Avenue South


Revlon has asked a judge to terminate office and retail leases of its subsidiary Elizabeth Arden at ABS Partners’ Everett Building at 200 Park Avenue South. Elizabeth Arden, who Revlon acquired for $870 million in 2016, occupies nearly 36,000 square feet of offices at the Union Square building and a 10,000-square-foot, ground-floor retail space — leases which expire in 2027 and 2023, respectively. The retail space, previously an Elizabeth Arden-branded day spa, is permanently closed and available for lease, according to marketing materials. In court filings, Revlon’s restructuring officer, Robert Caruso, said the lease terminations could save the company $17 million in rent, adding that the rates on the leases are higher than those of “available alternatives,” the publication noted.


Revlon is also hoping to sell the various items and inventory left in the spaces, claiming it would be cheaper than removing them. The company has $2.3 billion in assets but $3.3 billion in debt on its balance sheet. It’s lost more than $800 million in the last two years. While Revlon is attempting to get out of its 200 Park Avenue South leases, it doesn’t appear to be ready to bail at its corporate headquarters at Brookfield Properties’ One New York Plaza in the Financial District, where its nearly 108,000-square-foot lease runs through 2030.


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Anbau lands $98M refi for Flatiron House


Anbau Enterprises landed a $98 million loan to refinance Flatiron House at 39 West 23rd Street, the Commercial Observer reported. The fixed-rate, full-term, interest-only loan was provided by First Republic Bank. The financing was arranged by a Meridian Capital Group team including Adam Hakim and James Murad. Anbau and First Republic didn’t respond to a request for comment from the outlet.


The development consists of two towers, encompassing 44 units and 117,000 square feet, as well as a retail unit. Amenities include a central courtyard garden, resident lounge, game room and fitness center. Anbau filed its plans for the development in 2016 — COOKFOX Architects served as the designer of the project. Anbau purchased the development site, then a parking lot, in 2011. It paid $23.5 million to a representative of Horizen Global. In 2019, the developer landed a $139 million loan for construction financing. Bank OZK provided Anbau with a $96 million senior loan, while Goldman Sachs originated $42.6 million in mezzanine debt.


In 2018, Anbau bought two adjacent parking garages in Hamilton Heights for $22.5 million, planning to create two condo buildings. Anbau purchased the garages at 620 West 153rd Street from Verizon, which used the garages to store its vehicles. The developer was eyeing a total of 150 units, ranging in price from below $1 million up to $3 million. First Republic recently provided a $22 million mortgage to an affiliate of Infinity BH Corp., led by Ighal Goldfarb, for the acquisition of 160 condos in Hollywood, Florida. Infinity BH paid $212,000 per unit, $33.9 million in total.