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Weekly Market Report - June 6, 2022

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Dreaded Commute to the City Is Keeping Offices Mostly Empty


The Covid-19 pandemic led to a surge in remote work, emptying out office towers as more people worked from home. Cities with longer commutes have taken the biggest economic hit, while urban areas where people live closer to work have a higher return-to-office rate. In a Gallup survey last summer, for example, 52% of those who want to work remotely listed avoiding commuting time as a top reason they don’t want to go to the office. Other common reasons, like well-being and flexibility, are also closely tied to the commute. Employee opposition to commuting means that landlords and cities aiming to refill their office floors may need to do more than renovate old buildings or put more police on street corners. It may require investing in housing, highways, public transportation and other infrastructure necessary to reduce commute times. Luring commuters back is critical to central business districts that depend on these workers to support bars, restaurants and other small businesses that fuel these economies.


Eight of the 10 major cities with the biggest drop in office occupancy during the pandemic had an average one-way commute of more than 30 minutes in 2019. Meanwhile, six of the 10 cities with the smallest drop in office occupancy have average commutes of less than 30 minutes. The New York metropolitan area had the longest average commute time before the pandemic at 37.7 minutes. It also has one of the country’s lowest office-occupancy rates. Keycard swipes were down by 62% since early 2020 as of May 18, according to Kastle, compared with an average decline of 57% for the country’s biggest cities. Businesses catering to commuters have closed and retail vacancies in Midtown Manhattan have soared.


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New York City REIT in danger of default on NY real estate loans


New York City REIT, which is in the midst of a heated proxy fight, is in danger of defaulting on loans at several of its New York properties. The AR Global Investments-managed REIT has been in breach of covenants on more than $200 million of debt at four of its New York properties in the past year, the company disclosed in its most recent quarterly report. In the disclosure, NYC REIT cited “ financial difficulties” of tenants and early lease expirations for the breaches at four properties: 9 Times Square, 1140 Sixth Avenue, 400 East 67th Street/200 Riverside Boulevard and 8713 Fifth Avenue. The breaches don’t automatically put the company in default, and at one of the buildings the REIT was able to come back into compliance under the terms for the past two quarters. But the company, led by Michael Weil, warned in a filing with the Securities and Exchange Commission that it expected to be in breach of some of the loans for the coming months, and if that continued, the company could be in default. When reached for comment, a representative for the REIT emailed that there “have been no defaults on any of the company’s loans or mortgages.”


The buildings span nearly 550,000 square feet, or about half of the REIT’s eight-property, 1.2 million-square-foot portfolio. The company fell out of compliance on its debt-service coverage ratios, or the amount of cash needed to cover its mortgage payments. This required it to set aside cash in separate accounts for the loans. At 9 Times Square, it worked to pay down a portion of the loan’s principal, and at 400 East 67th Street/200 Riverside Boulevard it’s been able to get back into compliance for the past two quarters. New York City REIT is part of a web of companies founded by Nicholas Schorsch. One of those companies, American Realty Capital Properties, announced in 2014 that it had misstated previous earnings. The scandal led to Schorsch’s resignation and a securities fraud conviction for CFO Brian Block.


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WeWork Loss Narrows as Desk Sales Reach Pre Pandemic Levels


WeWork Inc.’s first-quarter loss narrowed sharply as gross desk sales reached prepandemic levels with the gradual return of employees in the U.S. to in-person work. The shared-office company said Thursday its top line rose 28% from a year ago, with 166,000 desks sold, the highest level since the first quarter of 2020. Revenue was higher than WeWork’s forecast for the period and the company raised the low end of its revenue outlook for the year. The results are the latest sign that in-person work is slowly normalizing, after the pandemic forced many office workers to work from home and companies reassessed their real estate needs.


WeWork, which maintains office space that it rents out to workers on a piecemeal basis, went public in October through a merger with a special-purpose acquisition company. The process came after an implosion of earlier plans for an initial public offering over corporate-governance issues and questions over its valuation. The company also cut ties with its co-founder and former chief executive, Adam Neumann. The company brought in a new CEO, Sandeep Mathrani, who has refreshed company operations by closing locations, renegotiating leases and cutting thousands of jobs.


In the first quarter, which ended March 31, the reduced costs substantially cut down on the company’s net loss, which came in at $435 million, or 57 cents a share, compared with a loss of $2 billion, or $14.34 a share, a year earlier. Revenue rose to $765 million in the quarter, just under Wall Street forecasts of $768 million but ahead of the company’s earlier projection. The company’s total expenses fell to $1.1 billion from $2.1 billion a year earlier, aided by a $130 million gain from lease terminations. WeWork raised the low end of its second-quarter revenue guidance to $800 million from $775 million, and upped the low end of its expected full-year revenue by $50 million to $3.4 billion.


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RXR seeking $1.5B refi for Times Square office tower


Days after signing Roku to a massive long-term lease, Scott Rechler is in the market for a ten-figure loan to refinance his Times Square office tower. Rechler’s RXR Realty aims to refinance its 1.1 million-square-foot, 39-story tower at 5 Times Square to the tune of $1.5 billion, sources familiar with the property. The tower, which long featured EY’s signage, will now don Roku branding. RXR is seeking the new debt after signing the streaming service Roku to 240,000 square feet across the building’s top eight floors, filling a major vacancy left by accounting firm EY’s impending relocation to Brookfield’s One Manhattan West.


RXR owns the office tower along with David Werner, who purchased the building in 2014 for $1.5 billion. The partners refinanced the property in 2017 with a $1.4 billion debt package from Morgan Stanley. EY is planning to fully vacate the building when its lease expires in May. Roku’s lease runs through 2033, according to marketing materials for the refinancing. Rechler and Werner recently kicked off a $126 million capital improvement project at the property, which includes a new 50,000-square-foot amenities package on the third and fourth floors. A lobby renovation and modernization to the elevator system are expected to be completed this year.