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New York's largest commercial property owners, SL Green and Vornado Realty Trust, are showing signs of finally abating due to lower occupancy rates and low interest rates. SL Green's shares have more than doubled in the last 12 months, reaching $67 a share, and Vornado's shares have also doubled in the past year. Both companies still trade for at least a third below their pre-pandemic levels, with occupancy rates remaining below those halcyon days. However, RFR Holding has fallen $21 million behind on the Chrysler Building's ground rent, and landlord Cooper Union has moved to terminate its lease. Evercore ISI analyst Steve Sakwa agrees that the clouds are starting to part, at least for Class A office space owners.
SL Green has leased 1.7 million square feet through mid-September and is on track to exceed its goal of leasing 2 million square feet this year. The company's stock price is super-sensitive to interest-rate changes due to its $11 billion in debt. Falling interest rates make it easier to refinance loans, such as the $1.4 billion mortgage for 11 Madison Ave. due next September. Meanwhile, Vornado is showing progress leasing the redeveloped Penn 1 and Penn 2 towers next to Madison Square Garden, with occupancy in New York expected to reach 87.8%. Only 8% of Vornado's shares have been sold short, down from 13% a year ago.
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JPMorgan is set to open its new 60-story headquarters at 270 Park Ave. next year, with David Werner leading an investor group that owns 40% of 237 Park Ave., a building across the street from the soaring new skyscraper. The bank's lease for 270,000 square feet expires next year and won't be renewed because the new tower will be ready. A second big tenant, investment firm Jennison Associates, is expected to move out of 160,000 square feet next year. Replacing JPMorgan and Jennison will cost 237 Park's owners up to $150 million in free rent and lost income, according to KBRA.
The independent ratings firm valued the 21-story, 1.25 million square-foot tower at $510 million, a 59% drop since 2019. Werner and his partners have time to review their long-term real estate options in Manhattan, as 237 Park's $780 million in mortgage and mezzanine debt aren't due until 2027. JPMorgan will consolidate 10,000 of its 17,500 Manhattan workers into the new tower after it's finished next year, which could reverberate across Manhattan and especially on Park Avenue, where the vacancy rate of 13.4% is about half that of the rest of Midtown.
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Thakkar plans “something creative” for Midtown building bought on Ten-X for $8.5M
The sale of a nearly 1 million-square-foot Manhattan office building listed on online auction site Ten-X for only $8.5 million, 97 percent less than the $332.5 million that Swiss bank UBS paid for the property in 2006. The loss on the building was minimally offset by a $6 million gain UBS realized by buying and selling the ground beneath it in the interim. UBS and its brokers at JLL listed the 920,000-square-foot building for sale on the online platform. The two-day auction kicked off July 30 with a starting bid of $7.5 million. The sale ended the next day after Ten-X lowered the reserve price.
The winning bidder, whose identity has yet to hit property records, closed about 70 days later. Ten-X was an unusual place to sell such a large property, as such online listing platforms are often used by owners looking to unload lower-quality, middle-market properties, not where major institutions go to sell big-time assets. Ground leases have been especially hard hit since the pandemic because as offices have emptied, the monthly rent payments have come to exceed the revenue generated by the property. In these cases, the building owner will often try to renegotiate the ground rent, only to find the landowner is not willing to do so.
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Lender says troubled NJ investor defaulted on $153M in office loans
New Jersey investor Shaya Prager is facing lawsuits from Connecticut-based Webster Bank, which claims he defaulted on $153 million in loans. The lawsuits allege that Prager and his wife Shulamit Prager defaulted on a $62 million loan backed by ground leases at American Metro Center and a $91 million loan backed by ground leases at 300-600 Campus Drive in Florham Park, New Jersey. Between the two loans, Webster claims, Prager owes $141 million. Pragger's ground lease structure involves purchasing the land and buildings on properties, leasing them to an entity affiliated with Opal, and taking out loans against the land and ground lease. This scheme has caused issues in Texas, where his lender claims he lied about the connection between the landlord and ground lease tenant of Burnett Plaza.
Pragger is also facing foreclosure on two Minneapolis office towers and a four-building office complex in the Chicago suburbs. He is on track to face sanctions in the Chicago property lawsuit for failing to comply with the judge's orders to turn over $2 million to the property's receiver. Pragger is also facing lawsuits from preferred equity investors on three other properties, arguing he owes them $10 million in preferred returns. In this case, Prager is accusing the investors' managing member of embezzling the $10 million.
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Lender must wait for $534M foreclosure auction to close first
Fortress Credit Corporation is pursuing Charles Cohen for a $187 million personal guaranty he signed to secure a mortgage for Cohen Brothers Realty in 2022. Cohen quit making payments on the $534 million loan earlier this year, leading to a lawsuit and a knock-down-drag-out. A New York Supreme Court judge ruled in Cohen's favor, stating that no written agreement was ever signed. Cohen's attorney, Donald Harwood, said they would appeal the decision. Fortress can't collect just yet, as the parties must see through the $534 million UCC foreclosure initiated by the lender. After sued Cohen for the guaranty, Fortress launched a UCC foreclosure on the collateral for the loan, including a design center, Le Méridien hotel, 50 movie theaters, and Tower 57, an office building in default. Cohen managed to stave off the auction in June while the courts determined if the sale was "commercially reasonable," a requirement under the Uniform Commercial Code.
If the portfolio sells at auction, the price could satisfy some or all of the $187 million judgment against Cohen, allowing the landlord to pay out Fortress. However, the odds aren't in Cohen's favor, as most UCC foreclosures are uneventful and usually the lender wins in a credit bid. Cohen Brothers Realty is still on the hook for the balance of the $534 million debt. Fortress' attorney Lindsey Harris said the lender would have an "unsecured claim" against Cohen Brothers Realty if the collateral plus the guaranty is not more than the debt.
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Deer Park Road Management launches fund for office-backed debt
Deer Park Road Management, a Colorado-based hedge fund, has launched a commercial mortgages fund targeting office-backed debt. The Commercial Mortgage Opportunities I fund, the first of its kind for Michael Craig-Scheckman's firm, aims to raise up to $500 million, targeting investors from Europe and the Middle East. The fund has an 8% hurdle rate, the minimum rate of return required for an investment. The company has previously invested in discounted mortgage- and asset-backed securities after the Great Recession. Investing in commercial debt today is likely a long-term play, as valuations sink and defaults rise in the aftermath of the pandemic and the Federal Reserve's frequent rate hikes. Wall Street has been circling the distressed commercial real estate market for months, split between debt and assets themselves. MSCI reported in May that over $38 billion worth of office buildings nationally were at risk of default, foreclosure, or other distress, the most distress in the sector since the fourth quarter of 2012. Deer Park has more than $3 billion in assets under management and invested $15 million in BidMyListing in 2022.
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Meridian Capital Group has overhauled its risk and controls and will resume business with the mortgage-finance giant next year
Freddie Mac is set to end its blacklist of Meridian Capital Group after the real-estate broker overhauled its risk and controls. Meridian, which was banned in response to allegations of falsifying client financials to get bigger loans, will resume business with Freddie in January. The company has also been blacklisted by Fannie Mae and FNMA. Meridian shook up its management and started to build a risk and control framework, requiring brokers to obtain internal approval before moving forward with certain deals. A credit approval committee that includes members of management would have to sign off on all Fannie and Freddie loans, as well as those that are $75 million or above in size or some that have known concerns.
Fannie and Freddie, which are backed by the government, purchase and securitize a huge portion of loans in the U.S. residential and commercial mortgage markets. The agreement with Freddie came with terms that could slow the breakneck speed of deals in the real-estate brokerage industry. Lenders would face repurchase obligations if a Meridian loan defaults within the first 12 months, and they would have to complete extra due diligence for Meridian loans. Meridian also rolled out a review system for loans each quarter, assigning a score on a risk scale to assess whether and to what degree brokers may have altered the financials of the borrower.
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Nashville-based school will take over Manhattan campus of Episcopal seminary in financial distress
Vanderbilt University is pursuing an ambitious expansion plan that would give it footholds beyond Tennessee. The university has signed a 99-year lease for a 2.2-acre property in Manhattan's Chelsea neighborhood, valued at more than $100 million. The property currently includes 13 buildings with 150,000 square feet of space. Vanderbilt is also in discussions with West Palm Beach, Fla., for a $520 million project focusing on data science, fintech, and engineering. The university is in a fortunate class of colleges, attracting plenty of students, faculty, and research dollars. As colleges raise their price tags, Vanderbilt and its peers are jostling for new ways to attract students.
Location can be a significant selling point, given access to jobs and internships. Vanderbilt's published price for tuition, fees, room and board this year is around $95,000. About half of undergraduate students received need-based financial aid last year. The space in New York is currently owned by the General Theological Seminary, an Episcopal seminary dating back to 1817. Vanderbilt will pay for the New York campus with a combination of funds from tuition revenue and donations. The school can afford to expand while continuing to invest in its Nashville campus and provide financial aid to students.
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Payrolls in the sector also contracted sharply last month as a pandemic-era boom fades
The U.S. warehousing sector is experiencing a contraction following a period of frenzied expansion during the pandemic. Real-estate developers have slowed down the construction of warehouses and reduced warehousing payrolls, indicating a resetting market ahead of the busy holiday shopping season. The amount of industrial real estate under construction fell to 309 million square feet in the third quarter, a 43% drop from the previous year and the steepest drop since 2008. The vacancy rate for industrial real estate climbed to 6.4% in the third quarter, the highest quarterly level since the end of 2014. The receding demand is reaching across the sector, with warehouse operators shedding 11,000 jobs in September from August.
Payrolls in the storage and distribution sector have fallen by 171,600 jobs from a pandemic-era high of 1.94 million jobs in May 2022. The Logistics Managers' Index showed available warehouse capacity expanded in September but at a slower pace than August and below year-ago levels. The storage industry is contracting following a two-year stretch of feverish leasing, construction, and expansion due to e-commerce demand soared during the pandemic and companies seeking to place goods as close as possible to consumers. Consumer demand for goods has since cooled off as Americans have shifted towards spending more on services and grappled with higher inflation.
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