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Weekly Market Report - May 23, 2024


Bain & Co. is doubling its New York City office by moving to a renovated tower next to Grand Central Terminal. The Boston-based company plans to move into four floors at the building, which used to be called 335 Madison Ave., in 2026. The deal was one of five announced by the building's owner, Milstein Properties, for a total of 460K SF in commitments, bringing the building to 91% leased with just 96K SF available. The leases followed a $250M upgrade to the building, which initially kicked off in 2017, when it was projected to cost $100M. The building is also one of just six office buildings with direct access to Grand Central, an important factor for commuters looking for shorter journeys to and from the office after the flexibility of remote working during the pandemic. The leasing success is a significant change of fortunes for the property, as it has been offering out leases on a floor-by-floor basis and considering a teardown.



Barry Sternlicht’s real estate investment trust faces heavy redemption requests

Starwood Real Estate Investment Trust (SREIT) may run out of credit and cash by the end of the year if the pace of redemption requests continues. The fund, managed by Starwood Capital, has drawn over $1.3 billion of its unsecured credit facility since the start of last year. As of April 30, SREIT had $752 million in liquidity, split between $446 million in cash, $225 million available on the credit line, and $45 million of debt securities available for sale. Redemption requests are a major culprit hampering SREIT, as last year, investors withdrew $2.6 billion from the property fund due to real estate valuations and interest rates concerns. However, liquidity could be coming down soon, with several asset sales expected to close this month and Starwood may also sell other assets and announce plans to sell $1 billion of property through special tax-efficient transactions.


$500 million loan heading to special servicing before June maturity

Bloomberg's commitment to hold tight at 731 Lexington Avenue has caused less confidence in the noteholders of the $500 million CMBS loan. The debt landed in special servicing just as Bloomberg announced its 99 percent lease extension through 2040. Alexander's, partially owned by Vornado Realty Trust, offered to pay down $25 million of the debt in exchange for a four-year extension, but the special servicer rejected the proposal. The building's floating-rate loan has pressured its cash flow, with the rate rising to 6.2% in the last two years. Fitch Ratings lowered its outlook on the 731 Lex debt to negative in February, noting the possibility of a downgrade if the borrower and servicer cannot agree upon extension terms. However, Morningstar noted that the transfer to special servicing does not mean an extension is less likely, with a resolution by September 2024.


CIM’s Midtown office tower now worth $320 million — half of prior value

CIM Group was considering deeding 1440 Broadway to its lender due to WeWork's bankruptcy and declining revenues. However, a loan modification pushed the maturity date to October 2025 and replaced the guarantor's general partner. The property was revalued at $320 million in May, a 46% cut from its 2021 value. Last year was a leasing nightmare for the Times Square office building, with WeWork reworking its lease and losing its second-largest tenant, Macy's, in January. The Midtown building is now 58% occupied and its gross rental income is down 52% from a year ago. WeWork's amended lease is a blessing, as it has outright exited dozens of New York City leases as part of its Chapter 11 bankruptcy. However, filling Macy's footprint could be challenging, as office leasing took a dive in the first quarter of 2024, with 25% less space leased than in the fourth quarter. Newer offices continue to attract tenants, but 1440 Broadway may not be fresh enough to fetch the rents it needs.


JPMorgan Chase picking up mortgage warehouse loans

New York Community Bank (NYCB) is preparing to revamp its balance sheet after a chaotic first quarter. The bank has agreed to sell $5 billion of mortgage warehouse loans to JPMorgan Chase, a positive sign for multifamily owners in the New York metro area. The sale is expected to close in the next quarter and is part of NYCB's strategic plan to improve capital, liquidity, and loan-to-deposit metrics. NYCB's mortgage business remains an important part of the company. The bank's exposure to New York commercial real estate, particularly rent-regulated multifamily buildings, has been a threat to its bottom line. The bank's first quarter also saw a surprising loss and a plummeting stock price, which is down 62% year-to-date. In March, NYCB secured a $1 billion infusion, helping the bank avoid collapse. This month, defaulted loans increased by nearly 400% year-over-year, with multifamily accounting for $339 million of those non-performing loans.


Madison Realty Capital, Maguire Capital Group to buy RFR’s distressed debt

Madison Realty Capital has acquired Aby Rosen's 827-unit multifamily project in Gowanus, Brooklyn, after the developer defaulted on the $80 million mortgage. Madison Realty Capital plans to foreclose on RFR's interest in the site, which could disrupt another development site in Gowanus, which has been a hub of activity despite slowing multifamily construction. RFR financed the site with a loan from Union Labor Life Insurance Company in 2018, but defaulted on the loan. Madison Realty Capital partnered with Maguire Capital Group to purchase the debt and have scheduled a UCC foreclosure of RFR's interest in the property. Madison and Maguire have previously partnered on the Fifth Avenue Hotel in Nomad. RFR has struggled to hold onto some of its properties, including the Lever House and Gramercy Park Hotel.

The Gowanus project, one of the largest apartment developments pending in Brooklyn, has remained dormant since its inception in 2019. The state extended the construction completion deadline for 421a by five years to 2031, but high interest rates and a tight lending environment continue to pose challenges to the development market.


Kurt Reiman

The commercial real estate sector is facing a crisis, with regional and community banks facing deep losses on problematic loans, potentially reaching hundreds of billions of dollars. This could lead to a string of bank failures as commercial real estate price declines deepen and loans come due this year and next. Structurally weak demand for office properties and a prolonged period of high interest rates pose potentially insurmountable headwinds for the entire market. Small and mid-sized banks need to address the problem now or face a potentially existential crisis.

The risk in the office market is not evenly distributed, with new and renovated trophy office buildings in prime locations in great shape but older class B and C buildings struggling with tenant flight, higher operational costs, record-high vacancy rates, and downward pressure on rents. Companies have a choice: lower real estate expenditures by reducing square footage or draw employees back to the office by upgrading the experience there. The largest banks have already started recognizing higher commercial real estate loan delinquencies and charge-offs, but smaller banks with greater exposure to commercial real estate face a "trainwreckoning." Companies should prepare for an extended period of tight lending standards and elevated borrowing costs as banks come to terms with their commercial real estate problems' severity.



New York office landlords are facing double-digit increases in borrowing costs due to higher interest rates, as they anticipate a 17% increase in interest expense in 2025. This will take a more than $50 million bite out of earnings for both Manhattan office owners, SL Green and Vornado Realty Trust. Evercore ISI predicts a 30% decline in SL Green's funds from operations and an 8% decline for Vornado's. Borrowing costs are typically a landlord's biggest cash expense, rising as demand for office space remains muted and vacancy rates in many Midtown and Financial District buildings continue to rise. Asset managers are heading for the exits due to deteriorating fundamentals, with 28% net underweight in the real estate sector this month. SL Green and Vornado made arrangements with lenders to mitigate their exposure to increase rates, but some of these arrangements are winding down this year.


PIMCO-owned landlord nabs new terms on $1.7B in debt

Columbia Property Trust, a PIMCO-owned landlord, has secured an extension on its $1.7 billion CMBS loan, which has a maturity date of July 2025 and a six-month extension option. The loan is collateralized by seven office buildings, with their valuation slashed by 30%. The modification cuts the interest rate on $485 million in subordinate A-notes to near-zero and the $160 million B-notes to 0%, as well as defers payments on the $125 million mezzanine debt. Columbia had previously had an interest rate cap with a strike price of about 2.9%, which expired in December 2023 when its loan matured. The portfolio, valued at $2.3 billion in 2021, was reappraised last month for $1.6 billion. The 30% reduction reflects the leasing difficulties across the portfolio.

Elon Musk has been the biggest thorn in the landlord's side, with the tech titan quitting paying rent on the then-Twitter offices in Chelsea and San Francisco's Financial District. The portfolio's occupancy still hovered at a relatively healthy 87% early last year, but it is unclear where the figure now stands or to what degree revenue can now cover debt payments. The latest reappraisal puts the assets' loan-to-value ratio at 110 percent, meaning the portfolio, even with the modification, is underwater.


Signature Bank's collapse has led to a 10 percentage point increase in vacancy rates at 1177 Sixth Ave., a 47-story, 1 million-square-foot tower at West 45th Street. The property, developed in 1992 and acquired in 2007 by the California State Teachers Retirement System, Silverstein Properties, and UBS, has a 13% availability rate. Kramer Levin is the anchor tenant, taking 270,000 square feet across floors 22 to 30. The buildings at 1177 Sixth and 450 10th Ave. both suffered direct hits in last year's banking turmoil.

After Signature went bust, its new owner, New York Community Bancorp, kept office space at 1400 Broadway owned by the Malkin family. However, about 90,000 square feet of Signature's space was vacated, and the building's cash flow has declined by 5% since UBS was bought out. Over the next three years, the building faces the loss of tenants renting 16% of the space, including law firm Faegre Drinker Riddle & Reath and Tradeweb Markets. Fitch Ratings lowered its outlook for 1177's $450 million mortgage to "negative" while maintaining investment-grade ratings for all the various slices of the building's mortgage.



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