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Manhattan's office market is facing a crisis, with nearly 100 million square feet of space vacant. However, investors and developers are betting big on the city's future with a dozen jumbo towers in various stages of planning or completion. Companies like Blackstone, American Express, Jane Street Capital, Nomura, Barclays, CBS, Google, Ralph Lauren, Willkie Farr & Gallagher, MetLife, and Ares are seeking 200,000 to 500,000 square feet. At the smaller end, three dozen companies are seeking over 100,000 square feet, while at least 100 need 20,000 square feet or more — roughly a floor or two in a new tower. Hudson Yards, a site with several projects in various stages of planning, is preparing to launch 70 Hudson Yards, a 1.2 million-square-foot design by Roger Ferris + Partners and Gensler. The building is slated to be finished in 2026 and will offer lower property taxes under the Pilot program. Other towers are being constructed by competing developers within the Hudson Yards district and Hudson Square.
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The pandemic has significantly impacted office usage, with over 1 billion square feet of office space expected to be obsolete within seven years. Tenants are increasingly seeking office spaces with amenities, particularly in New York, as the five-days-a-week office schedule is dead. Buildings closer to mass transit options have seen a significant increase in activity, with office properties within 10 minutes of mass transit having 88% of the traffic compared to pre-pandemic levels. Commuting time is the biggest factor employees consider when returning to in-person work. For office tenants, the focus should be on the neighborhood the office is in rather than the amenity program at the building. High-end financial tenants are more likely to pay top-end rents and are more focused on good amenities nearby than in their buildings. There is also a large class of tenants who want amenities but don't have the money to build them out, which is where office owners can see a return on their investment if they are creating amenity centers. These centers can be helpful to tenants and potentially worth investing money in.
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Firm shoring up funds for distressed properties, waiting for 30% price drop
Cohen & Steers is preparing to invest in distressed commercial real estate, but is not yet ready to take the plunge due to price declines in the sector. CEO Joe Harvey stated that prices needed to fall between 25% and 30% before it would resume investing in distressed properties. The firm is still raising capital as the market corrects. Investors have pulled more money from Cohen & Steers funds than they've invested for six consecutive quarters, resulting in a 20 percent fall in assets under management. Shares of U.S. real estate investment trusts declined by 8.6% in the third quarter, outpacing the 3.3 percent decline on the broader S&P 500. Cohen & Steers' flagship fund has gained 2.3% on the stock market in the last three years, well behind the gains seen on the S&P 500. A McKinsey Global Institute report estimated that falling demand could wipe out $800 billion in office value across "superstar" cities worldwide.
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183 Madison loan 60 days’ delinquent; Club Row, 24 West 45th watchlisted
APF Properties, once a leading office landlord for WeWork, is struggling with loan payments tied to two of its properties and is delinquent on the debt collateralized by a third. The buildings back $423 million in debt, and all three have suffered a WeWork exit. 183 Madison Avenue, which APF bought from Tishman Speyer and Cogswell-Lee Realty for $220 million in 2018, is in the worst shape. The property's $173 million loan is over 60 days past due, and APF missed the September maturity date. As of April, WeWork was current on its rent, but with interest rates rising, APF's cash flow at the building was only covering two-thirds of its debt payments. When APF failed to pay off the loan last month, 183 Madison was no longer listed on WeWork's site. 28 West 44th Street and 25 West 45th Street have both seen WeWork go dark and occupancy suffer as loan maturities draw near. WeWork was once the largest tenant at the West 45th building with about 13% of the space. At the end of 2022, occupancy stood at 82%. At Club Row, WeWork held the second-largest lease, totaling 7% of the rentable area. Occupancy dropped throughout the pandemic, from 86% at the end of 2020 to 76% two years later.
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Two loans marked nonrecoverable account for most of increase
New York Community Bank has reported a surge in bad debts, primarily due to office properties. The bank's loan portfolio saw charge-offs or nonrecoverable debt rise to $26 million in Q3, up from $1 million in the same period last year. Commercial real estate loans, mostly backed by office properties, accounted for $14 million in charge-offs in Q3, compared with zero a year ago. CEO Thomas Cangemi blamed two office loans: a $28 million mortgage on a Syracuse property and a $112 million loan tied to a Manhattan building. The Syracuse building is owned by AMTrust Realty. The majority of NYCB's office loans are collateralized by properties in New York City, where remote work is forecast to deplete values by 44%. In Q3, Class B and C properties had already depreciated 20% since the start of the pandemic. Multifamily loans marked 30 to 89 days past due rose 76% year-over-year to $60 million, the largest increase across the firm's loan book.
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Storefronts from Soho to the Upper East Side dazzle as tenants race to gobble up space
Manhattan's retail market has rebounded rapidly, making prime locations difficult to find. Rents on upper Madison Avenue between 59th Street and 86th Street have pushed back toward $1,000 per foot, with 75 transactions bringing rents back to $1,000 per foot. Dolce & Gabbana secured a 23,338square-foot former Hermès women's store at 693 Madison Ave., while Sotheby's will take over the former Whitney Museum in the Breuer building at 945 Madison. Tiffany & Co.'s redevelopment will allow Louis Vuitton to move into the former Nike space to its east. Louis Vuitton will develop a new tower at 1 E. 57th St. and engulf 743 Fifth Ave., now occupied by Hublot. Gucci has renewed its large store on the Fifth Avenue base of Trump Tower, Swarovski is opening soon at 680 Fifth, Rolex is building its own tower at 665 Fifth Ave., and Marc Jacobs will take over the former Armani X on the north corner of East 51 Street at 645 Fifth Ave. The area closer to 42nd Street is lagging due to numerous big-box storefronts. One problem for the entire retail market is that it takes so long to get deals done, as it is not scientific to measure a market by counting empty storefronts. Electric Shuffleboard will be introduced to the city next spring, and the 32,400square-foot former Showfields space on Lafayette Street is up for grabs with Retail by Mona.
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Suit claims Joe Sitt’s firm refused to put money into the property
Charles Scribner's Sons' former headquarters, located at 597 Fifth Avenue, has become nearly vacant due to a court-appointed receiver claiming that its owner, Joe Sitt's Thor Equities, has abandoned the property and adjacent building on 48th Street after falling into default on a $105 million loan in 2020. Thor left the properties' operations to its mezzanine lender, SL Green, in 2021, but both firms have refused to put money into the buildings. The Scribner Building's facade is deteriorating and it needs over $1 million to fix its fire sprinkler system and water tanks. The properties require major repair, with the facade deteriorating and the fire sprinkler system needing over $1 million to fix. The receiver is looking to sell the properties. The 12-story Scribner Building, designed by Ernest Flagg, has over $20 billion in assets under management and is currently seeking a foreclosure lawsuit.