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Weekly Market Report - October 24, 2019

In January, WeWork jumped into an $850 million deal to buy Lord & Taylors flagship at 424 Fifth Avenue. A month later, the company signed a long-term lease to make them the only tenant in this building, which is 10-story’s tall and 660k SF. Now, after their IPO failure and letting go the CEO, Adam Neumann, WeWork is running around trying to figure out how to pay for this investment. Buildings in that neighborhood run for about $80/foot, however, WeWork is paying $105/foot, way above the average asking rent. The company will be forced to rely on outside brokers to market the space if they can’t find tenants themselves. To become a landlord to his own company, Neumann bought this building as well as others and because he was the CEO, no one said no to him.


No Fallout from WeWork IPO Failure

WeWork’s IPO crash will not affect the city’s leasing sector, according to landlords, as all the largest tech tenants in the world are coming to New York. As the West Coast is becoming too expensive and these companies want big buildings with big infrastructure. With WeWork’s fallout, people are expecting that leasing in the city will also fall, but that is not true. WeWork is just 1% of the city’s office space, which is roughly 7 million SF out of 550 million SF of city office space. Currently, there is 15 million SF of commercial space under construction in New York and projects that have been scheduled for 2019 completion have been 90% leased already. The commercial sector has a 6.9% vacancy rate, and during the second quarter of 2019, 18 million SF was leased. “This is the highest amount of transactions in the last 25 years,” according to REBNY.


In September, a bill was passed for fleshing out the definition of commercial tenant harassment and increasing the fines against said landlords for as much as $50k. Originally, the fines for commercial building landlords were from $1k to $10k. The bill listed 13 actions that qualify as harassment, including “using force, making threats and interfering with a tenant’s business with unnecessary construction, etc.” This also allows courts to order the Department of Buildings to deny construction permits to landlords if found guilty of harassing their tenants.


Office Leasing in Manhattan

· Midtown: leased 780k SF in August, down 28% from month to month and down 30% from year to year. The availability rate rose to 11.1% and the average asking rent increased to $87. 42.

· Midtown South: leased 330k SF, an 82% drop from the previous month and down 49% year after year. The availability rate dropped to 9.3% and the average asking rent fell to $85.70.

· Lower Manhattan: leased 260k SF, down 60% from the previous month and increased 8% from year to year. The availability rate decreased to 12.3% and the average asking rent increased to $63.36.


Federal Reserve Bank President see’s risks with landlords signing long-term deals with co-working firms. Some analysts worry about how the firms will pay rent on time, especially in an economic downturn, and if their tenants choose not to renew their leases. It was reported that “many co-working firms sign individual leases through separate shell companies, which makes it harder for landlords to sue the parent company if a shell company misses a payment”. If a co-working firm defaults on a lease during a healthy market, a landlord could take over the operation and cut deals with the subtenants.


Blackstone Group Inc. sold an office building in Boston last month. Because of this deal, the group was able to close on a $39 billion acquisition of Equity Office Properties Trust, which is the largest real-estate transaction ever. This deal was made in 2007, however, it was proven to be a disastrous move back then as well. Over 12 years later, the group has made $7 billion from the EOP buildings. It includes property sales and rental income over the year and is triple the $3.5 billion in equity that Blackstone originally contributed. In 2018, Blackstone left another major crisis deal with its remaining stock in Hilton Worldwide Holdings Inc. The group paid $26 billion for Hilton in 2007, and after taking it public, they made $14 billion, which is one of the largest profits ever made for a real-estate deal. Blackstone has become one of the biggest commercial owners, managing properties worth over $250 billion and all over the world. Some say that “Blackstone can’t keep churning out comparably strong returns without using the same level of leverage as with the Hilton and Equity Office”. Even with its riskiest deals, the firm keeps their debt under 70%, while Equity Office has a debt level of 82%.


In the Brooklyn Navy Yard, co-working space New Lab has taken over the 84,000 SF-work space in just over three years – all with startup companies. From 2016, membership went from 23 startups to 140 today. What makes New Lab different is they have strict rules on who they accept into their space: “Members must employ frontier technology and they must produce something helpful”. The acceptance rate is under 15%, and there is a wait list. The prices range from $500 a month for a free-floating desk to several thousand for a private office. A fun perk to being in this space is getting to test out everyone else’s products, such as a new coffee kiosk and lounge biodegradable chairs made from mushrooms. New Lab is open 24/7, and while they opened a second location nearby last month, the lab isn’t profitable yet. However, they will soon change that when they boost revenue from sources beyond renting desks, including corporations and municipalities paying to consult with New Lab on custom projects.


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