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Weekly Market Report - May 6, 2021

Paramount Group Chief Executive Albert Behler has 850 million reasons to hope Mayor Bill de Blasio’s forecast that the city economy will fully reopen July 1 comes true. Behler’s company owns 1301 Sixth Ave., a tower nearly 30% vacant after banking giant Barclays exited at the start of the year. While Paramount’s sales team markets the 500,000-square-foot space, Behler is doing what he can to steer his firm through the pandemic. Topping his to-do list: refinancing the building’s $850 million mortgage that expires in November. “The markets are very liquid,” Behler said on a conference call Thursday, referring to the ultra-low interest rates available to top-tier borrowers. “You want to take advantage of that.”


With the U.S. office market in its worst crisis in a decade, some landlords are discovering the risks of putting all their tenant eggs in one basket. Office landlords often consider leasing an entire building to one company an efficient way to collect steady rent checks. Now a small but growing number of landlords are in danger of losing their properties as their only or primary tenant declines to renew a lease, leaving the landlord at the mercy of a historically bad office-rental market. Manus Clancy, a senior managing director at research firm Trepp, said a departing major tenant is usually the main issue with office loans that are in trouble. That was the case in the Houston suburbs, where oil-field-services company Schlumberger Ltd. occupied more than half of a 100,000-square-foot building. But the lease expired in late February and Schlumberger didn’t renew. Office owner defaults are still a rarity, largely because most tenants sign long-term leases and continue paying even when their employees are working from home. Only 2.2% of office buildings with securitized loans were delinquent on their mortgages in March, up from 1.9% a year earlier, according to Trepp.


About 80,000 city workers returned to their offices Monday for the first time since the onset of the pandemic, providing a boost to a New York office market that remains decimated by the coronavirus. Mayor Bill de Blasio had announced during the winter that the city would start bringing its remote workers back to their offices in May. His administration moved forward with that pledge despite criticism from the city’s largest municipal employees union, DC37, that its approach has been haphazard and a weekend rally at City Hall opposing the return. But de Blasio defended the city’s approach to bringing its workers back at a Monday news briefing. “There is a single, unified approach. It is consistent,” he said. “There are differences in each office, that’s true, because some offices have more space, some offices have less space, but, no, I’m quite satisfied. It’s been a careful, consultative approach, and it is working.”


For those who enjoy a retail real-estate mystery, here’s one that puzzled me recently. Before the pandemic, a 27-block stretch of Second Avenue on Manhattan’s Upper East Side was outperforming most city shopping strips with a relatively low storefront vacancy rate of 8.6%, according to a real-estate advisory and management firm. Then Covid-19 hit. And what happened? Its vacancy rate actually dropped, to 6.4%. Same for Amsterdam Avenue on the Upper West Side. The street’s vacancy rate of 9.6% at the start of 2020 fell to 7.4% by year-end. These two corridors stand out in Manhattan, where many high-profile shopping districts, including Times Square and Soho, saw their vacancy rates soar past 25%. The biggest factor might be the Second Avenue subway, Mr. Kolb says. The awful construction period leading up to its 2017 opening kept the street’s storefront rents low at a time when rates were doubling in other parts of Manhattan. Asking rents now start at $140 a square foot, he says. Another factor: Most businesses lining Second Avenue are Amazon -proof—we’re talking nail salons, waxing joints and a ridiculous number of restaurants. Of the 138 storefronts I counted between 72nd and 86th streets, 73 were bars, restaurants or cafes.


Big companies are making plans to stick with city-center office buildings, but they are cutting back on space and driving down rent prices for years to come, according to an analysis of U.S. office leasing trends prepared for The Wall Street Journal. Rent proposals made during the first quarter suggest that many companies in the biggest markets—including New York, San Francisco, Chicago and Los Angeles—are embracing an emerging hybrid model: maintaining a shrunken office presence while allowing employees to work remotely at least part-time. The terms under negotiation show landlords are offering long-term leases of four and more years at discounts up to 13% below rent rates reached in the first quarter of 2020 when factoring in concessions like periods of free rent, according to VTS. Companies are also seeking on average about 10% less space than they were looking for in the first quarter of 2020.


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