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Weekly Market Report - June 30, 2022

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Peloton resorts to sublease at Hudson Commons


As Peloton gasps for air after a pandemic-fueled sprint, the fitness-media company is looking to sublease some of its pricey West Side office space. Peloton listed 100,000 feet — about a third of its office space at Hudson Commons — to be subleased, Bisnow reported this week. The fitness company signed a lease for 312,000 square feet of office space at 441 Ninth Avenue in 2018, becoming Hudson Commons’ anchor tenant. Lyft is the building’s second-largest tenant, leasing just over 100,000 square feet. The space, across the street from Hudson Yards, costs Peloton about $95 per square foot. Its lease runs until 2035. Subleasing is a move many battered companies have made during the pandemic to get something for their empty office space. But in the months after Covid hit, Peloton was thriving.


The pandemic was a boon for sales of Peloton’s exercise bikes, treadmills and at-home workout subscriptions, and the company’s stock soared from $20 in March 2020 to $163 toward the end of the year. The company had trouble keeping up with demand for its equipment because of supply chain delays. Only when the pandemic started to ease did Peloton’s troubles really start. In addition to equipment recalls and a factory plan cancellation, a decline in subscriptions hurt revenue as gyms reopened. Its founder lost his CEO post and listed his just-purchased Hamptons estate. Peloton shares were trading at just under $11 Friday afternoon.


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Commercial Property Sales Slow as Rising Interest Rates Sink Deals


Property sales were $39.4 billion in April, which was down 16% compared with the same month a year ago, according to MSCI Real Assets. The decline followed 13 consecutive months of increases. Property sales tanked sharply during the early months of the pandemic, when thousands of hotels temporarily closed and furloughed staff, nonessential retail stores closed, and offices emptied out in favor of remote work. A rebound began in late 2020, as investors took advantage of low interest rates and started to buy in anticipation of an eventual rebound.


Demand for multifamily and industrial properties in particular helped fuel commercial sales through 2021 and into this year. The success of those sectors outweighed the drag on property markets caused by underperforming office buildings, which continue to be hurt by remote work. Now, some analysts are starting to ask whether the rally is running out of steam. Hotels, office buildings, senior housing and industrial properties recorded big drops in sales last month. Sales of retail properties were up in April, the fourth consecutive month that U.S. households boosted spending, while apartment building sales continued to rise due to strong tenant demand and landlords’ ability to raise rents. But analysts and brokers said activity in even these sectors may be slowing as rising interest rates keep some investors from making competitive offers. April’s 16% decline in sales marked an abrupt turn from March, when total commercial property sales rose 57% from the same month a year before. But with interest rates considerably higher—the yield on 10-year Treasury notes, a common benchmark for commercial mortgages, has nearly doubled this year—property investors that relied on large amounts of cheap debt to purchase buildings have been some of the first ones to fall out of the market. Other investors are walking away from large deals already in contract.


Innovo Property Group recently backed out of an agreement to buy a Midtown Manhattan office tower for $855 million after surging interest rates made it harder to find a mortgage, according to a person familiar with the matter. The about-face meant the investor lost its $35 million deposit. Most have been moving ahead with planned purchases, he said, but other investors are more cautious now about signing new contracts. That will inevitably drive down prices.


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Empty Wall Street Offices to Be Revived as Apartments


The venture, which includes Silverstein Properties and Metro Loft, has agreed to pay $180 million for the 30-story building that opened in 1967 and has housed numerous technology and financial-services tenants over the decades. The new owners plan to convert it into 571 market-rate apartments, ranging from studios to three bedrooms, during the next three to four years. The deal comes as the remote-working trend that became popular during the pandemic is sending vacancies soaring in office markets throughout the country. Businesses adopting hybrid workplace strategies are leasing less space and migrating to newer buildings with modern designs, good locations and abundant amenities.


In 2020 and 2021, office conversions created a total of more than 13,000 apartments nationwide, especially in cities like Arlington, Va., Washington and Chicago, according to a report by RentCafe, a national apartment search website. In many cities, elected officials and landlords are considering the possibility of converting aging commercial buildings into residential space to help return vibrancy to office districts and ease housing shortages. But these projects come with financial, political and structural challenges. For starters, many office buildings, especially those built in the past 50 years, tend to have large floors that don’t work well for living space. Zoning restrictions in many cities increase conversion costs by requiring windows, yards and other residential needs. Office pricing would have to drop 25% to 50% lower than it is today for a conversion wave to have more than a marginal impact on housing production and commercial property use. The developers purchasing 55 Broad feel that the building is designed in such a way that residential conversion is financially viable.


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Caterpillar to Move Global Headquarters to Texas From Illinois


Caterpillar Inc. CAT -2.75%▼ is decamping to Texas from its longtime Illinois base, joining other major U.S. companies weighing hiring and costs as they work to move past the continuing Covid-19 pandemic. The maker of construction and mining equipment said Tuesday that its existing office in Irving, Texas, a suburb of Dallas, would serve as its new global headquarters. Caterpillar said that the move from its current base in suburban Chicago would help it grow and that the company wasn’t getting any economic or tax incentives related to the headquarters move. The move—expected to affect the roughly 230 corporate employees at Caterpillar’s headquarters—is the latest in a series of recent relocations that have drawn major manufacturers closer to corporate and government customers, and tech giants from Silicon Valley to Texas. Companies including Tesla Inc., Oracle Corp. and Hewlett Packard Enterprise Co. have cited cheaper real estate and access to bigger or more flexible workforces as reasons to pack up and move their corporate offices over the last two years. Boeing Co. said in May that it would move its global headquarters to Arlington, Va., from Chicago, bringing its leadership closer to federal officials and an engineering talent pool.


Defense giant Raytheon Technologies Corp. said this month that it would move its global headquarters to the Washington, D.C., area from Waltham, Mass., seeking proximity to the Pentagon, regulators and lawmakers. Manufacturers have increasingly turned to the Southwest as a destination for new factories, drawn by available space, appealing tax policies and an expanding technology workforce. Arizona, New Mexico, Texas, Oklahoma and Nevada added more than 100,000 manufacturing jobs from January 2017 to January 2020, representing 30% of U.S. job growth in that sector and at roughly triple the national growth rate. Caterpillar, founded in 1925, was based in Peoria, Ill., for decades. The company, which employs about 108,000 people world-wide, said in 2017 that it would shift its headquarters to Deerfield, a Chicago suburb, as the company increasingly turned to global markets for sales and sought to attract executive-level talent with the amenities of a major city like Chicago.


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Brookfield hotel REIT sues insurers for denying pandemic claims


The private REIT, which owns hotels branded by Hilton, Marriott and Hyatt, on Tuesday filed a lawsuit in New York against six insurers over a “sham investigation” meant to delay and deny up to $150 million in coverage “under a broad ‘all-risk’ commercial property insurance,” according to the complaint. The hospitality company claimed its insurance policies cover “physical loss or damage,” “business interruption losses,” and “coverage for communicable disease,” without the requirement of physical loss or damage. The insurers dispute the claim that the pandemic caused physical damage and argue claims for loss or damage due to the pandemic are excluded by the policies, according to the lawsuit.


Hospitality Investors put its losses due to business interruption during the pandemic at $54 million —at least — across more than 12,000 hotel rooms at 98 properties nationwide. The company likens Covid to airborne asbestos fibers, carbon monoxide, wildfire smoke and pervasive odors including cat urine — “all of which [the courts have found] to cause direct physical loss or damage to property,” the lawsuit claims. The company was, in part, a victim of timing. It refinanced its portfolio with a $1.04 billion debt deal in 2019 as occupancy rates showed steady growth, but could not service the debt after the pandemic took hold and throttled revenue across the industry. Insurers have largely avoided paying claims made by businesses that lost money due to the pandemic.


Policies rarely cover the effects of communicative disease explicitly, and courts have largely declined to interpret the pandemic as causing property damage. Insurance products that cover business interruptions not related to property loss are uncommon. The hospitality industry suffered in the wake of the pandemic as waves of layoffs and deep cuts to revenue crashed over it with each new variant of the virus. Lawsuits recently filed by three New York City hotels against insurers for pandemic-related losses are ongoing.