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Weekly Market Report - July 2, 2024

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The Archdiocese of New York is leasing a 140,000-square-foot Midtown headquarters at 488 Madison Ave., paying just $45 a square foot, or 55% below the area's average. The archdiocese will occupy less than half the space it has in its longtime office home, the Terence Cardinal Cooke Building at 1011 First Ave. The archdiocese plans to put 1011 First on the market by fall, and the estimated market value for the 50-year-old building is $122 million. The archdiocese will pay $6.6 million a year in base rent at 488 Madison to landlord the Feil Organization for a lease through 2055. The archdiocese, which serves about 2.5 million Catholics, controls 13% of all land in Manhattan, but its expenses for pastoral services, schools, and social services exceeded revenue by $37 million in 2022.

 

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Swiss banking giant UBS has put up a 920K SF Midtown Manhattan office building for auction, with a starting bid of just $7.5M. The building, controlled by 135 W. 50th St. via a ground lease, has been put on online auction platform Ten-X instead of traditional channels. Despite $76M in upgrades, the building is only 35% leased, with the remaining tenants having an average term of 9.5 years on their leases. The 23-story office tower can be converted as of right to residential or other uses. UBS acquired the land underneath the property in 2012 and sold it to Safehold in 2019. The ground lease may have damaged the property value.

 

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The Spiral, a 2.8M SF skyscraper in Manhattan, has reached over 80% occupancy with five lease agreements signed by developer Tishman Speyer. HSBC has expanded its footprint to over 300K SF, occupying the entire 66-story tower's 29th and 30th floors, as well as three podium floors and the street-level Wealth Center. The bank's move to The Spiral has led to increased employee feedback and engagement. Tech firm XR Extreme Reach and proptech venture capital firm Fifth Wall have also signed leases, with Tishman Speyer adding coworking to the tower. The developer has also introduced Spiral Suites, offering pre-built suites ranging from 7K SF to 48K SF. The leases are a sign of the momentum building in Manhattan's office market, where available space has begun to tick down from record highs over the winter.

 

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American Strategic Investment Company is looking to diversify out of Manhattan


American Strategic Investment Company (ASIC) is set to sell 9 Times Square for $63.5 million to an unknown buyer. The property, which was purchased in 2014 for $162.3 million, is located at 200 West 41st Street near Seventh Avenue in Times Square. ASIC CEO Michael Anderson expects the sale to net the company $13.5 million, but it is unclear how the company plans to make a profit on a $63.5 million sale.


The company is also exploring selling a commercial building at 123 William Street and the retail space at 196 Orchard Street, which would unload 67% of its current square footage. ASIC owns six other properties in New York City, with a total portfolio value of $725.5 million. Office vacancies have nearly doubled since early 2020, partly due to a decline in leases from finance, insurance, and real estate tenants. The Times Square area is recovering well from the pandemic, with new retail business openings and hotel occupancy.

 

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Cult favorite grocery store will span 58K sf at Broadway and West 65th Street


Wegmans is taking over the lease at the former Bed Bath & Beyond space on the Upper West Side, becoming the supermarket chain's third New York City location. The long-term lease was signed in February with an asking rent of $3.5 million a year. The new store will span 58,874 square feet on the lower levels of Glenwood Management's luxury apartment building, providing another tenant perk. Wegmans worked on an uptown location years ago but switched its plans to the Astor Place spot when the first deal fell through. The neighborhood's retail properties have been struggling, with 85 ground-floor storefronts standing empty along Broadway between West 59th and West 110th streets last year.

 

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Office-to-residential conversions, initially skeptic, have gained prominence in New York due to an incentive program in this year's state budget and a general eagerness among developers to get on board. The idea of turning empty offices into rentable apartments seems to be a solution to the city's housing and office-vacancy crises, but it still seems unlikely to be a complete solution. Developers and architects have argued that turning office buildings into residential ones tends to cost more than demolishing an office building and starting over.


However, New York exceptionalism already exists on issues such as pizza quality and bagel quality, so adding office-to-residential conversions to the list is becoming more likely. Developers are not known for holding their tongues on government policies, and the response so far to the conversion incentive bodes well for the level of interest in it. As Manhattan struggles with nearly 100 million square feet of available office space, residential conversions may not be able to solve all of the city's problems.

 

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Herald Center, an office building in New York City, is facing trouble due to a wave of troubled office loans. The building's appraised value was cut in half to $276 million in March, three months after landlord JEMB Realty failed to repay the mortgage when it came due. Instead of foreclosing, lenders agreed to extend the loan until next January in hopes the building's fortunes will improve.


This is a sign of the times, as lenders are playing a waiting game, "extend and pretend," giving debt-ridden borrowers more time to repay their maturing loans. About $300 billion worth of commercial real estate loans were extended last year, swelling the total due to mature this year to more than $900 billion. Banks have also set aside $100 billion to protect against eventual losses. Federal regulators could conclude that banks have too much money tied up in dud real estate loans, forcing them to purge their balance sheets.

 

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Case involves high-profile developments in NYC, San Francisco


The owners of an elite club, Core Club, have sued developer Michael Shvo for allegedly overpromising and underdelivering on developing high-profile locations in New York City, San Francisco, and Milan. Core Club, founded in 2005 by Jennie Enterprise, accused Shvo of fraud and demanded reduced Manhattan rent, rescinding its lease at Shvo's Transamerica Pyramid, and paying $600 million in damages.


Enterprise and her various Core groups claimed they were misled by Shvo, not only in his promises of investment and turnkey clubs but also about the ownership of the New York and San Francisco buildings. The lawsuit alleges that Shvo lured Core Club into unfair loan terms and leases to enhance the value of his properties and attract other high-profile tenants. Shvo's attorney denies the lawsuit's version of events and characterized it as a pressure tactic. The lawsuit comes just weeks after Shvo sued the club, alleging that it defaulted on a $1 million loan to build out the three club locations.


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A report from Moody's predicts that by 2026, nearly one-quarter of US office space will be vacant due to the continued trend of working from home. Office vacancy rates are expected to rise to 24%, reducing revenue for office landlords by $8 billion and $10 billion. This could result in property value destruction of up to a quarter-trillion dollars. The report focuses on white-collar sectors with the highest work-from-home rates, such as finance, information, real estate, and administrative. The report also accounts for the ongoing decline in office space allotted per worker, which began after the 2008 financial crisis and has accelerated since then. The report predicts that vacancy rates will plateau as enough offices are demolished or converted to other uses.

 

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Redemptions from real-estate funds are expected to hit $16.5 billion this year while new fundraising shrinks

 

Starwood Capital Group's tightening of restrictions on investor withdrawals from its $10 billion real-estate fund has caused a surge in redemption requests from similar funds. This has led to concerns that investors may also be forced to wait indefinitely in line to cash out. While some firms have reported stabilizing withdrawals, there is widespread industry concern that Starwood's move may have a long-term negative impact on investor sentiment. The shrinking fund business is a significant sign of the commercial-property downturn caused by the jump in interest rates and flagging demand in the office sector. The total asset value of the funds has fallen to $90 billion from their peak of close to $110 billion last year.

 

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