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Weekly Market Report - October 2, 2023

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The Partnership for New York City has released a survey revealing that 58% of Manhattan office workers are at their desks on an average weekday, up from 52% in late January 2023 and 49% in September 2022. This data is much higher than the Kastle Systems Back-to-Work Barometer's recent report of "metro" New York occupancy at 50.1%. The Partnership also found that the "rate of return" to offices was 72% of pre-pandemic levels, meaning offices were on average 72% occupied. The actual drop in office attendance since 2019 is much smaller than previously assumed. Most Kastle-covered buildings are a mix of Class A-minus and Class B locations, and most of the city's 11 largest commercial landlords have higher attendance than smaller landlords. The Partnership's numbers are based on a survey of over 140 major Manhattan office employers. However, the Partnership's chief executive Kathryn Wylde has never sought to sugar-coat the city's undeniably troubled economic state.



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Boston Properties has partnered with trillion-dollar sovereign wealth fund Norges Bank Investment Management (NBIM) on a 49-story office project in Midtown Manhattan. NBIM bought a 45% stake in the planned development, a 900K SF commercial skyscraper near Grand Central Station. The developer revealed last month that it had a joint venture in place for the development but didn't disclose the identity of its new partner. The venture has signed a 99-year ground lease for the site with its owner, the New York City Metropolitan Transportation Authority. The ground lease agreement requires the developers to build a new entrance to the Grand Central Station terminal, but plans aren't final. The partners have the ability to terminate the ground lease and receive reimbursement for costs associated with transit access. The $1.4T sovereign wealth fund is already a joint venture partner in New York City office properties, including Hudson Street offices leased to Google and 2 Herald Square.



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Landlords are in a bind with building values, rental income down while expenses keep rising


Commercial property owners are facing increasing insurance costs due to natural disasters, inflation, and a shrinking reinsurance market. Commercial real-estate insurance costs have risen 7.6% annually since 2017, with some cities being particularly hard hit, particularly for multifamily buildings. The impact of rising insurance costs has been more punishing than rising interest rates, as many landlords still have low debt costs due to long-term, fixed-rate mortgages. Insurance contracts typically renew every year, forcing property owners to either sign a new policy at a higher cost or skip insurance altogether. The number of property sales for $25 million or more is down 79% since late 2021, contributing to the steep drop. Intensifying natural disasters, increasing reinsurance costs, and inflation have pushed up the cost of repairing or rebuilding damaged properties. Many landlords are left to foot much of the bill themselves, with mortgage lenders demanding insurance that covers the full cost of rebuilding the property.



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Wells Fargo, Two Trees Management and Fulton Street Cos. buck the trend


Wells Fargo is investing $550 million to buy 20 Hudson Yards for a retail-to-office conversion, despite the prevailing perception that the office market is in decline. The deal, which spans floors five through seven, is expected to be one of the year's largest commercial property deals in Manhattan. This move is not a reversal of office-to-residential, but a conversion to office is rare these days as companies adapt hybrid and remote work policies. Two Tree Management in Brooklyn converted a 460,000-square-foot Domino Park megaproject into office space, a move that was unheard of in the past. Office space is on the rise in Brooklyn, while office leasing is declining. In Chicago, Fulton Street Cos. secured financing for its $300 million development at 919 West Fulton Street, the city's first major new office development in over a year. Bank OZK and Manulife are financing the project with a $200 million loan, with Manulife providing $120 million.



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Mark Zuckerberg’s company had 18 years left on the unoccupied space


Mark Zuckerberg is spending $181 million to break its office lease at British Land's 1 Triton Square in London, despite having 18 years remaining on the lease. Meta, Facebook's parent company, agreed to lease the 310,000-square-foot space in 2021, a year into the pandemic. By the end of last year, the company said it would not occupy the space and instead try to sublet it. Meta still holds a lease at another British Land property, 10 Brock Street, taking all 10 floors. In the last eight months, British Land leased 262,000 square feet across its London office portfolio. Meta is looking to sublease or give up nearly 1 million square feet in Europe, particularly in London or Dublin. The cash infusion from Meta's lease break will benefit the firm.



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A survey of investors suggests that the commercial real estate market is heading for a severe collapse due to high interest rates and declining property values. Around two-thirds of respondents believe that the market will recover only after a crash. The Fed's aggressive interest rate hikes are increasing the cost of financing commercial properties, which has hit rent levels. Investors are bracing for a possible crisis triggered by default on $1.5 trillion in debt due by the end of 2025. Over the next four years, commercial real estate properties must pay off debt maturities that will peak at $550 billion in 2027. Vacancy rates are at 30-year highs in many American cities, with New York City experiencing a 22.2% vacancy rate in Q1 2023. Office buildings in New York City have lost $76 billion in value from their most recent sales prices. The New York Fed has expressed uncertainty about the commercial real estate sector's return to its prior strength, largely due to the shift to remote work and online shopping.

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