Weekly Market Report - May 27, 2025
- Broker Support
- 12 minutes ago
- 8 min read
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Amid uncertainty, tenants sit tight or look for turnkey space
Office sublets have become a popular option for companies seeking cost-effective office space without expensive buildouts. Tours are increasing at sublets that have been languishing on the market, and lease negotiations are ramping up. Sublets offer a temporary solution for tenants to ride out economic uncertainty, as lease terms are usually shorter than a direct lease. As companies focus on the impact of tariffs and the economy, they are encouraging companies to consider capital-light alternatives.
Sublease deals have continued to accelerate since Trump's tariff rollout, with 17.4 million square feet of available sublet space in Manhattan at the end of 2024. Tenants inked deals for about 1.2 million square feet of sublet space in the first quarter, compared to 729,000 square feet during the same period a year earlier. Pre-built spaces offer an alternative to expensive renovations, but high-quality sublets are being scooped up faster than ever. Some tenants are opting out of the market altogether and extending their current leases.
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Albert Behler’s company exploring possible sale
Paramount Group's future is uncertain after controversy surrounding its leader and top executive departures. The real estate investment trust launched a strategic review of the business, with law firm Lathan & Watkins leading the process and Bank of America serving as financial adviser. The company faces various outcomes, including a sale of all or part of the company, recapitalization, or joint venture formation. Paramount stock surged by 15% after the strategic review was announced. Security filings revealed that the company paid CEO Albert Behler at least $4 million for personal expenses and business interests, which it disclosed in a proxy statement.
In the last three years, the company has paid over $900,000 for Behler's personal accounting services, over $3 million to a jet-chartering company co-owned by Behler, $214,000 to a consultant who used Behler's wife's design firm, and $220,000 for a separate use of the same design firm. Paramount's chief operating officer and general counsel have departed, and its outside counsel advising on disclosures is gone. A recent Green Street report called Paramount "one of the worst performing office REITs over many time periods." In the last five years, the company rejected two takeover offers without strategic reviews or explanations to shareholders.
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Tech firm negotiating lease in Midtown South: report
Pinterest is reportedly negotiating with SL Green and PGIM Real Estate for office space at 11 Madison Avenue in Midtown South. The tech firm is interested in 80,000 square feet at the 2.3 million-square-foot property, potentially becoming one of the larger tenants. The talks are ongoing, and no deal has been finalized as the parties involved declined to comment. Last year, Pinterest signed a lease for 21,500 square feet at Met Park East in Seattle, moving to the Beacon Capital Partners building from space rented from a WeWork office. SL Green acquired the full-block office property in 2015 for $2.6 billion and sold a 40% stake to Prudential's PGIM Real Estate for $480 million. The property was financed with a $1.1 billion senior CMBS loan and $325 million in mezzanine debt. Credit Suisse was the dominant tenant at the property in March 2020, occupying 1.3 million square feet at slightly below-market rates. In 2021, liquor giant Beam Suntory signed a 15-year lease, taking roughly 100,000 square feet across the entire 12th floor.
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Property at 1177 Sixth Avenue suffered blow in Signature Bank collapse
Silverstein Properties has secured a lease for the Starr in Midtown Manhattan, occupying the seventh and eighth floors of Americas Tower. The insurance and investment firm is expected to retain its space on the second floor of BXP's 399 Park Avenue, which it agreed to renew in 2016. The building is currently occupied by law firm Kramer Levin, private equity firm Mill Point Capital, and nonprofit Practising Law Institute. Other tenants include menswear shop Charles Tyrwhitt and fast-casual Middle Eastern shop Naya. The building's availability rate spiked due to the collapse of Signature Bank, which vacated approximately 90,000 square feet. In 2021, Silverstein and the California State Teachers Retirement System bought out UBS at an $860 million valuation, and the ownership secured a $450 million refinancing from DBR Investments Co. and Wells Fargo. The building's second-largest tenant, Signature Bank, was vacated when it failed.
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Paramount Group, an office REIT with towers in Manhattan and San Francisco, is undergoing a strategic review after it was revealed that it paid out millions for its CEO's personal expenses and business interests. The company has replaced two high-level executives, Wilbur Paes and Gage Johnson, with Ermelinda Berberi and Timothy Dembo. The board of directors has tapped BofA Securities as its financial adviser and Latham & Watkins LLP as its legal adviser for the strategic review.
The review aims to close the gap between the company's public market valuation and its assessment of intrinsic value. Paramount has not set a timetable for completing the review and does not intend to make any further public comment until it has been completed. The company has made at least $4M in payments for services retained by Behler and contracts with companies with his or his wife's ownership interests. The company owns approximately 13 million square feet of office space and has leased nearly 284K square feet in the first three months of the year.
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Manhattan's office market is experiencing a slowdown due to new tariffs on construction materials and economic uncertainty. Landlords are building out spaces for their growing tenants, forcing them to find ways to absorb or avoid the costs of these tariffs. Construction firms are monitoring prices and discussing with owners about switching to locally sourced materials and using prefabricated construction methods for build-outs. Developers and contractors who signed guaranteed maximum price contracts (GMPs) with tenants face challenges in mitigating the added costs. The White House's tariff policies have not affected the leasing market yet, but there is no guarantee they will. The city's overall vacancy rate is still elevated at 15.5%, with Class-B and C landlords struggling to sign tenants at the same rate.
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The Empire State Development Board of Directors has approved an amendment to allow 5 Times Square to be converted to residential use. The 42nd Street Development General Project Plan will see Apollo Global Management, SL Green, and RXR transform the 1.1 million SF office tower into 1,250 rental units, 313 of which will be permanently affordable. The project will participate in the city's Office Conversion Accelerator and capitalize on the 467-m tax incentive.
The repositioning of 5 Times Square demonstrates how forward-thinking policies can strengthen and reimagine neighborhoods like Times Square. The project will begin by the end of 2025, with the first phase expected to be completed in 2027. Construction is projected to create approximately 1,400 construction jobs and 830 direct and indirect permanent jobs. The 5 Times Square building has a vacancy rate of 77% and was originally constructed in 2002 as the headquarters for Ernst & Young. RXR and SL Green invested significant money in upgrading the property after the vacancy, taking out a $1.3B loan to refinance the building in September 2022.
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The JACX office complex in Long Island City, developed by Tishman Speyer, was fully leased before its completion in 2019. The two largest tenants were Macy's and WeWork. After the pandemic, Macy's chose not to occupy 600,000 square feet of back-office space, and WeWork terminated its lease for over 200,000 square feet when it filed for bankruptcy in 2023. Moody's downgraded the JACX's $425 million floating-rate mortgage, citing concerns over "significant dark space at the property and softer office market fundamentals."
Tishman Speyer, owner of Rockefeller Center, developed the JACX at a cost of $650 million. The towers, which were the largest office towers to rise in Queens since the Citigroup Building opened almost 30 years earlier, have amenities like a 1.6-acre landscaped terrace and indoor pavilion. However, Covid-19 has disrupted the world of work, with most of the space leased to Macy's remaining empty and available for sublease. Moody's reports that net operating income at the towers has fallen by 35% since 2023, to $30 million, and the property is not generating enough cash to service debt on its floating-rate mortgage, which may face increased refinance risk.
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Institutional Shareholders Services (ISS) has criticized SL Green CEO Marc Holliday's pay, citing poor responsiveness from the board. ISS highlighted several problematic provisions in Holliday's employment contract, including excessive severance and change-in-control benefits and guaranteed equity awards. The firm argues these provisions are inconsistent with broader market practice and there is an "unmitigated pay-for-performance misalignment" at SL Green, which owns 30 million square feet of space. ISS recommended that investors vote two directors off the board at SL Green's annual meeting: lead independent director John Alschuler and compensation committee chair Lauren Dillard. Alschuler and Dillard strongly disagree with ISS, citing SL Green's stock's 58% return last year and its positive return over the last five years.
ISS co-founder Nell Minow stated that firms like ISS recommend voting with management 90% of the time, explaining why investors pay attention when ISS raises concerns. A majority of SL Green shareholders voted against Holliday's pay in 2020 and 2016, when he was awarded $15 million and $17 million, respectively. Last year, 33% shareholder votes were cast against his pay, a figure that is unusually high considering opposition in non-binding elections is less than 5% at most companies. ISS, co-founded in 1985 by Nell Minow and Robert A.G. Monks, is owned by Germany's Deutsche Börse Group and provides services to 4,200 clients, including many of the world's leading money managers.
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Bank of New York Mellon in talks for FiDi space
Bank of New York Mellon is in talks to sublease 200,000 square feet from Condé Nast's 1 World Trade Center property, while BNY is seeking to sublease four floors from Condé as it renovates its global headquarters at 240 Greenwich Street. The Durst Organization and the Port Authority of New York and New Jersey own the property at 1 WTC, which Condé holds 1.2 million square feet in. Since 2019, over 230,000 square feet have been claimed by subtenants. Condé has faced competition within its own building to find tenants or subtenants, with the landlord making the 89th and 90th floors available to lease, the first time they're being marketed to office tenants. The negotiations have been ongoing for months but may still collapse. The publisher has competition within its own building to find tenants or subtenants, and the landlord is hoping to garner rents in the ballpark of $160 per square foot.
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Flagstar Bank went after the landlord’s portfolio in court in March
Joel Wiener's Pinnacle Group is facing foreclosure efforts from Flagstar Bank, which has filed bankruptcy protection petitions across 82 entities. These entities control 91 properties and around 5,000 multifamily units, with an original debt principle of $574.4 million. Wiener is aiming to consolidate the petitions under a single entity, which controls the 73-unit building at 4530 Broadway in Washington Heights. Flagstar Bank filed its largest pre-foreclosure action in years, filing four summonses against Pinnacle.
Both bankruptcy petitions and pre-foreclosure filings represent more than half of Pinnacle's 8,700-unit multifamily portfolio in New York City, which spans approximately 136 properties totaling about 7.5 million square feet. Wiener became a billionaire in 2017 despite being a target of tenant complaints and fraud investigations. In 2022, he was penalized for not properly acknowledging needed capital repairs at a Forest Hills condo conversion. Wiener paid $330,000 to the reserve fund of The Georgian and $150,000 to the HPD. This year, Flagstar sold $142 million in rent-stabilized debt to Cantor Fitzgerald, backed by 27 assets tied to various borrowers, including Pinnacle.