News.

Weekly Market Report - September 1, 2022

***

Tech Giants Shedding Corporate Office Space


The San Francisco-based ride-hailing company will sublease roughly half of its office space at its corporate headquarters in Seattle, New York City, Nashville, and Tennessee. The four offices combined span about 615,000 square feet, about 45% of which will be up for grabs. The company declined to say how much space it took in the other target cities or how much would be put up for sublease. The downsizing plan comes several months after the ride-hailing giant said its corporate employees would have the option to work remotely on an indefinite basis. More than 4,000 office workers were allowed to pivot to a "fully flexible workplace" in March, a shift that meant employees had no requirements about when or where they chose to work.


“Our approach will always be about bringing people together, not forcing them together,” the company previously said about the transition out of in-person office space. Lyft and other tech companies, including Salesforce, Yelp, Dropbox, Zillow, Amazon and Facebook parent Meta, have been at the forefront of real estate decisions made to either downsize, relocate or get rid of office space altogether in order to adapt to an evolving pandemic. The impact has rippled across the national office market, sending sublet availability to record highs in some cities and creating a blueprint for companies in other sectors on how to balance a new type of work environment with their spatial needs. Vacancy has soared to about 15.5% across the regional office market, far beyond the roughly 6% reported at the beginning of 2020.


***

Tax code change led to today’s office glut


The pandemic has shone a harsh spotlight on office vacancies. The glut of space long predates Covid, though. In fact, analysts and investors trace its origins all the way back to a Ronald Reagan era tax change. The change led to a building boom that ultimately outstripped demand for desk space. In 1981, the Reagan administration changed the tax code in a bid to amp up the economy, for example, by allowing investors to depreciate commercial real estate at a faster pace. As a result, they put more money into office development than was justified by demand. On top of that, developers found it easy to borrow money to build office projects, at least until the savings-and-loan crisis.


From 1981 to 1989, completion of new office space in the top 50 markets topped 100 million square feet annually, peaking in 1985 at 182 million square feet. While vacancy rates declined in the 1990s, the trend reversed with the Great Recession as companies slashed their office footprints to lower costs. Empty offices have been abundant since then, yet tax subsidies have continued to fuel office development. The office vacancy rate in the United States hasn’t dipped below 12 percent in the past 17 years. The 18.9 percent vacancy rate last quarter was the highest of that period.


The long-term nature of the problem, combined with the post-pandemic rise of remote work, means vacancy rates aren’t likely to ebb anytime soon. Meanwhile, a flight to quality has exacerbated the problem for older buildings, which for a variety of reasons are difficult to convert to other uses.


***

Related Reportedly Looking to Offload Equinox Hotel


Related Companies is looking to get $200 million for the David Childs and Skidmore, Owings & Merrill– designed building at 35 Hudson Yards, which has a mix of hotel, office and retail space including a Stephen Starr restaurant known as Electric Lemon. Equinox — which Related owns a stake in — will continue to manage the hotel even after the sale, The potential sale of 35 Hudson Yards comes on the heels of Related looking to sell off other assets in its portfolio, including the Argyle House luxury apartment building in Los Angeles.


Marketing materials shared with Commercial Observer in May showed that Related was seeking a sale on an all-cash basis, or with financing in place of $80 million at 3.65 percent interest. An asking price was not included and Related did not return requests for comment at the time. Then, in April, Related seemed to be taking another look at their financing for its Hudson Yards assets and sought to modify the $1.2 billion loan from Deutsche Bank and Bank of China on The Shops & Restaurants at Hudson Yard. The developer was successful in extending the maturity date by four years, CO reported at the time.


The seven-story mall was originally anchored by Neiman Marcus but the department store was one of the first to file for bankruptcy during the pandemic and shuttered the Hudson Yards outpost just 16 months after opening. Related is converting the store into office space, with sources previously telling CO the developer was close to securing a tenant for.


***

Pension Funds Are Selling Their Office Buildings


Major U.S. and Canadian pension funds are cutting back investments in office buildings, betting that prices will likely fall as the five-day office workweek becomes a thing of the past. Retirement funds are still buying property, partly in a bid to reduce the impact of inflation. But those investments are more focused on warehouses, lab space, housing and infrastructure such as airports. The shift is part of a broader transition away from traditional real estate holdings in offices and shopping centers as the Covid-19 pandemic has accelerated the rise of e-commerce and remote work.


Michael Turner, president of Oxford Properties, the real-estate arm of the $90 billion Ontario Municipal Employees Retirement System, said that within the next decade he expects office space to fall to roughly 20% of the real-estate portfolio from about 25% today. Oxford, whose portfolio was 44% office space six years ago, is buying warehouses and biomedical-science research facilities. In the past 12 months, it has sold its stake in a $2.1 billion building in Manhattan, an $850 million tower in Toronto and an $825 million building in Boston. Private real-estate funds currently hold 23% of their investments in offices, down from 34% three years ago, according to an index maintained by the National Council of Real Estate Investment Fiduciaries. These funds’ holdings in retail space have fallen to 10% from 17% over the same period,


Meanwhile, industrial properties have grown to account for 31% of those private real-estate funds’ investments, according to the council, up from 18% in 2019. Pension officials are increasingly seeking out stakes in airports, highways and utilities. Those so-called infrastructure assets have grown to 4.1% of total pension portfolios from 3% in 2017 for retirement funds that report them separately from other real-estate assets.


***

Jeff Sutton faces Fifth Avenue foreclosure for unpaid $300M loan


The lender alleges 717 GFC LLC, which lists the same address as Wharton Properties, now owes $314 million, including interest and late charges. The loan is secured by the retail and fourth-floor offices at 717 Fifth Avenue, where Dolce & Gabbana and Armani are tenants. The lawsuit was filed in Manhattan Wednesday and does not have an index number, which means the county clerk has yet to review it. Sutton and partners, including Stanley Chera, bought the retail space in the 26-story office building in 2004. Two years later, Sutton bought out his partners and SL Green took a stake in the property.


In 2012, Sutton acquired most of SL Green’s stake, leaving Marc Holliday’s firm with 10.92 percent, according to SL Green’s filings with the Securities and Exchange Commission.


In 2012, New York Life Insurance and TIAA provided the $300 million loan in two $150 million pieces. The property also took a $355 million mezzanine loan, according to an SL Green filing with the SEC. New York Life bought TIAA’s half of the loan last fall, according to the lawsuit. The insurance company alleges the property owner failed to pay off the loan when it came due July 11. Two weeks later, New York Life notified 717 GFC that it was in default. The property owners said Wednesday that the foreclosure suit was filed even though the two sides are working things out.