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Weekly Market Report - November 14, 2023


Companies That Don't Mandate Office Attendance Grow Revenue Faster, Study Finds

A study by Scoop Technologies and Boston Consulting Group has found that companies with flexible work-from-home policies experienced four times faster revenue growth than those with in-person requirements. The survey analyzed 556 public companies, employing 26.5 million people across 20 sectors. Firms that allowed employees to work entirely from home or choose the days they come in increased sales by 21% between 2020 and 2022, while companies with hybrid or full-time office policies saw revenue growth of just 5%. Among companies that required office work, those that allowed just a few days in-person saw sales increase at twice the rate of those that demanded workers come into the office full-time.

The revenue growth in the survey was normalized against average industry growth rates, so the findings weren't skewed by higher-performing sectors. Flexible workplace policies allow companies to hire from a broader range of people and recruit more quickly. The remote work debate has raged for years, with some sectors, like law firms, mandating workers return to the office. Tech firms have given workers flexibility, but more than 3 million workers are expected to be under new office attendance mandates this year.


Empire State Building office occupancy rate tops 90% to buck NYC’s woes

Empire State Realty Trust's third-quarter results showed a solid leasing performance, with 90.5% occupancy in Manhattan and comfortable liquidity. Revenue increased by 13.6% over the second quarter and 14% over 3Q in 2022, with visitors spending more. LinkedIn added over 25,000 square feet to its space in the tower last month, while Starbucks leased 26,000 square feet for its offices. The landmark is 90.2% leased, with 20% vacancy being the norm. The building has earned three awards for excellence in building management, sustainability, and community contributions, including the BOMA Grand Pinnacle Award, BOMA Earth Award, and the Manhattan Chamber of Commerce's Landmark of the Year honor. Stone Peak Capital is said to have a lease out for 75,000 square feet at SL Green's 245 Park Avenue. Large firms have also secured leases or are in advanced talks for expansion or consolidation space at prominent locations, such as BDT & MSD Partners for 100,000 square feet at Olayan America's 550 Madison Avenue and TD Bank for 100,000 square feet at 22 Vanderbilt.


Office Usage Reaches Highest Mark Since March 2020

Office usage reached record levels for the pandemic era last week, reaching 50.5% across 10 cities tracked in Kastle Systems’ Back to Work Barometer. Chicago, San Francisco, and New York City led the charge, with Chicago rising 3 percentage points to 55% of pre-pandemic usage, San Francisco going up 2.1 points to 44%, and New York City rising 1.6 points to 50.5%. The national usage rate just surpassed the previous pandemic-era high of 50.4%, recorded in September. The most occupied day on average across the 10 tracked cities was Wednesday at 59.4%, and the lowest was Friday at 33.1%. 2023 has seen an increase in return-to-office mandates, with 2 million workers under an in-person work requirement in August and an additional million expected by the end of the year. However, usage has been relatively stagnant throughout the year, hovering around 50% across the markets Kastle tracks.


RXR’s Helmsley Building nears default

Midtown landmark’s $670M loan matures Dec. 8

The Helmsley Building in Midtown Manhattan's office market is facing an imminent maturity default due to a $670 million loan. The property, which was purchased by Scott Rechler's firm for $1.2 billion in 2015, has been experiencing financial struggles since the start of the pandemic. The landlord has had to provide significant incentives to tenants to keep them around, leading to a weighted average rent of $79.40 per square foot in 2021. Voya, Reed Elsevier, and Clarion Partners all have leases that expire in 2025, putting 30% of the building's rent roll at risk of disappearing. The property was developed in 1929 and landmarked in 1987. RXR defaulted on a 33-story office tower in May, highlighting the threat of rising interest rates and remote work trends to office properties' viability.


Why real estate is so difficult to price right now

“Nobody has a good sense of value”: Deal shortage clouds market

New York City office sales have fallen nearly 50% from last year, and New York multifamily sales this summer fell to their lowest level since the Federal Reserve started raising interest rates in March 2022. This has made the guessing game of real estate valuations particularly difficult, leading dealmakers to avoid office spaces and instead focus on more stable asset classes such as top-of-the-line apartment buildings and warehouses. Lenders are focusing on metrics outside of valuations, such as debt service coverage ratio, a measure of whether a property is bringing in enough money to make its debt payments. Historically, developers and lenders have relied on appraisers for valuations, but they say their job is harder than ever. They need to cast a wider net when looking for comparables, going to bigger geographies, and not only looking at Class A.

The gap between the expectations of buyers and sellers is a key reason for the lack of sales, and it is unclear how long that will take. Large office owners like Blackstone, Brookfield, and RXR have already handed lenders the keys to some office buildings, figuring they are worth less than their debt. Non-judicial foreclosures are up significantly, and many lenders do not want to take back these assets or write down the loans and reveal properties' eroded value.The deal stasis is largely in the office sector, with demand for warehouses and logistics properties remaining strong.


Rejected WeWork space going residential

Vanbarton to convert 100K sf at 980 Sixth Avenue

The Vanbarton Group plans to convert about 90,000 square feet of office space at its 980 Sixth Avenue mixed-use tower into apartments, marking an early sign of landlords dealing with the failure of WeWork, the city's largest office tenant. The company, led by founders Richard Coles and Gary Tischler, began working on the plan several years ago as WeWork's struggles became more apparent. With WeWork out of the picture, the space will soon be turned into about 100 apartments. The 25-story building, which already has 380 rental apartments above the former co-working space and retail on the ground floor, was signed a lease there in 2017 during its big push into Manhattan. Vanbarton bought 980 Sixth Avenue in 2018 for $316 million and renovated it in 2021, rebranding it as The Hollingsworth. The company is one of the most active developers converting offices into housing.


WeWork's Bankruptcy Sends NYC Office Market Into Scramble Mode

WeWork has filed for Chapter 11 bankruptcy in New York City, with 69 of its U.S. and Canada leases rejected. Major landlords, including RFR, Nuveen, and Chetrit Group, are among the largest unsecured creditors against the company. WeWork leased 7.4 million square feet across New York City as of October 15, but it is unclear how much will remain after the rejected leases are tallied. The company anticipates exiting nearly 100 additional U.S. and Canada locations as part of the restructuring process. The solidifying of the lease rejections brings some comfort to the dozens of landlords with buildings on the list, but confusion has been generated by the company's list of its biggest unsecured creditors. The biggest unsecured claim of an NYC landlord is $8.7 million owed to Westfield Fulton Center and more than $8 million owed to Aby Rosen's RFR. WeWork's leases are concentrated in a particularly strained area: Class-B and C buildings.


WeWork Cuts Deal With Tishman Speyer To Hand Over 217K SF Coworking Space

WeWork has agreed to hand back 217K SF of coworking space to Tishman Speyer, a real estate company, as it appears to be on the verge of calling it quits on Queens. The bankrupt coworking operator at The Jacx in Long Island City will operate the large coworking space at its 1.2M SF development. WeWork members operating out of The Jacx will be offered the opportunity to stay in their spaces for the duration of their agreements with the coworking company. The transition will take place in the coming days, affecting several hundred individuals and companies housed in its coworking space at The Jacx.

WeWork operates two locations in Queens, at the Jacx and at Studio Square in Astoria. Neither building is listed on its website anymore. WeWork is still negotiating with the owner of Studio Square, but Google lists the location as permanently closed. The Jacx and Studio Square leases weren't among the 69 WeWork locations the company is looking to reject as part of its Chapter 11 restructuring process. WeWork is approaching each building on a case-by-case basis to find working options for its members and landlords, including reducing rent and tenancy expenses, alternative lease structures, and investment opportunities for its strongest assets.


Signature Bank loans could sell 40% below face value

Bids due on $33B commercial loan book Thursday

Signature Bank's $33 billion commercial loan book is set for auction, potentially impacting New York property values and transactions for years. Bidding is expected to be 15% to 40% below the original face value, with the process expected to set the barometer for commercial property values in the city. The loans are divided into pools secured by office, retail, hotel, and unregulated multifamily properties, representing about half of the loan book. Firms like Blackstone, KKR, TPG, and Goldman Sachs are reviewing the bidding material on the Signature portfolio. The LeFrak Organization is expected to bid on debt pools linked to apartment debt, while Marathon Asset Management is also chasing the portfolio. Discounts are expected due to rising interest rates since the original transactions. The Federal Deposit Insurance Corporation is expected to retain control of the $15 billion rent-stabilized loan book and sell minority stakes.


Rudin’s 32 Sixth Avenue nearly 40% vacant

Two major tenants downsized at Tribeca property and a third left last year

Michael Rudin, who will take over his family firm's office portfolio in January, is focusing on 32 Sixth Avenue due to rising occupancy rates at Rudin Management's Tribeca property. The property, which was purchased from AT&T for $150 million in 1999, has been in "solid financial shape" with approximately 150,000 square feet of lease extensions secured with telecom and data center companies. Rudin has also partnered with Industrious on a 52,000-square-foot space on the property's 13th floor, replacing CenturyLink Communications, Dentsu Holdings USA, and iHeartMedia division AMFM Operating. The building, has undergone $100 million in renovations. The company has proposed a triangular extension on the ground floor but has faced opposition from the community board. Michael Rudin will soon be taking on the role of co-CEO alongside Samantha Rudin Earls, who will be in charge of the company's apartment portfolio.

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