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Weekly Market Report - November 4, 2022

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Meta Expects To Shell Out $2B This Year To Get Out Of Office Leases


Dave Wehner, chief financial officer of the company that owns Facebook, Instagram, WhatsApp and other platforms, said on its third-quarter earnings call Wednesday that Meta expects to lose roughly $2B from its cutback in office leases this year. California-based Meta embarked on a series of cost-cutting measures as its stock price plunged this year and revenue growth slowed. Wehner said the company is willing to take a financial hit in the near term from backing out of leases in order to protect its budget for next year.


Meta reported $84.4B in total revenue for the first nine months of the year, and it expects fourth-quarter revenue to exceed $30B. The fallout from Meta's office footprint rollback has struck multiple markets. In Mountain View, California, the tech giant ended a two-building, 457K SF lease earlier this year. Meta also confirmed to Bisnow it was backing out of a 200K SF Manhattan lease earlier this month and previously said it was putting other New York office expansion plans on ice. In the third quarter alone, impairment costs for Meta totaled $413M. The company is also slowing hiring to manage expenses, CoStar reported.


The Facebook parent isn't the only tech company bracing for a tough winter. Alphabet Inc. Chief Financial Officer Ruth Porat said the firm was also slowing hiring during the Google parent's Q3 earnings call. Other big tech companies have backed out of offices too. In August, Lyft revealed it was looking to sublease nearly half of its office holdings across San Francisco, New York City, Seattle and Nashville, Tennessee. And Yelp said in June it was closing offices in New York, Chicago and D.C.


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Soloviev selling Solow Building in what could be record NYC office deal: sources


The heir to Sheldon Solow’s real estate empire is negotiating to sell what is arguably the most prized address in modern capitalism: 9 West 57th Street. A deal for the Plaza District property would likely be the biggest of the pandemic era in New York City, and likely one of the largest office deals in history. The 50-story, 1.6 million-square-foot building was last appraised in July 2016 at $3.4 billion, or over $2,000 per square foot, CMBS documents filed with the SEC show.


Developed by Solow in 1974, the building became as famous for its distinctive SOM-designed sloping facade as for its developer’s scrupulous nature. Solow reportedly hand-picked the companies he thought suitable for his prized property. That velvet rope gave 9 West 57th Street an air of exclusivity beyond that created by $200-a-foot rents. Private equity giant KKR was headquartered in the building during its leveraged-buyout heyday, when it did made-for-movie deals like the buyout of RJR Nabisco. The popular footwear company Nine West was named after the building. The building sometimes dealt with high vacancies, as Solow preferred to let space sit empty rather than lower rents and dent its cachet.


In the half-century since 9 West opened its doors, newer, shinier buildings have lured some occupants away — KKR relocated to Hudson Yards — but the property retains its allure. Manhattan office leasing volume surged in the third quarter as the borough’s availability rate dropped to its lowest level in 18 months, according to Colliers. Asking rents, on average, remain about 7 percent lower than at the onset of the pandemic. But trophy office towers such as 9 West 57th Street tend to float above market trends. In 1970, when Solow had completed the five-year assemblage for the tower, he told the New York Times that “you can only get away with this once.”


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CBRE plans layoffs, $400M in cost reductions


The commercial brokerage giant outlined a $400 million cost-reduction plan on Thursday as it adjusts to macroeconomic realities, and indicated that a large portion of those cuts will be achieved through layoffs. On its third-quarter earnings call, CBRE said the cost reductions will be implemented over the next six months, and $300 million of the cuts will be permanent — with the vast majority coming from headcount reductions. The remaining $100 million of cost-cutting efforts are expected to be temporary until the business stabilizes.


While the Dallas-based brokerage handled a solid volume of transactions in July and August, it cited a significant post-Labor Day pause in both property sales and loan originations. The company’s Americas Capital Markets revenue, which includes sales and debt origination, was flat in July and August on a year-over-year basis, then plummeted 43 percent in September. The slowdown coincided with the Federal Reserve’s latest interest rate hikes intended to slow the flow of cash across the economy as regulators aim to reel in inflation. The cuts will be made in addition to walking back discretionary bonuses, incentive compensation, profit sharing and commissions, the company said. The decline in business was more rapid than the brokerage expected during the second quarter, when it was preparing for a more challenging market but not to the degree it’s experienced so far.


With the $400 million target for spending cuts, CBRE has identified $175 million in reductions by the end of the year, and a significant majority of the remainder to be completed by the end of the first quarter of 2023. Deal volume is expected to ramp back up toward the end of next year, Giamartino said. And leasing volume was a bright spot in the quarter, up 14 percent from last year, with a positive near-term outlook.


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Why NYC companies are betting on big office space


Jumbo city tenants are looking far into the future and not the pandemic past by exploring options and committing to new spaces. Inking deals at $200 per foot has become the old $100 per foot, while $300 per foot has been achieved at both One Vanderbilt and L+L Holding’s 425 Park Ave. which officially opens today. 16 deals over 100,000 square feet were closed in Q3 compared to 11 deals in Q2. With 25 million square feet signed already, 2022 will surpass last year’s 26 million square feet of leases. Recent large commitments to new buildings include KPMG and D. E. Shaw leased 456,000 square feet and 283,421 square feet, respectively, both at Brookfield’s upcoming Two Manhattan West.


Franklin Templeton inked a deal for 347,000 square feet on the high floors of SL Green Realty Corp.’s upcoming reinvention of One Madison Ave. at a reported $145 per square foot in a project that already snagged IBM for 328,000 square feet and Chelsea Piers Fitness for 56,000 square feet. To wit, on the east side of Grand Central Terminal, TF Cornerstone is planning a jumbo 2 million-square-foot tower at 175 Park Ave. with offices and a Hyatt brand hotel. Brokers say Blackstone is contemplating 1 million square feet of its glass and steel space. Vornado’s buildings by Penn Station have been snagging tenants with 300,000 square feet leased at Penn 1 alone. Blue Cross Blue Shield has recently moved into its new 70,000 square feet of offices designed by Gensler.


Bloomberg has leases rolling in 2029 at its namesake tower at 731 Lexington Ave. and you can bet that owner, Steve Roth’s Vornado Realty Trust, is courting them for the replacement tower at the Hotel Pennsylvania, Penn 15. Apple is also seeking 1 million square feet and as Vornado’s ever-growing tenant at Penn 11, is another candidate for Penn 15.


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Comcast Puts 500K SF Of Office Back On Market As Sublease Surges


Comcast has more than 500K SF of office on the market for sublease nationwide, representing about a tenth of all the office space the media giant occupies in the United States. The company told CoStar that it is using office space differently now — that is, workers are coming to their offices less often than before, a widespread trend. A significant return to the office nationwide was anticipated for this fall but hasn't materialized in the way the CRE industry hoped. For its part, Comcast said its office workers need to be in the office three days a week, an increasingly common pattern.


Comcast is hardly alone in putting space on the sublease market. There are a record 217.8M SF of offices for sublease nationwide. That is considerably more than the last peak of 143.3M SF in the second quarter of 2009, when the Global Financial Crisis was in full swing. This time around, the surfeit of sublease space is driven by companies re-evaluating their real estate needs in light of the fact that the five-day-in-office workweek is a dead letter for many office workers. For anyone actually looking for office space, however, the influx of sublease space means that good deals are available. The average discount for Class-A sublease space in the top 10 U.S. office markets is now more than 30%, up from just over 26% at the beginning of the year.


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Silverstein, Berman extend deadline to close $180M deal


It’s been more than five months since Silverstein Properties and Berman’s Metroloft Management went into contract in May to buy the 30-story Financial District tower from Rudin Management in an office-to-resi conversion play. The buyers had a deadline to close the deal by the end of October, but now say they plan to close the deal by the first quarter of next year. Sellers typically give their buyers 60 to 90 days to close large commercial deals, so the original end-of-October deadline was already an extended timeframe that recognized the challenge of financing deals as the Federal Reserve aggressively pushed up borrowing costs.


The central bank is expected to hike interest rates by another 75 basis points next week and has one more meeting planned this year, in December. The cost of financing a big commercial real estate deal seems likely to only get more expensive. Rising interest rates, the war in Ukraine and the possibility of a recession are making it difficult to execute big real estate deals. Many owners are choosing not to put their properties up for sale, while others have pulled properties off the market when the prices they expected don’t materialize.


In the most extreme cases, deals are disintegrating. Andrew Chung’s Innovo Group lost its $30 million deposit when the company’s attempt to buy the HSBC Tower at 452 Fifth Avenue for $855 million fell apart. While several issues led to its demise, the sudden increase in interest rates played a significant part. The 55 Broad Street deal is different in some ways. While Chung had to deal with a large vacancy at a time when doubt plagues the office market, Silverstein and Berman are planning to convert the 425,000-square-foot building into apartments. Also, Property & Building Corp., the owner of the HSBC Tower, is listed on the Tel Aviv Stock Exchange and had public shareholders to answer to.