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Weekly Market Report - June 27, 2023


Japanese firm Mori Trust buys 50% of Midtown office tower at $2B valuation

SL Green has made a significant office sale, with the transaction of a stake in 245 Park Avenue valuing the tower at $2 billion, marking the largest office sale since the Federal Reserve's rate hikes impacted commercial real estate markets. This deal is seen as an important development for the city's office market, as investors seek to determine the value of office properties amidst hybrid work arrangements and high borrowing costs. Japanese developer Mori Trust recently acquired a 50% equity stake in the 1.7 million-square-foot tower, assuming half of the $1.76 billion debt associated with the building.

The sale price aligns with the valuation when SL Green purchased the property in 2017, following the previous owner, China's HNA Group, buying it for $2.2 billion. The transaction not only gives SL Green a vote of confidence but also helps reduce its debt burden. The sale signifies a turning point for 245 Park, which faced challenges under HNA's ownership, including a significant vacancy after Major League Baseball relocated its headquarters. SL Green has plans to revamp the building, including upgrades to the lobby, amenities center, elevator cabs, and the addition of a full-service restaurant. Mori Trust's acquisition at 245 Park marks its first venture in New York City as it expands its presence in the U.S., following its previous acquisitions in Boston and Washington, D.C.


Borrowers find a way around CRE’s $1.5T maturities wall through extensions

Earlier this year, Vornado Realty Trust faced a significant challenge when the retail portion of the St. Regis Hotel was deemed 'not refinanceable' after defaulting on its $450 million loan. However, the company received a lifeline last week as Crédit Agricole, the lender, granted a five-year extension on the loan in exchange for a substantial payment towards the principal. This situation is part of a broader trend in commercial real estate, as property owners and lenders navigate the impending $1.5 trillion wave of loan maturities. While extending loan terms allows property owners to continue operating, it comes at a cost and leaves them dependent on the leniency of their lenders. Some experts predict that owners seeking extensions will face significant financial losses, as they will have to make substantial concessions. Similar extensions have been granted to other notable properties, such as Aby Rosen's Seagram Building and Tishman Speyer's office building at 300 Park Avenue. Lenders are hoping for a positive outcome, where borrowers can regain control of their debts and take advantage of a more favorable refinancing market in the future. However, there is also the possibility that the office market could worsen, leading to lenders reclaiming properties further down the line.

Efforts to extend repayment terms are reminiscent of the 'extend and pretend' deals that were criticized after the financial crisis, but the current landscape involves more substantial financial restructuring. For example, in the case of the St. Regis retail property, the borrowers agreed to reduce the balance by $95 million, bringing it down to $355 million. RFR, the owner of the Seagram Building, paid $15 million towards the principal and committed to an additional $40 million payment over the next two years.

Tishman Speyer and its partner at 300 Park Avenue allocated over $30 million to a reserve fund, while GFP made a $5 million down payment and contributed significant equity for tenant improvements and leasing commissions at 515 Madison Avenue. Vornado's loan was issued by a bank, while the others are CMBS deals, which typically have stricter modification rules due to securitization regulations. Despite the challenges, property owners like Jeff Gural of GFP remain optimistic about improving building performance and securing lower interest rates by the time their loans come due.


A new study reveals that while remote work offers flexibility, many parents are experiencing drawbacks. Approximately 40% of parents working from home go days without leaving the house, and 33% feel isolated, according to the Modern Family Index. The empathy of employers toward working parents during the pandemic has decreased, causing concerns about accessible and affordable childcare. Although flexible schedules contribute to job satisfaction for many, 35% of parents believe that hybrid work negatively affects their careers, and 40% desire guidance from their managers regarding office presence. Essential workers face additional challenges in managing childcare and work schedules. Employers are responding by offering on-site childcare centers and backup childcare options. Mental health support is also increasingly sought after, with companies providing customized care plans and therapy. Overall, employers need to prioritize support for working parents by offering childcare assistance, backup care, and mental health services.


Companies ready to get serious despite pushback from workers

Many companies are implementing new policies regarding remote and in-person work as they strive to find the right balance. While remote work has become more accepted as a permanent reality, businesses are calling their employees back to the office in various capacities. Manny Medina, CEO of Outreach, believes that being in the office fosters better collaboration and organic idea generation. Companies like Disney, Amazon, Meta, and Lyft have summoned their employees back to the office, sometimes facing resistance or pushback. Google, for example, has limited remote work to exceptional cases, encouraging in-person connection and collaboration. Despite these shifts, hybrid work is expected to remain prevalent, with about a quarter of full workdays still conducted remotely. Salesforce is incentivizing office attendance by making charitable donations on behalf of employees who come into the office or attend company events. While the concept of work has evolved, companies are still navigating the best strategies for fostering productivity and employee satisfaction.


The financier, who retains a role at SoftBank, agreed through his new fund to provide the office landlord nearly $500 million of high-interest debt

SoftBank Group's decreasing stock performance continues, while WeWork's losses keep accumulating. Rajeev Misra, a long-time SoftBank financier, has stepped in to assist WeWork through his new investment fund, One Investment Management. The fund has agreed to provide approximately $500 million in high-interest debt to the struggling office space provider. Misra, who previously worked for SoftBank but now operates independently, is involved in a debt deal that places him on both sides of the transaction. This arrangement is not uncommon at SoftBank, as several transactions involving executives or their relatives have taken place. SoftBank's first-quarter earnings reveal a $1.6 billion write-down of its WeWork-related debt. SoftBank's total losses on its investment in WeWork amount to over $12 billion since 2017, making it one of the worst startup investments ever.

WeWork's CEO, Sandeep Mathrani, has announced his departure, further adding to the company's challenges. Despite the setbacks, SoftBank remains hopeful for WeWork's turnaround. Misra's return to WeWork marks a shift from his initial skepticism about SoftBank's investment in the company, as he viewed WeWork primarily as a real estate company. Misra's expertise lies in financial engineering, and he has played a pivotal role in assisting SoftBank with its various ventures. His new fund, One Investment Management, has garnered commitments from Abu Dhabi-aligned investment funds, positioning it with substantial assets under management.


An investment manager that called the office sector’s woes early during COVID now warns of problems in life sciences

Investment management firm Land & Buildings has released a white paper highlighting a decline in attendance at medical office properties compared to pre-pandemic levels. The analysis, based on cellphone data from Alexandria Real Estate's buildings, reveals a 50% drop in attendance. Notably, Alexandria's lab and office buildings in major cities like New York City, Seattle, Boston, and San Francisco experienced significant declines ranging from 52% to 60%. The white paper also highlights a 50% annual decline in leasing volumes for Alexandria in the first quarter of 2023, attributed to flexible remote-work policies of major tenants. This trend raises concerns about the future of lab space fundamentals as life science companies adopt more flexible work arrangements. The commercial brokerage data supports these observations, showing a rise in lab space vacancy rates and a decrease in venture capital funding for life sciences startups. The white paper suggests potential downside for real estate investment trusts like Alexandria if the life science market follows the trajectory of traditional office markets.


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