No Grave Dancing For Sam Zell Now. He’s Paying Up For Hot Properties
Storied real-estate investor is focusing on more mainstream deals, a strategy reflecting the dearth of distressed properties. No Grave Dancing For Sam Zell Now. He’s Paying Up For Hot Properties
Sam Zell, who made a fortune buying distressed commercial properties, isn’t finding many bargains these days.
Instead, the storied real-estate investor is doing something he usually avoids: following the pack and spending big on something safer.
His most notable real estate deal during the coronavirus pandemic period came last month, when one of his companies agreed to pay about $3.4 billion for Monmouth Real Estate Investment Corp. Far from a hobbled company in distress, Monmouth owns 120 industrial properties in 31 states. The sector is one of the most profitable because of high demand for fulfillment centers from e-commerce companies such as Amazon.com Inc.
Mr. Zell also wasn’t able to drive as hard a bargain as he had in many previous distressed deals. The all-stock deal reached in May is valued at more than $18 a share, a near-record for Monmouth stock. He could conceivably have to pay even more, since Blackwells Capital, which made an $18-a-share all-cash bid late last year, said it is weighing options including a higher offer.
Mr. Zell declined to comment. But the 79 year-old’s more conventional investment strategy is the latest sign that the pandemic hasn’t produced the distressed opportunities many investors expected.
Hotels, malls and other properties have suffered enormous declines in revenue. But few owners have been forced to sell at steep discounts thanks to government stimulus programs and the Federal Reserve’s easy money policy which kept a lid on foreclosure.
“From both a monetary and fiscal perspective, authorities have made sure that distress would be extremely limited in all walks of life,” said Cedrik Lachance, Green Street Advisors’ head of global REIT research.
Meanwhile, the popularity of online shopping and remote working during the pandemic raised big questions over when or if office buildings, malls and other property types would ever rebound. That has greatly increased the risk of buying such real estate at what might seem to be an attractive price.
Mr. Zell is known in the industry as the “grave dancer” for his ability to pick up wounded real estate for cheap prices, and then selling them years later at a big profit. He purchased dozens of foreclosed office buildings in the 1990s at steep discounts. He eventually sold most of them through his $39-billion Equity Office Properties deal in 2007.
Yet on a recent conference call, Mr. Zell described retail real estate as a “falling knife”—investors who think they are getting a bargain might end up getting bloody themselves. Prices haven’t fallen enough in the sectors that are getting beaten up, he said.
“There obviously is going to be an opportunity in retail. I just don’t think it’s here yet,” he said. He added that hotels also look expensive: “I can’t relate…pricing to the way I see opportunity.”
Mr. Zell owns a range of real estate through private and publicly traded companies as well as other businesses. His largest real estate holdings include his stakes in Equity Residential, which owns nearly 80,000 apartments, and Equity LifeStyle Properties Inc., one of the country’s largest investors in manufactured homes. Neither of these two companies made major acquisitions or dispositions during the pandemic.
His firm Equity Commonwealth, which has agreed to buy Monmouth, was formed after a group including Mr. Zell seized control of an office building company named CommonWealth REIT in 2014 by ousting its board in an unusual proxy battle.
The new board raised cash by selling most of its assets, recognizing that private investors were paying more for office buildings than their public market valuations.
The strategy was applauded by analysts. “Normally companies sell a couple of buildings and give themselves a pat on the back,” Mr. Lachance said. “These guys just kept going.”
Mr. Zell’s goal was always to reinvest that cash. “What it tells you about the Covid era is that they just couldn’t find true distress,” Mr. Lachance said.
The $10 Billion Bright Spot In The Battered World of Office Real Estate
Blackstone, KKR and other investors are betting on laboratory space as vaccines fuel the economic rebound.
Even as the remote-work era clouds the future for offices, one segment of the business is drawing cash from investors including Blackstone Group Inc. and KKR & Co.
More than $10 billion has gone toward buying buildings used for life sciences and other research this year, according to Real Capital Analytics Inc. That accounted for approximately 4% of all global commercial real estate transactions through May, double the share from last year.
That estimate doesn’t count new construction, and fresh buildings are breaking ground in U.S. cities including Boston, San Diego and San Francisco — many without having signed major tenants. Unlike workers in conventional offices, many scientists don’t work remotely. And as vaccines help fuel the economic rebound, funding for medical innovations is expected to drive the need for more space, particularly in the U.S. and U.K.
“The pandemic only amplified the demand growth, but it’s a trend we think will continue for years,” Nadeem Meghji, Blackstone’s head of real estate Americas, said in an interview. “This is about, broadly, advances in drug discovery, advances in biology and a greater need given an aging population.”
Last year, as social-distancing emptied out office buildings and damped investor interest in malls and hotels, life science building sales and refinancing totaled about $25 billion, up from roughly $9 billion in 2019, according to Eastdil Secured.
Blackstone, a veteran investor in the sector, booked a $6.5 billion profit from refinancing BioMed Realty Trust, the largest private owner of life-science office buildings in the U.S. It also agreed in December to buy a portfolio of lab buildings for $3.4 billion.
KKR paid about $1.1 billion in March for a San Francisco office complex it plans to repurpose for life science tenants. DropBox Inc. had rented the entire site in 2017, but gave up the space so employees could work remotely. In one high-profile U.K. example, a science campus is planned for a Canary Wharf site once slated as the London headquarters for Deutsche Bank AG.
Overall, the U.K. life sciences market saw a 166% increase in the volume of transactions in the last three years, according to real-estate services firm Jones Lang LaSalle Inc.
Even before the pandemic, life science property was on the upswing. Over the last five years, asking rents for such space soared 90% in the San Francisco Bay Area compared with 20% for conventional office space, according to commercial property brokerage Newmark. In Boston, which along with nearby Cambridge is an epicenter of the industry in the U.S., asking rents climbed three times as fast.
Life sciences specialist Alexandria out-gained office REITs through Covid-19.
Investors see the higher rents translating into higher property values, which explains why construction projects are moving ahead without tenants lined up. Among the biggest spec builders is IQHQ, a startup that raised $2.6 billion last year to develop laboratory buildings that are breaking ground without signed leases.
In April, the firm launched construction of Fenway Center, a $1 billion complex on a platform above Boston’s Interstate 90 with a rooftop view of the famed Red Sox ballpark. The firm isn’t concerned about filling up the space, according President Tracy Murphy.
“We build spec, but we don’t build blind,” Murphy said in an interview from San Diego, where her firm is pouring concrete for a 1.6 million-square-foot waterfront lab complex. “I don’t see any end in sight for money coming in.”
Harrison Street, a Chicago-based alternative real asset investor, has about $2.6 billion invested in lab properties and wants to double that over the next 24 months, Chief Executive Officer Christopher Merrill said in an interview. Alexandria Real Estate Equities Inc., the largest life sciences real estate investment trust, also has big expansion plans.
In January, it paid $1.5 billion for a project in Boston’s Fenway neighborhood. The company has 4 million square feet of space under construction — about 1 million of which still hasn’t been leased.
As investors clamor to break ground, there’s a risk of an oversupply of space, said Jeffrey Langbaum, an analyst with Bloomberg Intelligence. Another hazard for developers is that lab space construction can cost as much as 15% more than conventional offices. Science buildings require stronger structures and higher ceilings to accommodate features such as enhanced air filtration. That limits potential other uses for the property if health-industry tenants don’t materialize.
Lab buildings are trading for capitalization rates, a measure of returns for investors, of less than 4%, which is lower than apartment buildings or industrial properties. There’s been cap rate “compression” over the last year amid a surge in investor capital flowing into the sector, according to Sarah Lagosh, managing director in the Boston office of Eastdil.
The recovery of traditional offices is expected to take time as companies call employees back over the next few months. Even then, many firms have said they’ll let people stay home at least part of the time. That’s raised concerns about the future of downtown skyscrapers, while Covid-19 has added to the momentum for life sciences properties.
“The pandemic has pushed life sciences into warp speed,” said Jonathan Varholak, who runs the life sciences team in the Boston office of the real estate firm CBRE. “You can’t do chemistry from home.”
How A SoftBank-Backed Construction Startup Burned Through $3 Billion
Katerra’s downfall shows how Silicon Valley’s strategy of growth at any cost can backfire in complicated industries like real estate.
Venture-backed startup Katerra Inc. aimed to revolutionize the construction business by mastering every element of the trade at once. Instead, its June bankruptcy filing made clear just how difficult it is for Silicon Valley to disrupt this complex industry.
The firm’s downfall wiped out nearly $3 billion of investor money, making it one of the best-funded U.S. startups ever to go bankrupt. Katerra thought it could save time and money by bringing every step of the construction process in-house—from manufacturing windows to factory-built walls to making its own lightbulbs.
It sold the idea to a deep-pocketed roster of financial backers, including SoftBank Group Corp. , Soros Fund Management LLC and the Canada Pension Plan Investment Board. At its peak, the company was valued at nearly $6 billion.
But Katerra never managed to do very well at all the aspects of construction it hoped to master, former employees say, leaving some of them exasperated at its recent demise.
“You guys had the golden goose, you had all that money from SoftBank and at the end of the day it was all pissed away,” said Chris Severson, a former construction-cost estimator at Katerra.
Katerra’s failure is the latest sign that the hypergrowth strategy employed by social media and software companies faces challenges in complicated, slower-moving industries like real estate.
Its bankruptcy also highlights the difficulty of modernizing construction, which accounts for around 4% of U.S. gross domestic product but still operates largely the way it did 100 years ago.
The company is in the process of crafting a restructuring through a chapter 11 bankruptcy process—one that involves selling some assets and keeping its international operations, a Katerra spokesman said.
The Menlo Park, Calif.-based company was co-founded in 2015 by a group of entrepreneurs including Chief Executive Michael Marks, the former CEO of electronics manufacturer Flextronics International Ltd.
Katerra’s strategy was to bring the electronics industry’s end-to-end manufacturing process to the construction business. The firm would buy materials and fixtures like sinks and faucets in bulk, skipping the middlemen and selling them directly to general contractors. When the company found general contractors were reluctant to use their products, Katerra took on that role, too.
Properties would be built with assembly-line-made parts in its own factories and shipped to sites managed by its in-house construction business. Katerra would then turn them into apartments, hotels or offices designed by its architects, all with the help of its in-house software.
This would streamline the process and enable an apartment building to be built in as few as 30 days, slicing off many months that the process would take through traditional construction.
Katerra managed to succeed with some of this top-to-bottom process, but few developers were interested in everything Katerra offered.
Still, as Katerra’s business model became more complex, it found a new backer in SoftBank. With the help of the Japanese conglomerate’s nearly $2 billion investment, Katerra bought general contractors across the U.S. and a building-parts manufacturer in India.
It was further aided by $440 million in debt from Greensill Capital, a SoftBank-backed lender that tumbled into insolvency in March. Eyeing international expansion, Katerra signed a contract to build thousands of homes in Saudi Arabia.
“Everyone’s so excited about the mission that everybody just says yes to everything,” recalled Erica Storck, one of the company’s first employees. ‘It gets out of control.”
In its race to boost revenue, Katerra agreed to build properties before it had figured out how to mass-produce building parts and get them to its projects cheaply and quickly enough to make the model work, say former employees, customers and investors. Architects designed buildings with parts from Katerra’s factories, only to learn that the parts wouldn’t be ready. Losses on projects piled up.
The company often signed contracts with prices based on rosy projections and then turned to its in-house team of estimators to figure out how much it would actually cost. Often there was a gap of millions of dollars, said Mr. Severson, the former Katerra estimator.
“We just beat our heads against the wall going: ‘No you can’t, it’s not possible,” Mr. Severson recalled. In one case, the company briefly considered leaving air-conditioning units out of a California student-housing development to make the numbers work, he said.
When architects and engineers raised concerns, Katerra executives would at times hold up an iPhone, telling the skeptical workers that if it could be done for phones, it could be done for apartments, a former employee said.
Rather than mass-produce a single type of building, Katerra built offices, hotels, single-family homes and apartment buildings of varying heights. That made it much harder to mass-produce prefabricated parts in factories and reduce costs because a wall panel designed for a three-story apartment building didn’t work for a 10-story building, former employees said.
The contractors it acquired also often balked at buying parts from Katerra, preferring their old subcontractors and suppliers, these people said.
By early 2020, the company was in danger of running out of money. Mr. Marks’s solution was to go even bigger. To realize his seamless vision, he believed Katerra needed to also be a developer that would own stakes in the real-estate projects it built and get a cut of their profits. That, he said, was where the real money was, former employees recalled.
The company’s board, though, ousted him early last year. His successor, the former oil-field-services executive Paal Kibsgaard, cut costs in part by shrinking the company’s research and design and manufacturing divisions. The cuts came too late, and Katerra filed for bankruptcy protection on June 6.
Former employees said they still believe in the idea of a vertically integrated, automated construction company. Multiple former executives said they believe cost overruns on early projects obscured more recent progress elsewhere in the business, and Katerra could have been profitable if it pivoted to more development and stayed focused on growth.
Still, many in the industry think a more focused approach is better.
“The problem’s not money,” said Gerry McCaughey, whose Entekra LLC makes factory-built wood frames for houses. “They were trying to go end-to-end on everything—and that’s what failed.”
Billionaire N.Y. ‘Bottom Feeder’ Buys Malls As Others Run Away
Igal Namdar has made a fortune buying shopping malls no one else wants.
He scoops up struggling centers at bargain-basement prices after their landlords lose faith, betting he can turn a profit before the last tenants turn out the lights. So far, that strategy has netted big gains — as well as lawsuits accusing Namdar of allowing his real estate to slide into disrepair.
In building an empire of 268 properties in 35 U.S. states — most prominently aging malls in small cities — Namdar has accumulated a personal net worth of about $2 billion, according to the Bloomberg Billionaires Index.
The pandemic accelerated Americans’ years-long shift to e-commerce, forcing many already-ailing department stores and apparel shops to go dark. Landlords that own lower-end malls — with high proportions of tenants that have fallen behind on rents or shuttered stores — have been hit especially hard.
For Namdar, that smells like opportunity. He expects a flurry of deals in 2022 as more owners of troubled retail properties head for the exits.
“Any seller of retail — malls or open air — any size of portfolio, we’re there,” Namdar, 51, said in an interview from his headquarters in Great Neck, New York. “We can close immediately, as is, where it is, with no due diligence.”
The formula for Namdar Realty Group and partner firm Mason Asset Management is to recruit down-market retailers to fill vacancies while holding down costs by limiting debt and capital-improvement spending.
“They’ve been a bottom feeder, historically, buying on the cheap, for pennies on the dollar and making a go of it,” said Jim Costello, senior vice president at Real Capital Analytics Inc. “It’s not the high end of the market, but it’s solid retail if you can set it up right.”
Real Capital tracks 134 of the Namdar Realty Group’s properties and estimates that portfolio is worth about $2.7 billion.
Namdar declined to comment on the value of the properties his company owns, or his personal wealth, but said the figures Bloomberg is reporting are inaccurate.
U.S. mall values have plunged 46% from their 2017 peak, including an 18% drop since the Covid-19 pandemic started, according to real estate information service Green Street. Declines have been fastest among B and C-rated malls like Namdar’s, where sales per square foot average a few hundred dollars.
Namdar’s bet is that he can pay a small enough price to outrun the decline. He said he sees value in the properties as malls, where other investors in the market are more interested in redeveloping them for other uses.
“It’s all about the cost basis,” said Cedrik Lachance, director of research at Green Street. “If you’re buying to harvest cash and not reinvest, it will work.”
Some of the biggest landlords, including Simon Property Group Inc. and Brookfield Asset Management Inc., have walked away from centers where values slumped below the property’s debt. Other companies — Washington Prime Group Inc., CBL & Associates Properties Inc. and Pennsylvania Real Estate Investment Trust — filed for bankruptcy, raising the potential for massive portfolios to come up for sale.
Namdar and Mason have averaged 20 acquisitions annually over the past decade, but could swallow 100 at a time if the right deal came along, Namdar said, declining to provide details on how much money they plan to spend.
Mason President Elliot Nassim, 40, whose cousin married Namdar, focuses on leasing and redevelopment while Namdar oversees property management.
Namdar and Nassim make no pretense of catering to luxury consumers. They say they charge affordable rents so stores such as Claire’s, Lids and Piercing Pagoda can fill vacancies.
One center, the Eastdale Mall in Montgomery, Alabama, is now 100% leased, up from 70% when it was purchased in January 2020 for $24 million.
“Is it where my wife would shop?” Nassim said about their properties. “It’s a different market.”
Their first purchase, in 2012, was the DeSoto Square Mall in Bradenton, Florida, after Simon defaulted on the debt. They sold it in 2016 for $25.5 million to ML Estate Holdings LLC, which sued two years later, contending the property had lower revenue and higher costs than represented.
“Namdar’s approach to its real estate business generally is to purchase marginally performing properties, drain them of cash and operating funds, and then sell them,” the lawsuit in New York Supreme Court in Brooklyn alleged.
DeSoto Square closed permanently in April, according to local news reports. Meyer Silber, an attorney for ML Estate, declined to comment.
Namdar has also been sued by retailers, including International Decor Outlet, which in 2017 accused the landlord of contract breaches such as malfunctioning air conditioning, substandard repairs and inadequate security at the Regency Square Mall in Jacksonville, Florida.
“Landlord is an absentee landlord with a reputation as a ‘slumlord,’” the complaint in Duval County Circuit court alleged.
At the same property, Impact Church of Jacksonville accused managers of avoiding upkeep, making the “building look abandoned.” Impact paid $7.4 million in 2016 to buy a former Belk department store on the site, where it now runs a school as well as a church. The price was more than half the $13 million Namdar paid for the entire mall, which names 46 other tenants on its website.
Namdar declined to discuss individual cases but said such complaints are rare.
“There were factors that led to this, such as not having the rent to pay,” he said. “Properties that are marked for redevelopment are few and far between, so we maintain our assets.”
In addition to buying properties, the company has acquired potential tenants. Last year, Namdar and Mason paid $12 million to buy cinema chain Goodrich Quality Theaters Inc. out of bankruptcy. They also invested in the furniture chain formerly known as Jennifer Convertibles.
Among recent mall deals was the $10.3 million purchase in April of Marketplace at Brown Deer outside Milwaukee, valued at $45 million in 2005, according to loan documents and an announcement by the seller, Retail Value.
“We’d like to improve our quality but we’re not going to pay a crazy premium for an A-mall,” Namdar said. “Our goal is to stick to those B and B-plus assets. Those A’s get to be too crazy. The Ferraris of the world — that’s not the kind of car we’re looking for.”
Bill Gates Takes Control Of Four Seasons In Deal With Saudi Prince Alwaleed
Bill Gates will take control of the Four Seasons hotel chain after his investment firm agreed to acquire a stake from Saudi Prince Alwaleed bin Talal’s Kingdom Holding Co., in a bet that luxury travel will rebound from a pandemic-induced slump.
Gates’s Cascade Investment LLC will pay $2.2 billion in cash to boost its stake in Four Seasons Holdings to 71.25% from 47.5%, according to a statement Wednesday.
The lodging industry has been hobbled by a drastic slowdown in global travel as the world struggles to halt the spread of Covid-19. Vaccination campaigns helped fuel a lodging rebound led by leisure travelers, but luxury hotels are still lagging behind lower-quality properties, according to data from STR.
Gates, 65, and Alwaleed, 66, have known each other for decades. In 2017, the Microsoft Corp. co-founder described the prince as an “important partner” in their charitable work, and he was one of a few Western executives to voice support for Alwaleed after he was detained and accused of corruption by Crown Prince Mohammed Bin Salman.
Four Seasons shareholders took the company private in 2007, when it managed 74 hotels, with Gates and Alwaleed leading the deal. The new owners expanded the company’s footprint to more markets in a bid to capitalize on what was then a booming market for luxury travel.
The chain now manages 121 hotels and resorts, and 46 residential properties, and has more than 50 projects under development, according to the statement. Its landmark Kingdom Tower in Riyadh is among the two dozen hotels it owns across the Middle East and Africa. That property is popular among the consultants and bankers who commute from nearby Dubai and have helped transform Saudi Arabia’s economy.
It has also expanded efforts to attach its brand to luxury homes, as real estate developers realized that affluent buyers would pay more to live in a condominium or residential community associated with the hotel brand.
Kingdom Holding, which will retain 23.75% of the hotel chain, plans to use proceeds from the transaction for investments and to repay debt. Four Seasons Chairman Isadore Sharp, who founded the company in 1960, will keep his 5% stake. The deal is expected to be completed in January.
Alwaleed has made a series of deals since he reached a “confirmed understanding” to secure his release from detention in 2018. Shortly after, he invested about $270 million in music streaming service Deezer. In February, he sold a stake in his Rotana Music label to Warner Music Group Corp.
Cascade, which is run by Gates’s money manager, Michael Larson, first invested in Four Seasons in 1997, when it was publicly traded. The investment firm also manages the endowment of the Bill and Melinda Gates Foundation.
Gates and Melinda French Gates ended their 27-year marriage last month. He has a net worth of $152.2 billion, according to the Bloomberg Billionaires Index, and she has received almost $6 billion of shares in public companies, filings show. More precise details of how the ex-couple’s fortune is being split remain confidential.
Alwaleed’s wealth has been almost cut in half since 2014 and now stands at $18.4 billion. In an earlier interview, he attributed the decline to a slump in Kingdom Holding’s shares and not because of any agreement or settlement he made during his detention. About half of the prince’s wealth is tied to shares in the holding company, in which he owns a 95% stake.
Alwaleed’s holdings include shares of Citigroup Inc., ride-hailing firm Lyft Inc. and Accor SA.
His investment company reported a loss last year of 1.47 billion riyals ($392 million). The value of his other holdings — including Saudi real estate, public and private equities, jewelry and a superyacht — helped mitigate some of the losses, according to figures previously provided by the firm.
Shares of Kingdom Holding rose 1.1% on Wednesday, giving it a market value of almost 40 billion riyals.
Pimco Sets Its Sights On Commercial Real Estate
As the Covid-19 pandemic reduces property values, the bond investor pursues higher yields by acquiring hotels and office buildings.
Pimco, one of the world’s largest fixed-income investors, has been ramping up its commercial real-estate holdings at the same time that historically low interest rates have undercut bond returns.
The firm, which is officially known as Pacific Investment Management Co. and has $2.2 trillion under management, has been seeking higher yields than those offered by investment-grade corporate bonds by buying hotels, office buildings and other property types that have lost value during the Covid-19 pandemic.
Pimco also has become more active because last year its parent, German insurer Allianz SE, put the firm based in Newport Beach, Calif., in charge of managing its Allianz Real Estate investment business. Between its own investments and those made by Allianz, Pimco acquired $12 billion in private commercial property between January 2020 and June 2021, the firm said.
The combined Pimco and Allianz real-estate business also originated or invested in $7 billion in real-estate loans during that time, a Pimco spokeswoman said.
In its biggest real-estate investment during the pandemic, Pimco agreed this month to pay $3.9 billion for Columbia Property Trust, a real-estate investment trust that owns a portfolio of office buildings in New York City, Washington, D.C., Boston and San Francisco. The purchase, subject to Columbia shareholder approval, would be the first acquisition of a pure office real-estate investment trust since 2019, according to Thomas Catherwood, an analyst with BTIG LLC.
Columbia owns 6.2 million square feet of space mostly in decades-old downtown office buildings, such as the former New York Times headquarters and 315 Park Avenue South in Manhattan.
The big bond manager’s recent property-buying spree stands in contrast to many dedicated real-estate investment funds and private-equity firms, which have mostly held on to money raised for distressed sales in hopes that prices might fall further.
In the early months of the pandemic, Pimco was the rare active competitor in the distressed public-securities market. The firm invested $1 billion in shares of real-estate investment trusts and commercial mortgage-backed securities. Pimco also was active last year restructuring properties as a lender, taking advantage of the retreat from the market of traditional lenders.
More recently, Pimco has been one of the first investors to begin buying downtown hotels. That sector has been slower to rebound than resort hotels because business travel has yet to make a big comeback.
Pimco’s recent hotel deals have included the W Washington D.C. hotel, which the firm agreed to buy for more than $200 million. The firm plans to rebrand the property, which opened in 1917 and offers views of the White House from its rooftop, as an independent hotel.
Pimco has been more optimistic than many other investors in the office sector. Some investors are steering clear of these buildings because the success of remote work has raised questions about whether office demand will ever return to previous levels.
But Pimco is bullish on well-located offices in major markets, as well as those “in high-growth markets like the Southeast that benefit from population migration,” the spokeswoman said.
By being a contrarian, Pimco is able to buy office buildings for lower prices. Pimco’s purchase of Columbia Property Trust amounted to $19.30 a share, or 20 cents below what an investment group led by Arkhouse Partners and the Sapir Organization offered in March. The price dropped as Covid-19’s Delta variant spread around the U.S.
“As recently as June, when vaccinations were going up and case counts were going down, there was a little more optimism,” said John Kim, analyst at BMO Capital Markets Corp. “But since Delta spread out, office REITs started to fall with the delay of return to office.”
Distressed Retail Debt Pile Collapses
Distressed debt tied to retail enterprises is putting on something of a vanishing act.
The overall amount of tradeable troubled debt has shrunk from near $1 trillion in March of last year to less than $60 billion as of September 10, data compiled by Bloomberg show. And the portion of that from the retail industry has collapsed at an even faster clip.
In late March 2020, about $60 billion of distressed bonds and loans could be traced to the retail industry, data compiled by Bloomberg show. That pile stands at some $1.1 billion now, representing about a 98% decline.
The retail industry has been in a tailspin for years, with brick-and-mortar sellers decimated by shifting consumer preferences and booming online rivals. The Covid-19 pandemic quickly made matters worse: lockdowns sent dozens of hobbled retailers into Chapter 11 bankruptcy, including the likes of J.C. Penney Co. and Brooks Brothers Group Inc.
Since then, a number of once-troubled retail giants have slashed their debt in bankruptcy, cut their store count or tapped wide-open credit markets to resolve immediate liquidity issues. Plus, massive government spending and a resurgent economy have helped troubled businesses more broadly.
“The pandemic accelerated restructuring plans for the weakest players, while the recovery narrative and, to no small extent, retail traders, facilitated a strong rebound for most survivors,” said Noel Hebert, director of credit research at Bloomberg Intelligence.
So far this year, 95 companies with at least $50 million of liabilities have filed for bankruptcy in the U.S., according to data compiled by Bloomberg. That’s about half the pace seen last year, but still higher than the 10-year average of 93 filings as of September 13.
The total amount of traded distressed bonds and loans fell 6.9% week-over-week to $56.9 billion as of September 10, data compiled by Bloomberg show. The amount of traded distressed bonds dropped 3.9% week-on-week, while distressed loans slipped 14.6%.
There were 174 distressed bonds from 97 issuers trading as of Monday, down from 175 bonds and up from 94 issuers about one week earlier, according to Trace data.
Diamond Sports Group LLC had the most distressed debt of issuers that hadn’t filed for bankruptcy as of September 10, data compiled by Bloomberg show. Its parent company, Sinclair Broadcast Group Inc., said in a March filing that it expects Diamond to have enough cash for the next 12 months if the pandemic doesn’t get worse.
Home Builders Might Be A Home Run Once Supply Woes Ease
Lumber prices drop, but materials and labor hold back supply and send U.S. new home prices higher.
If only lumber had been all that was keeping home builders from selling more homes.
The Commerce Department on Friday reported that 740,000 new homes were sold in August, at a seasonally adjusted, annual rate. That was above July’s 729,000 but is nothing close to the 977,000 homes sold in August of last year.
The continuing problem is that builders have struggled to meet the increase in demand for homes that the pandemic helped set off. That struggle has been compounded by their difficulties obtaining materials and labor. Many builders have delayed putting homes on the market to bring their inventory levels back in balance with demand and taken other actions such as limiting how much buyers can customize homes.
One of the first indications of how severe builders’ supply-chain problems were came when framing-lumber prices began shooting higher last year. But many problems affecting lumber supplies have since been ironed out, and framing-lumber futures prices are now down over 60% from their May high. Yet there is a lot more that goes into building a house than lumber, and builders are dealing with myriad other materials that are in short supply, from garage doors to vinyl siding.
On Monday, Lennar said that in its fiscal quarter ended August 31 that it delivered fewer homes than it expected, blaming “unprecedented supply chain challenges.” Also on Monday, D.R. Horton said that it expects to close on fewer homes in its fiscal quarter ending this month than it earlier thought. It, too, cited supply-chain issues, as well as difficulties finding workers. KB Home on Wednesday reported fiscal third-quarter home deliveries that fell short of expectations and said that disruptions to its supply chain had intensified as the quarter progressed.
Even so, this is an especially profitable time to be a home builder. The Commerce Department reported the median price for a new home in August was $390,900, versus $325,500 a year earlier, and the drop in lumber prices is now providing them with a boost. D.R. Horton said that it expects the gross margin on its home sales in the current quarter to be 26.5% to 26.8%, for example, compared with its previous forecast of 26.0% to 26.3%.
It would be nice to have some assurances on when builders’ supply-chain woes will be worked out, but so far—and understandably given how uncertain the environment is—they aren’t giving them. If and when they are able to build enough houses to meet demand, they could be rolling in money.
Big Tech Companies Amass Property Holdings During Covid-19 Pandemic
Google, Amazon and Facebook acquire offices and retail space, helping prop up commercial real-estate markets.
The biggest U.S. companies are sitting on record piles of cash. They are getting paid next to nothing for holding it, and they are running out of ways to spend it.
So they are buying a lot of commercial real estate.
Google’s announcement last week that it would purchase a Manhattan office building for $2.1 billion is the latest in a string of blockbuster corporate real-estate deals since the start of the pandemic. Amazon.com Inc. last year paid $978 million for the former Lord & Taylor department store in Manhattan. Facebook Inc. bought an office campus in Bellevue, Wash., for $368 million.
Overall, publicly traded U.S. companies own land and buildings valued at $1.64 trillion, according to S&P Global Market Intelligence. That is up 38% from 10 years ago, and the highest for at least the past 10 years, according to S&P.
Retailers such as Walmart Inc. and restaurant chains such as McDonald’s Corp. have long been major property owners of their own stores. Big technology companies are now joining them, scooping up offices, data centers, warehouses and even retail space.
Buying real estate is a way for these companies to avoid sometimes pricey and cumbersome leases, because they often occupy these buildings and become their own landlords. These usually modern or renovated and sometimes custom-built properties are the kind of buildings that have appreciated in value over the years. But owning real estate also puts companies at risk of losses if urban property values fall.
For now, the corporate buying spree is helping prop up commercial real-estate markets at the same time many investors are shying away from office and retail buildings amid rising vacancy rates.
Many private-equity and real-estate funds have also raised hoards of cash, but for the most part they have been reluctant to spend during the pandemic in hopes that prices could fall further. And unlike real-estate investment firms, big corporations often buy their buildings without taking out mortgages, allowing them to spend more of their money and to close on deals more quickly.
A number of factors have converged to unleash the buying spree. For one, firms have more money to purchase real estate. Big, profitable companies that dominate their industries have grown even bigger, allowing them to accumulate more cash.
More recently, uncertainty over how much Covid-19 will harm the economy has prompted more companies to hoard cash, said Kristine Hankins, a professor of finance at the University of Kentucky.
U.S. publicly traded companies hold $2.7 trillion in cash, cash equivalents and short-term investments, not counting real-estate and financial companies, according to S&P Global. That is up more than 90% from the fourth quarter of 2011.
Interest rates are hovering around their all-time lows, so companies can get higher returns buying real estate than by keeping their money in low-risk bonds or other public securities, said Brian Kingston, chief executive of real estate at Brookfield Asset Management.
“That cash is just sitting there in a not particularly productive way,” he said.
Office prices, meanwhile, have fallen in Manhattan, San Francisco, Chicago and other big cities during the pandemic, making investing in this real estate cheaper than it was 18 months ago, investors say.
Google and its deep cash coffers have set it apart from most every other company in terms of an increasing appetite for real estate. Alphabet Inc., Google’s parent, held $135.9 billion in cash, cash equivalents and short-term investments as of the second quarter of 2021, more than any other publicly traded company, not counting financial and real-estate firms, according to S&P Global.
Alphabet is now one of the biggest real-estate owners in New York City and the U.S. It held $49.7 billion worth of land and buildings as of 2020, up from $5.2 billion in 2011.
Google buys real estate because it wants to control the buildings it occupies, for example to make changes without having to get a landlord’s permission, said the company’s director of public policy and government affairs, William Floyd.
Amazon, which owns a lot of warehouses, held $57.3 billion worth of land and buildings—more than any other U.S. public company except Walmart. The online retailer doesn’t care whether it buys or leases as long as the building is right, according to the company’s vice president of real estate and global facilities, John Schoettler.
“We’re really agnostic about it,” he told The Wall Street Journal last fall.
The Beauty of Buying A Ski Home In Idaho? Nobody Knows A Thing About It
Not typically regarded as a high-end ski destination, the state is attracting a wave of home buyers who want smaller resorts, shorter lift lines and a more low-key, laid-back vibe.
Schweitzer Mountain has 2,900 acres, great snow and stunning lake views; it’s Idaho’s largest ski terrain area.
Most people have never heard of it.
“We have no lift lines. It’s low-key, it isn’t pretentious and there’s a strong sense of community,” says David Thompson, a retired surgeon from Houston who bought a ski-in, ski-out house there with views of Lake Pend Oreille in 2009 for $850,000.
It isn’t easy to get to Schweitzer—the closest major airport is in Spokane, Wash., about a two-hour drive, including a steep road with sharp switchbacks. The two fastest routes from Idaho’s capital, Boise, are 10-12 hours and involve going through either Washington or Montana.
There aren’t many shops and hotels right at the mountain’s base, and cell and internet service can be spotty in the area. Residents have to pick up their mail in the village.
But Schweitzer is in the midst of a dramatic transformation, aiming to become a destination resort. Last season it added seven runs and two lifts and joined the Ikon Pass, a 47-mountain destination ticket that gives members access to elite ski areas around the world, including Aspen, Colo., Jackson Hole, Wyo., Utah’s Deer Valley, Vermont’s Killington and Zermatt in Switzerland.
The resort village, with a year-round population of about 65, currently looks like a giant construction site, as the resort embarks on a multiphase rollout of residential development. An angled, contemporary glass-and-steel hotel and restaurant, designed by hip Portland, Ore., firm Skylab Architecture, is rising amid the more traditional alpine condos and lodges.
The skeletons of new modern houses and townhouses bolstered by steel rods now inundate the steep slopes.
Demand for real estate is so high that there are currently no houses on the market for sale and only two condos—a stark difference from the 40-50 units for sale in the wider area at any given time in the past, says Patrick Werry, an agent with Century 21 Riverstone. Home prices have risen 40% over the past year in this resort village of about 700 homes.
“Everyone is trying to get on the bandwagon,” says Craig Mearns of M2 Construction, which has a three-year waiting list to even start building a custom house. Its latest spec project sold out in a month, even when prices increased from $550,000 to $950,000 for a unit.
What’s happening at Schweitzer is happening all over Idaho. The state is in the midst of a ski renaissance. As its resorts expand their ski terrain and add amenities, demand for homes is booming.
“Idaho is attracting people who want a smaller resort experience—the feel that other Western resorts used to offer but don’t anymore,” says Thomas Wright, president of Summit Sotheby’s International Realty.
Idaho’s ski resorts are scattered across the state and their characters are as different as the terrain that surrounds them, from the arid, celebrity-infused Sun Valley, to the insular, pine-tree dense village of Tamarack, north of Boise.
All the way east is the wilder, remote Grand Targhee, in the Teton Range, located in Alta, Wyo., just on the border with Idaho. But the appeal of all these places is the same: low-key, uncrowded skiing with consistent snow.
Real-estate agents say the demand for ski resort homes is an offshoot of the demand for homes in Idaho overall, a movement fueled by the pandemic, with people looking for properties with more space and, in some cases, more lax Covid restrictions.
(Idaho is currently in a hospital resource crisis because of its high rate of Covid.)
Idaho’s home prices have grown 42% in the past two years—twice the national average and the highest of all the states, according to Nik Shah, CEO of Home LLC., a down payment assistance provider.
“Most of my friends are like ‘Idaho, what’s there?’ My response is, ‘exactly—it’s because you don’t know about it,’ ” says Harmon Kong, a 57-year-old investment adviser from Lake Forest, Calif.
Mr. Kong and his wife, Lea Kong, fell hard last year for Tamarack and bought two places: a ski-in ski-out, three-bedroom, three-bathroom penthouse condo in the fall of 2020 for $1.8 million, and three-bedroom, three-bathroom chalet nearby for $1.28 million.
Mr. Kong was used to skiing at Heavenly Ski Resort in Lake Tahoe, Calif., which he likens to Disneyland because of the crowds. At Tamarack, he says the snow is routinely powdery, there are hardly ever lift lines and there’s lots of backcountry skiing.
Opened in 2004, then shut in 2008 due to bankruptcy, Tamarack is in the midst of a resurgence. The resort’s lifts currently service about 1,000 acres of skiable terrain and it has applied to the U.S. Forest Service for permits to add seven to nine new lifts, including a gondola, and more than double its size by adding 3,300 new acres of ski terrain and a new summit lodge.
Building is underway on ambitious, multiphase residential development projects, which will result in 2,043 residential units, including about 1,000 hotel rooms and a mix of condos, estate homes, townhomes, cottages and chalets.
Tamarack is in the process of starting a charter school. The average sold price for a home in Tamarack, which has about 450 homes in all, has grown 80% over the past two years, according to the Mountain Central Association of Realtors.
To attract more skiers, this past year Tamarack joined the Indy Pass, which includes small, independent resorts around North America.
The resort’s president Scott Turlington is aiming for 500,000 skier visits over the next couple of seasons (up from 120,000 last season), which he acknowledges might make him persona non grata among some of the current homeowners. “If I do my job properly I won’t be the most popular person,” he says.
Still, Mr. Turlington says, “We want to maintain our rugged individualism and independent spirit. It’s a very different feeling here than at one of the top resorts.”
The top ski resort in Idaho is Sun Valley. In fact, Ski Magazine readers voted Sun Valley the top ski resort in Western North America in 2021, in part because of its comparably short lift lines.
It’s located in an arid, high-altitude and desert-like environment and its famed Sun Valley Lodge has walls lined with photos of celebrities like Marilyn Monroe, Ernest Hemingway and Tom Hanks. Business moguls and world leaders convene there every summer for the annual Allen & Company conference.
Sun Valley has also been growing its ski operations. Last season, it added 380 acres of skiable terrain on Bald Mountain and a new high-speed chairlift. It became a partner in the Epic Pass, which includes mountain resorts like Colorado’s Vail, Utah’s Park City and Whistler in Canada, a move to bring more skiers to the mountains.
Sun Valley Resort’s vice president and general manager Pete Sonntag says the resort has no plans to expand further for now. “Our goal is never about competing for the most skiers. It’s about improving the guest experience,” he says, adding, “The remote location will keep it from feeling overrun.”
But, like many resort towns, the issue of development and affordable housing is a hot topic right now. “There’s a huge concern about people getting priced out,” says Katherine Rixon, a real-estate agent with Keller Williams Sun Valley. Property values have appreciated so much that many owners of rental properties are cashing out of the market, leaving their tenants having to find a new place to live in an already tight rental environment.
And at the same time, rental rates have doubled in the past year. There are a number of government and nonprofit groups working on increasing housing for the workforce, she says.
The number of sold homes was up 71% in August compared with a year earlier, the median price was up 20%, and the number of homes for sale down 56%. A three-bedroom, three-bathroom townhouse Ms. Rixon sold at Sun Valley last year for $2 million just resold for $3.6 million.
“People here complain when there’s four people in the lift line,” says Jean-Pierre Veillet, a real-estate developer. He moved with his family this summer from Portland, Ore., to Bellevue, about half an hour from Sun Valley’s main town of Ketchum, in part because his 15-year-old son Oliver is a ski racer and was attending a boarding school in the area.
Mr. Veillet, 50, and his wife, Summer Veillet, 45, bought a four-bedroom, two-bathroom, 3,000-square-foot house with a library, a three-car garage and a barn on 10 acres for $1.3 million in March. They’d been looking for a house in Ketchum and Hailey, the two towns in the area which are closer to the slopes, but gave up after not finding anything for a year.
Mr. Veillet still works in Portland, and even though that’s not far geographically, getting back and forth is strenuous because there are no nonstop flights to the small Sun Valley airport.
The Veillets say there are pros and cons of living there: the skiing is great, Oliver is thriving, and their younger son, Zealand, who is 10 and is home-schooled, is getting a great education from the growing, fishing and renovating the family is doing.
On the other hand, the internet is terrible, there can be fierce windstorms and there’s no food delivery service. “It’s been a hard transition. It can be hard to slow down and make a change in life,” says Mr. Veillet.
David and Kimberly Barenborg just moved to Ketchum, into a five-bedroom, five-bathroom, over 4,000-square-foot log cabin-style house with a guest cottage in a quiet neighborhood right along a stream. They bought it for about $4 million in August after they sold their house in the Seattle suburb of Mercer Island.
Mr. Barenborg, 60, who co-founded a financial advisory firm, wanted somewhere that had sun, felt safe and where he could ski, bike and fish. “It’s just play time,” he says. “I’m so happy here.”
The only catch is the threat of development on a 65-acre dog park and green space that’s directly across the creek from their new home. He is working to help the town raise the $9 million the developer is asking for the property.
He says the process has been slow going but the community is starting to see the value of protected green space. “Everyone is overwhelmed by what’s going on,” says Mr. Barenborg, referring to the rapid growth that’s stressing the town’s infrastructure.
The rapid growth is also increasing jobs, but Heidi Husbands, a council member in Hailey, says Sun Valley is currently facing a shortage of workers because people can’t afford to live there anymore. Ketchum approved funding for an affordable housing project, but it is still controversial. At one point the town considered allowing workers to put tents in a park, but that idea was canceled.
Some residents of Schweitzer are also worried about more crowds, traffic and a shortage of housing. The resort, owned by Seattle-based McCaw Investment Group, just sold out a 35-lot subdivision and broke ground on an addition to a condo building. In a few weeks, it will start building a new residential neighborhood with cabins before embarking on several others later next year. In five to 10 years, the resort plans a whole new area, with four new lifts and a new lodge.
The potential impacts from climate change are also an issue. Schweitzer CEO Tom Chasse says, “Strategically, we are concerned about the snow level. We are seeing a change in precipitation. The snow lines have been moving up for the last few seasons. So we want to make sure we have lift access to the higher elevations and we are doing feasibility studies on adding snow-making on the lower levels.”
However, Mr. Chasse says the resort has plenty of room to grow. “We want to increase our sophistication level,” he says.
Commercial Real Estate Faces A Long Road Back To ‘Normal’ Even As Workers Ease Back Into Office Life
The days of eerily empty offices and airplanes may be behind us, but as commercial real estate bounces back from the pandemic, everything from the way we work to the way we shop and travel is in the middle of a major readjustment, said expert panelists on the second day of Mansion Global’s Luxury Real Estate Conference on Wednesday.
“What we’ve seen in New York in particular is that the return to office progression has been very gradual,” said Peter Miscovich, managing director, strategy and innovation at JLL Work Dynamics. “As of Oct. 8, we’ve just surpassed 20% occupancy. The Delta [Covid-19 variant] surge really delayed what was anticipated to be a major return after Labor Day.”
And while some luxury retail has roared back as consumers get out of the house and flex their spending power, businesses that rely on foot traffic from office workers in traditional commercial corridors continue to suffer.
“On some parts of Madison Avenue, retail rents are down 50% from their 2015 peak,” said Jonathan Litt, founder and CIO of Land & Buildings Investment Management. “It’s a ghost town because offices have not reopened, and international travel has not come back to the city. Until we see what office use is going to look like, and see international travel come back, it’s going to be a rough go.”
Suffice it to say that while many signs are trending positive, commercial real estate has emerged from the pandemic with a far less rosy picture than what’s transpired in the realm of residential.
Offices Might Change, but They Won’t Disappear
Their return may be slower than originally anticipated, but little by little, workers are making their way back to offices.
“Yesterday at One Bryant Park we reached 40% occupancy, from a low of 5% when the pandemic started,” said Douglas Durst, chairman of the Durst Organization. “We’re seeing occupancy coming back quite strong, and expecting normalcy by the end of the year.”
Market observers predicting the death of the office, Durst added, “Don’t know what they’re talking about.”
From an investment perspective, “I think the trends are positive,” said Tammy K. Jones, founder and CEO of Basis Investment Group. “We have 35% [office] occupancy right now, and I’ve seen studies forecasting that by the first quarter of 2022 we’ll be back to normalcy. I think that remains to be seen, but while the office has been disrupted, the office is not dead.”
But even as some workers come back, one trend line is abundantly clear: Hybrid working is here to stay.
“When we studied innovative companies in 2016, we found that innovative workers spent about 3.5 days a week or less in the office,” said Annie Bergeron, principal and design director at Gensler Toronto. “So the data was already pointing to this four or five years ago.”
In the U.K., “it’s fair to say we’re in the ‘new normal,’ and we’re seeing people coming in every other day or 50% of the time, as a generalization,” said Neil McLocklin, partner, strategic consulting EMEA at Knight Frank. “I’m not really aware of companies forcing people back to the office, but there’s been incentives.”
While some workers are eager to return to offices, others are distinctly less so, and in a fiercely competitive labor market, many companies are deploying remote- or hybrid-work flexibility as a means of appealing to prospective talent.
“Here in New York, the talent wars are very pronounced,” Mr. Miscovich said. “Tech clients in particular are looking with an agnostic locational strategy in order to engage that talent. Hybridization will occur, new technologies, new ways of working.”
And as in the world of residential, cleanliness and health-forward amenities will be crucial for office buildings that hope to succeed.
“There’s a flight to quality,” Mr. Durst said. “Quality in the sense that it’s a healthy environment and well maintained.”
Mr. Durst added: “From what we’ve seen, people want to be in offices, to be able to communicate in person. Even if you’re only there two or three days a week, you still need a place to have an office.”
To Stay Ahead OF AIRBNB, HOTELS PUT THE FOCUS ON EXPERIENCES
The ambivalence about the return-to-office is nowhere to be found in the travel and leisure sector, where consumers have enthusiastically embraced post-vaccine travel.
“We’re seeing restaurants and leisure travel off the charts,” said Ian Schrager, founder for the Ian Schrager Company. “Corporate travel hasn’t come back, but it will. We’re suffering from some supply line issues and labor issues, but other than that, I’m very optimistic about the hotel business, particularly in international gateway cities around the world.”
However, in the face of ongoing disruption from companies like Airbnb, hotels have to stay ahead of the curve to create unique experiences, Mr. Schrager said.
“Airbnb is a threat to the hotel world, and the industry has been in denial about it since the very inception,” Mr. Schrager said. “We have to out innovate them, be more creative, do things they can do. They can’t create the original experiences hotels can create.”
Pre-pandemic, a trend toward more experiential boutique hotels was already well underway.
“Focus on the experience. More leisure, boutique, glamping, container hotels where people have their own private space,” said Davonne Reaves, CEO of The Vonne Group. “It’s a different type of hotel.”
Part of the experiential hotel experience will include a focus on so-called ‘bleisure’ travel—a blend of business and leisure—and creating unique experiences for remote and traveling workers.
“Hotels have to wrap their brains around the idea that they’re creating [a situation] where you can have a unique business experience, then stay a little bit longer and have a unique leisure experience as well,” Ms. Reaves said. “We’re seeing brands creating shared spaces and working spaces, and they have to do that to bring back group business travel again.”
An Uneven Recovery for Retail
Traditional retail was suffering before the pandemic, and may well be the sector of commercial real estate to see the shakiest recovery moving forward.
“Retail is a big question mark as to what’s going to happen,” Mr. Durst said. “Rents have been coming down, we’re seeing some new businesses start up in places that were vacated. What the demand is for those retail tenants and businesses, we’ll have to see over the next six months to a year.”
Still, the picture isn’t entirely negative. Shoppers have returned to stores in person, previously online-only companies are carving out brick and mortar space, and some luxury retailers are seeing stronger activity than ever, Mr. Litt said.
“If you look at foot traffic at malls and shopping centers, it’s almost back to pre-pandemic,” Mr. Litt said. “Ecommerce is expanding, and there are going to be losers in that equation, but it’s fascinating how much people have gone back to stores. I’m not backing up the truck to buy retail real estate, but it’s much healthier than we thought it was going to be.”
Cushman & Wakefield To Buy 40% Stake In Greystone Multifamily Business For $500 Million
The deal marks an expansion by Cushman into the business of making loans to buyers and owners and servicing those loans.
Commercial real estate services giant Cushman & Wakefield PLC has agreed to pay $500 million for a 40% stake in the rental apartment lending and loan servicing business owned by Greystone & Co., the companies said, in the latest sign of the strength of the rental apartment industry.
Cushman, a firm founded more than a century ago that has about 400 offices in 60 countries, has been a major player in the rental apartment brokerage business, representing sellers in more than $11 billion of deals last year. The deal with Greystone marks an expansion by Cushman into the business of making loans to buyers and owners and servicing those loans.
Cushman believes that it can build its multifamily business by being able to offer a full plate of services. Last year, Cushman acquired Pinnacle Property Management Services LLC, one of the largest multifamily property management firms.
Greystone, which will continue to operate the lending and servicing business, has been one of the country’s largest originators of loans to owners and buyers of rental apartments that are resold to Fannie Mae, Freddie Mac and the Federal Housing Administration. Last year, Greystone originated $16.6 billion in loans.
Rental apartments have been one of the hottest sectors in commercial real estate in recent years, thanks partly to the high price of for-sale housing, which has closed many out of that market. Rents have continued to rise in many parts of the U.S. despite eviction bans during the pandemic.
Cushman’s purchase of the 40% stake of the Greystone business is expected to close this year, the companies said.
Amazon Targets Jersey City For Major Office Space Expansion
Amazon.com Inc. is looking to add office space in New Jersey as it expands in the New York City region.
The e-commerce giant is close to a deal for roughly 400,000-square feet (37,000 square meters) of space on the Jersey City waterfront, according to people familiar with the matter, who asked not to be named because the talks are private. It’s targeting a building called Harborside 1 at a Mack-Cali Realty Corp. complex.
A representative for Mack-Cali declined to comment. Amazon didn’t respond to a request for comment.
Amazon has been expanding in New York despite the collapse of its plan to build a second headquarters in Queens in 2019. The firm has recently been in talks to sublease offices in Manhattan’s Hudson Yards from JPMorgan Chase & Co., Bloomberg reported in August.
Early last year, Amazon bought the Lord & Taylor building, announcing plans to add more than 2,000 employees in the city. It also signed a lease in December 2019 for space on 10th Avenue, near Hudson Yards.
Companies taking space at Harborside can access tax breaks, according to Mack-Cali’s website. Jersey City had pitched itself for Amazon’s second headquarters, offering as much as $5 billion in economic incentives.
Businesses Lease Trophy Space To Stoke Return To The Office
Rents for elite buildings full of amenities are getting steeper; ‘The top of the top has just gone crazy’.
Businesses trying to wean employees off remote work and lure them back to the office are spending more than ever on upscale workspaces, reaching deep into their pockets to pay high rents for modern, amenity-rich buildings.
These new office digs offer custom-built lounges, game rooms with ping-pong tables and foosball, and apps that enable employees to contact building security or order a burger from the company cafeteria. The state-of-the art office towers also emphasize sanitation, outdoor space and sustainability, featuring robust ventilation systems and outside dining areas with fire pits.
Many firms are swallowing hard while paying the steeper rents that accompany all these extras. But they believe the costs are necessary to draw employees back into offices and to help recruit and retain talent in a tight labor market.
“It’s all about how do we as landlords create an environment that gives their tenants and their employees no excuses not to show up,” said Jeff Eckert, the head of JLL’s U.S. office landlord representation business.
‘It’s all about how do we as landlords create an environment that gives their tenants and their employees no excuses not to show up.’
— Jeff Eckert, head of JLL’s U.S. office landlord representation business
The flight to quality in the office market has widened to record levels the difference between rents being paid for top-tier space and run-of-the-mill space.
In October, the cost of effective rents under negotiation by owners of the top 10% of U.S. office buildings was 54% higher than for the rest of the market, according to data firm VTS. Effective rents take into account factors such as free rent concessions and the cost of building interior space.
That premium between elite buildings and the rest has never been greater in the years since 2012, when VTS began tracking this data. In both 2018 and 2019 the difference in rents between the trophy and the ordinary came to 43%, VTS said. The firm tracks deals being negotiated in more than 3.5 billion square feet of U.S. office space.
“The top of the top has just gone crazy,” said Mary Ann Tighe, chief executive for the New York region at real-estate firm CBRE Group Inc.
The search for amenity-rich headquarters is a big reason why the office leasing market, which was moribund during much of the pandemic, is starting to rebound as Covid-19 infection rates fall and employees feel more relaxed about populated workspaces.
Venable LLP is among those signing up for more attractive space. The law firm signed a New York City lease last month for five floors in an overhauled Times Square office tower. Its new space boasts a private balcony overlooking the Empire State Building in a building with an updated Frank Gehry-designed cafeteria, with a menu overseen by star chef Charlie Palmer.
Venable considered staying in place at the Rockefeller Center, but it opted for the shiny new space to consolidate offices from two locations and because the firm is more concerned about getting employees back than with cutting costs, said Chairman Stu Ingis.
“We want to be able to answer the question: Why would you come in today when you could just stay at home?” Mr. Ingis said.
The strong demand for top space contrasts sharply with what is happening in other parts of the office market. Overall, the office vacancy rate is at 16.8%, the highest since 2010, according to CBRE.
Tenants looking for discounts can find plenty of opportunities on the sublease market, where the volume of available space is at an 18-year high, according to CBRE. Event management firm Eventbrite Inc. agreed to pay about $65 a square foot to sublease in San Francisco earlier this year when it downsized its headquarters.
That is more than $20 a square foot less than what comparable space would have rented for before the pandemic if leased directly from a landlord, brokers say.
Landlords that control the top buildings, meanwhile, have been better able to hold the line on pricing. In New York, SL Green Realty Corp. has leased more than 90% of its new $3 billion office tower overlooking Grand Central Terminal, despite charging top-of-the-market average rents of $150 to $325 a square foot.
In Miami, the developer of a high-end 55-story tower known as 830 Brickell has increased asking rents by 23% compared with the days before the pandemic, said JLL, after signing up blue-chip names like Microsoft Corp. and private-equity firm Thoma Bravo.
“In 20 years of doing this, this has been the first cycle we’ve seen anything like this,” said Steven Hurwitz, head of office landlord representation for JLL in the Miami area.
Top Abu Dhabi Developer Is Shopping For Large Property Deals
Aldar Properties PJSC has built up a cash war chest and is considering investments in large real estate portfolios as Abu Dhabi’s biggest developer seeks to grow its management business.
The company, armed with 6.8 billion dirhams ($1.85 billion) in capital, has the resources to make purchases both in its home market and around the United Arab Emirates, according to Chief Financial Officer Greg Fewer.
It’s allocated 5 billion dirhams for “immediate deployment,” of which 20% may go toward its acquisition of an Egyptian developer known as Sodic, Aldar Chief Executive officer Talal Al Dhiyebi said in an interview with Bloomberg Television on Thursday.
“We are embarking on our most ambitious ever expansion and growth strategy both domestically” and abroad, he said.
With holdings spanning retail, commercial, residential and its education business, “those are the sectors where we see very interesting acquisition opportunities within Abu Dhabi and the UAE to scale all those different segments,” Fewer said, without naming a likely target.
Aldar, which primarily operates in Abu Dhabi, has been chasing growth in a cramped market. At home, the company is growing its management business after acquiring Asteco Property Management last year. Beyond the UAE, it’s also looking to gain a foothold in Egypt through a proposed acquisition of a majority stake in Sodic.
“We’ve got a rich pipeline of opportunities across all the areas that we’re focused on — UAE real estate, Egyptian opportunities as well as Saudi opportunities,” Fewer said on a conference call Wednesday. The company is targeting real estate portfolios that are for the most part either owned by large families or zoned near government entities, he said.
With the UAE property market on the upswing, Aldar is vying for the status of the most valuable listed developer in the country with Dubai’s Emaar Properties PJSC. Both are currently worth about $9.2 billion.
Aldar sees “great acquisition” opportunities within retail, commercial, logistics and residential assets, the CFO said.
In September, it submitted a $453 million offer for a stake of up to 90% in Egypt’s Sixth of October for Development & Investment Co., or Sodic. Fewer said the proposal is pending the regulator’s approval, with a response expected within “days or weeks.”
Aldar is meanwhile planning a significant drive to boost the efficiency of the buildings it operates in Abu Dhabi. It’s conducted a study that will aim to upgrade some energy-consuming systems with newer and more efficient technology, the CFO said. The company is focusing on cooling, heat pumps, lights and other building-management systems, he said.
Al Dhiyebi said Aldar is looking at spending more than 100 million dirhams across its existing assets on immediate energy improvements, with plans also to invest on making new projects more efficient.
Bain Capital Closes $3 Billion Fund For U.S. Real Estate Deals
Bain Capital Real Estate has closed a $3 billion fund, nearly double its initial target, as investors bet that U.S. property deals will provide high yields and inflation protection.
With leverage, the fund has the potential to invest as much as $9 billion in a mix of industrial, life science, entertainment and residential real estate, according to Dan Cummings, head of the Bain property unit, who joined the firm in 2018 from Harvard University’s endowment.
It’s the second real estate fund for Bain, and twice the size of the first. About one-third of its capital has been deployed. Projects backed so far include construction of single-family rental houses in Texas, an entertainment-production campus at the site of an old Sears store in Los Angeles, and a life sciences complex south of San Francisco.
Private equity firms have been hoarding dry powder to buy real estate, which offers an inflation hedge because rents can adjust to offset rising purchase prices, interest rates and other costs. Funds in North America have a record $225 billion in unspent money raised for property deals, according to Preqin.
“Despite today’s current prices,” Cummings said, “we continue to source compelling investments with attractive yields, prospects for future income growth and inflation protection.”
Closed Movie Theaters Leave Void From Small Towns To Big Cities
More than 600 remain shut almost two years after the onset of the pandemic.
Almost two years into the Covid-19 pandemic, about 630 movie theaters remain closed across North America. And many may never reopen.
The casualties stretch across the continent, afflicting big chains like AMC Entertainment Holdings Inc. and mom-and-pop outfits.
They’re shut in small towns, like Devils Lake, North Dakota, and in the heart of Hollywood, where plywood has been nailed over the windows of Los Angeles’ iconic Cinerama Dome.
ArcLight Chain Shuts Down In Sign Theaters Aren’t Out Of Trouble
Covid-19 has accelerated trends that preceded the pandemic, with major films today becoming available online far sooner than in the past and moviegoing already on the decline. While Americans are again jamming football stadiums and theme parks, theater attendance is recovering only slowly from last year’s industrywide shutdown.
For small towns like Rutland, Vermont, the closings particularly sting. You can read the pleas to reopen the town’s sole multiplex, Flagship Cinemas, on its Facebook page. It’s the only movie destination for about 30 miles.
“I’m a regular that went almost every Thursday night,” one man said. “My birthday ritual is to see a movie,” wrote another film lover. “Today’s my birthday, I’m going to miss it this year.”
The location, part of a Massachusetts-based chain, has been closed even though theaters in Vermont have been allowed to reopen. “It’s been a big loss for the city,” said Dave Allaire, the mayor of Rutland, which has fewer than 16,000 residents.
The shuttered locations represent a little under 12% of the roughly 5,500 theaters nationally that were operating just before the coronavirus pandemic, according to market researcher Comscore Inc., which says about half of the closed cinemas had three screens or fewer. Altogether, almost 40,000 screens are operating in North America.
The big problem is attendance. Even with several big-budget Hollywood films getting exclusive runs in theaters, box-office receipts remain well below what they were before the pandemic.
Movie theaters this year will likely take in about $4 billion in ticket revenue domestically, a fraction of the $11.4 billion generated in 2019.
Data from Comscore show revenue from states on the East Coast, which tended to keep their theaters closed longer and put in capacity restrictions when they reopened, have recovered more slowly than many in the middle of the country.
“If you can’t sell popcorn and you can’t put butts in seats, how can you remain a viable business?” said Paul Dergarabedian, a senior media analyst at Comscore.
AMC, the largest chain, has been a proxy for the industry’s troubles during the Covid pandemic, losing $4.59 billion last year and in the red through nine months of 2021. The stock fell as much as 9.6% in New York on Friday after a regulatory filing showed that Chief Executive Officer Adam Aron sold another $9.65 million of shares in the company.
AMC has soared almost 13-fold this year, spurred by meme-stock investors. The CEO continues to hold more than 3 million shares, most issuable in the future and based on performance targets.
Smaller operators have also suffered. Wendeslaus Schulz, owner of the six-screen Chalmette Movies in the namesake Louisiana town, couldn’t afford the back rent he owed after months of government-mandated closures.
Schulz, 73, tried to reopen in mid-2020—typically the best season for his theater. But business was just 10% of what it used to be. Chalmette Movies closed for good in March of this year.
“It was just too expensive to stay open,” Schulz said. “The irony of it is I just signed a new lease in February of 2020 and then Covid hit in March. You never know what’s going to happen.”
But like any Hollywood tearjerker, there’s at least a shot at a happy ending. In Crested Butte, a small ski town in Colorado, former employees of The Majestic theater are seeking $300,000 to reopen its doors. They’ve raised more than $40,000 thus far from 500 donors, said Carrie Wallace, one of those leading the effort.
“The movie theater is really an outlet to the world for a lot of people,” she said. “Right now there’s nothing to do at night except go to a bar or a restaurant.”
And on New York’s Long Island, Jay Levinson, 68, is working to reopen two of his shuttered locations, including the Elwood Cinemas in Suffolk County. He expects to invest $250,000 of his own money into Elwood, a theater he’s had for about 20 years, 19 of which he describes as “very good.”
Levinson plans to installing luxury recliners. Tickets likely won’t exceed $10 and he anticipates there will be bargain days. Still, he acknowledges a mix of confidence and worry, because of rising Covid numbers, and says others wonder if he still needs three theaters.
“People think I’m crazy,” Levinson said.
That Big Office Building? It’s An E-Commerce Warehouse Now
More companies are making remote work permanent, forcing developers to convert old office buildings into warehouses, apartments and other uses.
Allstate Corp.’s suburban campus outside Chicago, with its interconnected buildings, manicured grounds and acres of parking, represented a new vision for the U.S. office when it opened in 1967. That vision is now dead.
The insurer reached a deal last month to sell most of the campus. The new owner plans to demolish the office buildings and convert the Northbrook, Ill., site into more than 3 million square feet of e-commerce warehouses and other logistics facilities.
“I didn’t think I would ever live in a world where industrial land is worth more than office land,” said Douglas Kiersey Jr., president of Dermody Properties, which is paying $232 million for the 232-acre parcel. “But here we are.”
The workers who once commuted daily to the Allstate campus, meanwhile, will mostly work from home.
The American office building, where millions of white-collar employees have headed to work for more than a century, is in a state of reckoning.
Newly built skyscrapers in central business districts are still filling up and charging top rents, even during the pandemic. But thousands of older buildings across the U.S. face an uncertain future.
As more companies elect to make remote work or a hybrid model a permanent part of their corporate culture, they are looking to cut costs on real estate. An outdated office makes the decision to end a lease or sell a building easier.
In New York and San Francisco, more than 80% of all office space is more than 30 years old, and Chicago isn’t far behind, according to Phil Ryan, director of U.S. office research at Jones Lang LaSalle Inc.
These three cities also have some of the lowest office occupancy rates in the country: Less than 40% of the workforce was back in the office as of early December, according to Kastle Systems, which tracks how many people swipe into buildings.
What happens to these aging edifices across the U.S.—whether they are converted to other uses, torn down or upgraded to suit modern needs—will go a ways toward shaping what work, the modern city, and surrounding suburbs will look like in the decades ahead.
“There’s just not a lot of need for big-floor-plate, white-elephant suburban office buildings,” in and around cities like New York and Chicago, said Steve Poulos, chief executive of industrial real-estate developer Bridge Industrial.
Some of these white elephants will follow the Allstate campus in the service of e-commerce, becoming fulfillment centers for booming online retail. This is especially appealing for offices located in crowded cities where retailers face a scarcity of last-mile warehouses.
Bridge, which bid on Allstate’s headquarters, is in contract to buy several office properties in a number of major U.S. cities and convert them to distribution facilities, Mr. Poulos said.
Developers are also looking to turn suburban offices into schools or lab space, said JLL’s Mr. Ryan. In city centers, conversions of office towers into apartments and hotels are also becoming more common.
Even before the pandemic, developers in lower Manhattan transformed early 20th century office buildings into apartment towers that became popular with Wall Street traders and helped develop the financial district as a residential neighborhood.
But these conversions can be tricky, and may not offer widely applicable solutions. Urban office buildings built during the mid century or later tend to have larger footprints than those converted to apartments in Manhattan, and these newer buildings often have too much windowless space for apartments.
Others may face local zoning issues if an owner tries to change a property’s purpose. Office buildings that have outlived their usefulness and are unsuitable for conversion could simply be abandoned.
Still, some real-estate executives insist that sprawling suburban locations can continue to thrive as offices. Capital Commercial Investments Inc. in November bought the former office campus of retailer J.C. Penney Co. in Plano, Texas, with plans to modernize and lease it as offices. The company previously purchased the former headquarters of American Airlines Group Inc. in Fort Worth, Texas, and other large corporate complexes.
Such projects make sense in markets where there is strong demand for office space and an influx of workers, said Doug Agarwal, founder and president of Capital Commercial. His firm has refreshed large suburban complexes by adding glass, removing ceiling tiles, updating technology, and sprinkling in gyms, pickleball courts and social areas.
“We’re finding ways to make the space more acceptable and actually sought after by large corporations,” Mr. Agarwal said.
Some companies are hanging on to their offices, even as they offer more flexible work options. The accounting and consulting giant PricewaterhouseCoopers LLP this year gave most of its U.S. employees the option to work remotely in the continental U.S.
The firm said 40,000 of client-facing employees could work from a location of their choosing. About 20% of employees chose to do so, with the rest still wanting to work on-site with a client or in PwC’s offices multiple days a week.
The company is largely maintaining its existing offices to accommodate the hiring of more workers and give the company flexibility as its work evolves, said Tim Ryan, PwC’s U.S. chairman.
Allstate’s Illinois headquarters opened during the heyday of America’s suburban office boom in the decades after World War II. It included a pharmacy, salon and cafeteria on site. In the 1970s, the insurer boasted in newspaper job advertisements about training and working at “our beautiful corporate office complex in Northbrook.”
With the headquarters set to be sold, Allstate will maintain two smaller offices in downtown Chicago and facilities in other cities. But the company expects many employees to spend much of their work time at home.
While Allstate’s embrace of remote work has been popular internally, some employees have become nostalgic. Christy Harris, Allstate’s chief talent officer who worked in the Northbrook office for about 20 years, said she won’t miss the hour-plus commute but she appreciated the campus’s covered walkways, walking trails and bike paths.
“Of course I have a lot of memories there,” she said, “but if I was going to tell you about the memories, it was all actually surrounded by the people. It really wasn’t the physical space that drove the memories or kept me at Allstate.”
Vacation-Rental Manager Vacasa Aims To Add Homes After Public Listing
The company raised about $340 million this month by merging with a special-purpose acquisition company.
Vacation rental-management company Vacasa Inc. plans to use the roughly $340 million it raised in its recent public listing to add new homes and features to its platform.
Portland, Ore.-based Vacasa went public this month through a merger with TPG Pace Solutions Corp., a special-purpose acquisition company.
Vacasa offers to handle all aspects of property management for homeowners, including services such as cleaning and maintenance. Rental platforms such as Airbnb Inc. and Expedia Group Inc.’s Vrbo usually leave those duties to homeowners.
Vacasa plans to use the capital from its SPAC deal to increase the number of rental properties available on its platform, said Chief Financial Officer Jamie Cohen, who joined earlier this year from Angi Inc., a Denver-based home maintenance and repair company.
Vacasa, which was founded in 2009, currently lists roughly 35,000 homes for rent, an increase of about 70% from the end of 2020. Adding new properties is a key challenge for companies across the vacation-rental industry.
During the third quarter, gross bookings—the total value of reservations, including rent, fees and taxes—were $776 million, about double compared with a year earlier. By comparison, Airbnb, which went public in December 2020, reported $11.9 billion in gross bookings in the same period.
Vacasa is not currently profitable on a full-year, adjusted earnings before interest, taxes, depreciation and amortization basis, but intends to get there by 2023.
Vacasa charges property owners a management fee of 25% to 30% per nightly booking, while Airbnb and Vrbo charge 3% and 8% a booking, respectively.
By the end of 2022, Vacasa expects to list around 48,000 homes in the U.S., according to a recent investor presentation. Most of the properties on the company’s platform are in the U.S., where it operates in 34 states, as well as in Canada, Mexico, Belize and Costa Rica.
“Turn the keys over to us, tell us which nights you want to [rent] the property, and we will handle everything else and send you a check,” Ms. Cohen said, describing Vacasa’s pitch to homeowners. She declined to provide additional details on specific markets where Vacasa aims to expand.
The company plans to attract more individual homeowners by hiring more salespeople, and expand to new markets by acquiring new property managers, she said. Vacasa currently has about 8,000 employees, including seasonal and part-time workers.
The company has benefited from a recent boom in vacation rentals, driven in part by people working remotely and renting homes for a change of scenery, according to Mike Grondahl, a senior research analyst at investment firm Northland Securities Inc. Owners of second homes are also renting out their homes more often, looking for rental income, he said.
Vacasa not only competes with larger vacation-rental companies. It also needs them to market its listings. About one-third of the company’s gross bookings over the past year came from properties listed on its site. The rest hauls from listings that Vacasa posts on Airbnb and other platforms, according to Ms. Cohen.
“We provide a lot of inventory, especially in our key markets, to our partners,” she said. Vacasa has exclusive management contracts on its properties, meaning owners don’t serve as hosts on other rental platforms at the same time.
Vacasa also plans to use its fresh capital to add new features on its platform. The company recently launched an app that allows homeowners to track information such as rental income and guest bookings.
Vacasa is rolling out smart-home features across its properties, including smart locks, which allow renters to open the front door through the Vacasa app, and decibel monitors, which will alert the company to disruptive noise levels from parties.
Open-Air Shopping Centers Are Leading Retail Recovery
Grocery stores, curbside pickup boost neighborhood shopping.
Shopping centers are having a moment, propelled by increased foot traffic to grocery stores, curbside pickup and population shifts that favor suburban shopping.
Landlords filled 17 million square feet of additional real-estate space in open-air shopping centers last quarter, a 49% increase from 2019, according to commercial real-estate services firm CBRE Group Inc. That marks a 10-year high for net absorption, or the total space occupied minus what has been vacated.
These shopping destinations include larger, open-air shopping complexes as well as strip malls, which typically feature an anchor store and several smaller stores or services like pharmacies and fitness studios.
Grocery stores are often the anchor and help drive their success, said Brandon Isner, head of Americas retail research at CBRE.
“It’s almost an automatic flow of foot traffic, because grocery is the greatest retail need,” he said.
Grocery stores never closed during the pandemic. They are still benefiting from a shift to at-home cooking that started early on in the pandemic, when indoor dining was closed, said Ethan Chernofsky, vice president of marketing for data analytics firm Placer.ai.
The increasing popularity of grocery-delivery services like Gopuff and rapid-delivery providers such as New York City startup Gorillas pose a potential threat to the continued growth of traditional grocery stores.
Still, investors are recognizing the appeal of grocery-anchored retail. Such shopping centers drew $5 billion in investment activity last quarter, according to CBRE, representing the second-most active quarter in 10 years.
Kimco Realty Corp. owns nearly 100 million square feet of shopping-center space, mostly in the suburbs and mostly grocery-anchored. Kimco implemented curbside pickup across its portfolio at the start of the pandemic. Foot-traffic volume is now above 2019 levels, said Chief Executive Conor Flynn.
Foot traffic to grocery stores nationwide is up 3.6% so far this year compared with two years ago, according to Placer.ai. The firm also found that, overall, foot traffic to grocers remained strong even after restaurants reopened and in-person dining picked up steam.
Shopping centers have also benefited from people moving to the suburbs, retail analysts said, and the flexibility of remote work has made it easier for people to shop close to home and on weekdays.
Despite the pandemic-prompted boom in online shopping, bricks-and-mortar retail has remained surprisingly resilient, with e-commerce representing just one-fifth of core retail sales, CBRE’s Mr. Isner said.
Retailers are also using their existing stores as distribution and fulfillment hubs, a strategy that is paying off as it becomes increasingly difficult to find industrial space for last-mile warehouses.
Making it easier for customers to buy online and pick up or return items in store has the added benefit of drawing more traffic to shopping centers, Mr. Flynn of Kimco said.
“I think retailers are just starting to recognize how valuable that store is because it takes a very long time and it’s very expensive to build these massive distribution centers,” he said.
Neighborhood-embedded shopping centers that could accommodate outdoor experiences were well positioned to quickly recover from the pandemic. In Pennsylvania, the upscale King of Prussia Town Center is part of a mixed-use development that includes residential units and 1 million square feet of commercial space.
The shopping center also has a large “town square” where it hosts about 30 events a year, including live music, outdoor movie nights and yoga classes, to draw foot traffic for tenants, said Joseph Mancuso of CBRE Investment Management, which owns the shopping center.
“We had done a lot of these events prior to Covid, but it turned out having the outdoor space—we didn’t realize how much of a blessing that would be,” said Mr. Mancuso. He added that leasing this year is outpacing 2019 and rents have recovered to pre-pandemic levels.
In Northern Virginia, the landlord of Reston Town Center gave rent deferrals and other concessions to keep struggling retail tenants afloat last year, said Doug Linde, president of Boston Properties Inc., which owns the shopping center.
Some tenants, representing about 40,000 square feet, or 10% of the town center’s total retail footprint, closed anyway. But Mr. Linde said he quickly filled those vacancies and leased additional space.
“In the meantime, the ones that were able to stick with us are doing fabulously,” Mr. Linde said, adding that rent prices and collections are back to pre-pandemic levels while retail sales are now outpacing 2019. “We’re really comfortable that the recovery has taken hold.”
Blackstone Nears $930 Million Deal For Manhattan Apartments
Property giant has made a series of recent bets on staying power of high-end New York buildings.
Blackstone Inc. is nearing a deal to acquire luxury apartment rentals in downtown Manhattan, the firm’s latest wager on the resilience of New York real estate.
The property giant is in advanced talks to acquire a residential tower at 8 Spruce St. from Brookfield Asset Management Inc. and Nuveen for $930 million, according to people familiar with the matter.
It’s also nearing the purchase of a 49% stake in One Manhattan West, a trophy office building developed by Brookfield, in a deal that values the Hudson Yards-area property at $2.85 billion.
Representatives for Blackstone and Brookfield declined to comment.
In many ways, the deal for 8 Spruce St., which is located near the Brooklyn Bridge, is a poster-child for the city’s rebounding real estate market. The 899-unit property, whose rippled façade was designed by architect Frank Gehry, saw occupancy rates fall below 75% during the first year of the pandemic, according to Trepp.
The building wasn’t alone. Across Manhattan, vacancy rates were at record highs for much of 2020, as Covid-19 chased renters out of Manhattan or pushed them to seek larger living spaces to work and learn from home.
Leasing picked up throughout this year as vaccinations campaigns helped restore some normalcy to city life. By this fall, Manhattan rents were surging by the most on record.
The rental recovery included 8 Spruce St., which Brookfield acquired when it bought Forest City Realty Trust in 2018. The building, which was completed in 2012, was 95% occupied in November, the people said. Eastdil Secured is advising Brookfield on the sale.
Other property types have seen a bumpier recovery. Employers were increasingly eager to call workers back to the office until the emergence of the omicron variant pushed many to reconsider. Rising case counts also pose new threats to local hotels, which reported pandemic-era records for demand earlier this month.
In a recent podcast interview, Blackstone President Jon Gray said that he remains bullish on New York and other hubs for commerce and creativity.
In addition to the two proposed transactions with Brookfield, Blackstone has participated in the financing of ambitious New York real estate projects, including L&L Holding Co.’s Terminal Warehouse and Brookfield’s Greenpoint Landing.
It recently led a roughly $910 million financing package at 425 Park Ave. to cover the final stages of the office project, which has signed Citadel as its anchor tenant. The proceeds replace the original construction loan on the property and will cover the project until it’s fully leased, according to a statement Monday from developer L&L.
“As we get through Covid or learn to live with Covid, I think people will rediscover the importance of being together,” Gray said on the podcast, which was hosted by RXR Realty Chief Executive Officer Scott Rechler. “We’ve just had a fundamental view that this was temporary in nature and therefore it was an opportunity to deploy capital.”
Underused Office Buildings Get New Life As Deluxe Apartments
Overhaul of 1980s office complex in Virginia raises prospect that America’s office-building surplus could be ripe for apartment conversion.
A few years ago the two-tower Park Center in this Washington, D.C., suburb was another graying office complex. One building was about one-third empty, while the largest tenant was preparing to leave the other.
Today, the property has taken on a new life as upscale apartment buildings. The 435 residential units are surrounded by private cabanas for small gatherings, grilling stations, a bocce lawn and contemporary sculpture.
“This is a steampunk cherry tree,” said Liz Godesky, senior vice president of the project’s developer, Lowe Enterprises Inc., pointing to a piece of art her group commissioned for the properties.
The Park and Ford apartments, as the complex is now called, is one of 151 office buildings, hotels or other commercial properties that were converted to apartments in the U.S. in 2021, according to data from Yardi Matrix, a real-estate data firm.
With multifamily housing in short supply and rents hitting record highs, the Alexandria development raises the prospect that the country’s surplus of outdated office buildings could be ripe for apartment conversion.
Until recently, developers mostly looked to convert early to mid-20th century office towers located in downtown districts, properties that tend to have relatively compact dimensions that make them ideal for apartments.
But many empty office buildings are more like the Park and Ford. They are newer, more voluminous and often located somewhere off the interstate.
Nationwide, there are nearly 1,000 relatively new office buildings that developers might view as candidates for residential conversion: properties built since 1980, measuring more than 100,000 square feet and at least 50% vacant, according to data from CoStar Group.
Lowe and its partner USAA Real Estate acquired the two 1980s office towers in 2017, in an area where the office market was already weakening.
Several factors worked in the developers’ favor. The floors in the towers measured about 80-feet deep, shallower than some other office buildings of the same vintage and better suited to residential conversion.
Bigger floors leave too much space in the middle of the building or leave interior rooms far from natural light.
Rent payments from the remaining office tenants also meant the owners had cash to spend on relocating them. Next door, another large office building had already been turned into apartments, providing proof of concept.
The builders then began making these drab office buildings, enclosed in a vast concrete plaza, a place someone would want to live. They added operable windows and blue and orange accents to the facade and constructed a sleek glass and steel lobby.
They anchored new balconies directly into existing flooring, an effort to make them look like they had been there all along, instead of the simpler, cheaper method of hanging them from suspension rods.
“All those things add texture to the building and definitely make it read residential,” said Mark Rivers, executive vice president at Lowe.
Still, developers of conversion projects face challenges not found in new construction. At the Park and Ford, damaged concrete, mold and asbestos delayed construction and added millions of dollars in costs to resolve.
Zoning regulations, unconventional layouts and unpredictable construction budgets can also make many buildings bad candidates for reuse, said Valerie Campbell, a land use attorney at the Kramer Levin firm in New York who has worked on conversions for more than three decades.
“At a certain point, if the cost of altering a building starts approaching new construction, it really may not make any sense,” she said.
And despite the lack of affordable housing, most office conversions are built as market-rate apartments for professional class millennials to make the economics work for developers.
“The expense of rehabilitation can lead to only providing market rate,” said David Downey, president of the International Downtown Association. His business organization is lobbying for federal subsidies for conversions that include affordable housing.
At the Park and Ford——which has 10 affordable units, or about 2% of the total—the apartments had to fit into a building shaped much differently than any purpose-built residential property.
For example, in some units, the distance between the apartment door and its exterior window means the dens or bedrooms may face an interior living area instead of the outdoors.
The developers, who said the properties were built on land once owned by founding father George Washington, stocked the bottom floor full of amenities.
They added a pet spa, gym and yoga room, a package room with refrigerated storage, a multisport simulator for games such as baseball and golf, a private dining room and co-working office space.
The Park and Ford began leasing in the fall, and the developers expect to fill it by the summer. They couldn’t have come to market at a better time. Area asking rents have risen by double-digits over the past year.
The smallest one-bedroom unit at the property rents for more than $1,700 a month, and large two-bedroom units go for as much as $3,200. The developers are offering one month free.
That price sounded right to 27-year-old accounting student Clara Chapoton, who was living in the converted office building next door when she received notice of a large rent increase. She found a better rate at the Park and Ford.
“I feel like the amenities here are insane,” said Ms. Chapoton. She and her dog Rocket, a Pomeranian-shih tzu mix, plan to make regular use of the private dog park the developers are building across the street.
New York Property Firm Buys Long Island Offices In A Bet On Suburbs
A Long Island, New York, office complex that counts Morgan Stanley and UBS Group AG as tenants sold for $212 million, the biggest office deal in the area in the past decade.
The Birch Group purchased two buildings at 1 and 2 Jericho Plaza, with a total of 665,592 square feet (61,835 square meters) of space, from DRA Advisors and Onyx Equities, according to a statement Wednesday. The properties, just off the Long Island Expressway in Nassau County, are nearly 95% leased.
The Birch Group has been increasing its purchases of suburban offices as it bets on the post-pandemic staying power of flexible work arrangements.
The Nanuet, New York-based firm has acquired more than $1.1 billion of commercial properties in the tri-state area since 2020, including four buildings in Short Hills, New Jersey.
“We have signed several tenants in the pandemic that have come out of New York City,” Mark Meisner, president and founder of the Birch Group, said by phone. “Employers have to continue to remain flexible and give their employees the optionality of working closer to home certain days of the week.”
Cushman & Wakefield represented the sellers on the deal.
Early in the pandemic, New York-area suburbs saw a flurry of interest from banks and major finance firms that were assessing short-term offices outside the city.
Some companies, including Apollo Global Management Inc. and Elliott Management Corp., have opened locations or explored an expansion in the affluent Connecticut town of Greenwich.
While home sales have boomed across the suburbs, office-vacancy rates remain high. Manhattan continues to draw tenants looking for prime offices in the region, even as the surge in Covid-19 cases pushes companies to rethink return-to-work plans.
The Post-Pandemic Office Should Be A Clubhouse
If the primary purpose of an office today is no longer to get actual work done, then perhaps it’s better conceived as a place for connection and community. Do we still need desks and cubicles?
When I talk with senior executives about the ongoing pandemic, I often hear them wistfully yearn for a “return to work.” This choice of words is significant because it highlights how much we associate work with a workplace.
But the pandemic has taught us that many forms of work, especially high-end knowledge work, can be done effectively (or even more effectively) away from the workplace.
When confronted with this fact, most executives say that coming to an office at least a few days a week is essential for fostering personal relationships, developing and integrating new employees, generating ideas and building company culture.
What this leaves out is revealing. Since the industrial age, economic efficiency and productivity have required the centralization of the tools of work in a shared location. With the advent of the internet, the cloud, smartphones and affordable laptops, these tools can now be readily decentralized.
If the primary purpose of an office today is no longer to get actual work done, then perhaps it’s better conceived, as these executives suggest, as a place for connection and community—as a clubhouse rather than a workplace.
To be sure, our economy relies on many workers—nurses, technicians, child-care providers, retail and restaurant staff, and millions of others—whose jobs cannot easily be done remotely.
Not everyone has comfortable space at home for work, and converting the workplace to a clubhouse for some elite workers may exacerbate the inequities that the pandemic has so sharply revealed.
In an office functioning as a clubhouse, people will be mingling in informal conversations that might resemble ‘happy hour.’
Still, it’s clear that the office-as-a-workplace model no longer matches the needs of many white-collar and knowledge workers.
If you walk amid cubicles at an office and find many people at their desks wearing noise-canceling headphones and staring silently into a computer, it’s a sign that a company needs to rethink its expectations.
It’s still too attached to the idea of the office as a workplace when most of the work itself could be better done remotely.
In the post-pandemic economy, physical space where workers gather should have a much different feel and purpose. In an office functioning as a clubhouse, few people will be at their desks.
Instead, they’ll be talking and mingling—sometimes in meetings but more often in informal conversations that might resemble what we think of as “happy hour.”
I’m not the first to suggest that offices need to change dramatically to reflect the new realities of working from home and an office. Writing in the Harvard Business Review last year, Anne-Laure Fayard, John Weeks and Mahesh Khan argued that effectively shifting to hybrid work requires redesigning offices.
They describe companies devoting more space to couches and shared seating and changing acoustics to encourage an ambient buzz instead of today’s more typical quiet-as-a-library vibe.
Erica Pandey, writing recently in Axios, reported that 60% of companies are redesigning their offices to accommodate the shift to hybrid work, with many eliminating private offices and devoting more space to café-like seating.
In the Atlantic, Derek Thompson distinguished between “hard work” (the heads-down tasks we typically think of as work, which are increasingly best done remotely) and “soft work,” which he describes this way: “Soft work is getting coffee with a co-worker. It’s catching up about the NFL on Monday morning.
If networking, schmoozing, gossiping and mildly annoying people on your floor with ‘Hey, does this idea suck?’ are species of behavior, soft work is the genus that contains them.”
As we continue to redefine the purpose of shared space in a hybrid world, calling the office a “clubhouse” can spark a series of thought-provoking questions.
If shared space is primarily for colleagues to socialize, should offices continue to have desks or cubicles that encourage solo work?
If the purpose of bringing employees together is to promote social cohesion, why is this best done between 9 a.m. and 5 p.m.? Everyone’s family responsibilities and personal preferences are different.
Some teams might prefer meeting for early-morning breakfasts or exercise classes; others in the evening for drinks or team dinners—none of which require a physical office.
Companies might use expense account policies to incentivize such get-togethers. For instance, what if a company agreed to reimburse group meals, but only if five or more employees from at least two departments eat together?
If the primary goal for bringing people together is face-to-face interaction, should people be forced to leave electronics in their briefcases? One veteran employee at a company I work with has worked remotely for many years. She visits her company’s headquarters once or twice a month, but she intentionally leaves her laptop at home.
“My objective for being in the office is to talk to people, and I don’t want to have a computer that tempts me to do email or work I could do remotely,” she says. Going to the office without access to a computer might seem extreme, but it’s an example of how we can treat the office as a place to socialize, not a place to work.
As hybrid companies seek to improve the ways that employees socialize during limited hours in the office together, there are some industries and firms that already demonstrate best practices.
For example, at large consulting firms, many employees have historically traveled to client locations Monday to Thursday and reconvened together in the office on Friday, which naturally becomes a day for reconnection and in-person catching up.
During travel days, consultants often share meals during team dinners, which become an essential forum for transmitting company culture and learning from client work.
Another example worth examining is WeWork, the once fast-growing company that builds and leases co-working space. Despite all the noise about WeWork’s charismatic founder and its controversial financial model, in its heyday, the company excelled at creating opportunities for the people who worked in its spaces to socialize, network and collaborate.
When I visited WeWork locations, what struck me is how they encouraged people to gather and interact in common spaces—by offering an array of beverages and snacks, a formal lineup of public talks and a less formal slate of fun events, such as game nights and contests.
Successful co-working spaces were never just about real estate; creating community and connections was part of the value proposition.
Some percentage of the workforce who can work remotely may choose, for a variety of reasons, to revert to pre-pandemic habits and continue to treat the office as a place to do individual, task-focused work. That’s fine. These questions often come down to personal style and temperament.
Though I have grown comfortable working remotely, after recently returning to in-person meetings after many months of Zoom, I am acutely aware of how much more effective I feel in face-to-face interactions.
Many of my colleagues, in contrast, have realized that they continue to prefer remote work. We will have to accommodate such individual preferences and embrace them as another dimension of diversity, inclusion and belonging.
As we rethink how we work after so many months away from the office, we should also reconsider how we describe it. The framing effects of language are powerful.
The simple word “workplace” conveys more than we might think. In the emerging world of hybrid work, thinking of our shared space as a “clubhouse” may help us to find a new, more satisfying rhythm in our professional lives.
Manhattan Offices Face Reckoning As Older Buildings Get Left Behind
* Pandemic-Era Preferences Expose Shortcomings Of Aging Towers
* With Empty Space Piling Up, Landlords Have A Costly Dilemma
The fortunes of Manhattan’s office market are coming down to old versus new.
Glassy skyscrapers that have popped up in recent years are luring companies seeking new space and preparing for the hybrid-work era, a sign of New York’s revival from the depths of the pandemic. Left behind are countless older buildings that haven’t been modernized in the past decade, presenting a costly problem for landlords.
The question for owners of those buildings is whether it’s worth pouring hundreds of millions of dollars into a full gut-renovation — a gamble at a time when office use is down in general, available space is piling up at a record rate and high-profile companies such as Deutsche Bank AG and HSBC Holdings Plc are shrinking their global footprints.
“We are going to see a diminished use of offices as hybrid work becomes more popular,” said Ruth Colp-Haber, chief executive officer of brokerage Wharton Property Advisors. “The really cool buildings have a huge amount of activity. But for anything other than ‘really cool,’ the landlords are struggling and the dichotomies are getting worse.”
Doing a major makeover holds no guarantee that a property will compete. Not doing it would mean dwindling rent rolls, potentially leading to mortgage defaults and foreclosures. Another way out — converting obsolete office buildings to housing — can be complicated and prohibitively expensive.
Vacancies at Manhattan office buildings have surged during the pandemic.
The office-vacancy rate in Manhattan is 12.3%, up from 7.8% two years ago, data from CoStar Group Inc. show. At 15% of existing buildings, at least a fifth of the space is available.
As leasing picked up last year, about 65% of new deals were at higher-quality buildings — meaning properties that were recently constructed or have undergone a significant renovation, and have above-average maintenance with outdoor spaces and plenty of natural light, according to CoStar.
In a city where roughly 90% of the office stock is more than 20 years old, the disparities are stark. New skyscrapers, including those at the Hudson Yards mega-development and One Vanderbilt near Grand Central Terminal, have filled up quickly, attracting the world’s biggest finance and tech tenants.
Meanwhile, older buildings that haven’t been overhauled in the past decade or so can barely attract interest, even with major rent discounts.
“The market is telling us very clearly that the era of driving to the cheapest price on office space, regardless of its condition, is, for most companies, no longer an acceptable real estate strategy,” said Mary Ann Tighe, CEO of New York’s tri-state region for brokerage CBRE Group Inc.
Tenants are gravitating to the best-of-the-best trophy properties that are close to transit hubs and fitted with posh amenities including gyms, luxury restaurants and outdoor terraces. If workers are going to leave the comfort of their home offices, they want nice perks in exchange.
“The requirements for a building are so much higher coming out of the pandemic,” said Sarah Hawkins, East Region CEO at Hines, which is working with SL Green Realty Corp. on the redevelopment of One Madison.
Building upgrades are routine for landlords, who regularly reinvest capital into older properties to maintain them. But small updates won’t do much to increase their appeal.
“It has to be a real commitment to transforming the asset,” said Peter Riguardi, chairman of the tri-state region at Jones Lang LaSalle Inc. “We’re seeing a lot of renovations that are going beyond just modest face-lifts, where they are taking out slabs, being creative with floor plates, removing and changing heating and air-conditioning systems, changing windows.”
Even for landlords who have significantly reinvested in their properties, the supply of space can far outweigh the demand. Redeveloped offices including 120 Broadway in the Financial District and the Starrett-Lehigh Building in West Chelsea, at more than 2 million square feet (185,806 square meters) and spanning a full city block, have vacancy rates above 25%, according to CoStar.
Starrett-Lehigh’s landlord, RXR Realty, expects to reposition some spaces in the property as current leases expire. The firm just signed a major deal with Roku Inc. at another of its buildings, 5 Times Square. RXR spent more than $130 million on renovations and added a 50,000-square-foot amenity center at the tower, built in the 1990s.
“It went from a nice thing to have to an absolute need to have post-pandemic,” RXR CEO Scott Rechler said. “We need to do this for tenants to get them in.”
Older properties are competing with giant blocks of space that are being constructed in towers such as 2 Manhattan West in the Hudson Yards area, and Deutsche Bank’s former headquarters at 60 Wall St., a 1980s building that’s getting an overhaul costing at least $250 million. Numerous towers are also under development, which will only add to the immense supply.
The Financial District is particularly saturated with aging towers.
“Downtown is a whole other thing because there’s so many of these lower-quality buildings,” Colp-Haber said. “The buildings that are suffering are 1970s vintage, that have nothing different about it, no particular charm, fewer windows.”
While many buildings in the area have had more-minor updates, they haven’t had the type of overhaul that’s needed to lure tenants these days.
At 14 Wall St., across from the New York Stock Exchange, vacancy is close to 30%. The property, built in 1912 as the original home of Bankers Trust Co., has gotten some lobby improvements and amenities including a conference center, but it hasn’t been gut-renovated recently.
Goldman Sachs Group Inc.’s former headquarters at 85 Broad St. got an upgraded lobby, bike racks and wellness rooms as part of interior renovations after Hurricane Sandy. Still, the tower has a vacancy rate of roughly 20%.
“We cannot deny 85 Broad St. is a 1983 vintage building, but given its prime location and with ongoing investments it will continue to appeal to current and future tenants,” the owner, Ivanhoe Cambridge, said in an email.
Even if landlords are willing to spend on modernizing their older buildings, some properties still won’t be able to compete.
“It really boils down to basic elements of the building: ceiling heights, structure, location, window line — that all matters,” Hawkins said. “Even with a full repositioning, you can’t compete because of the bones in the building.”
Empty Offices Could Be Pricey Condos. Cost Is The Sticking Point
As American manufacturing declined over the decades, major cities inherited vast stretches of disused factories and warehouses. Eventually, savvy owners and developers redesigned and renovated that manufacturing space to create desirable downtown condominiums and loft apartments, often with stylish industrial accouterments.
Now, in metropolitan business environments forever altered by the Covid-19 pandemic, an abandoned office space is today’s empty factory. With many major urban areas still facing housing shortages for working professionals, the minds behind a new trend explore the possibility of transforming offices into residential real estate opportunities.
According to a recent Rent.com report, cities across the U.S. are seeing office vacancy rates averaging higher than 20%. The areas with the highest reported number of open office space include Fairfield County, Connecticut (32.6%), Westchester County, New York (25.6%), Houston,(25.4%) and Brooklyn, New York. (25.2%).
With a growing sense that viral pandemics might become a seasonal phenomena, and with remote-work technology proliferating the cultural landscape, there remain questions if those empty offices will ever fill again. Residential transformation could prove a solution for real estate companies possessing ample empty buildings.
While developers have the urban space to transform quiet offices into new condominiums or luxury apartments, the question remains if they want to take on the considerable cost. Like disused factories and warehouses, orphaned offices require reparceling and utility servicing to create living spaces.
Government Incentives Are Percolating
David Downey, president and CEO of the Washington, D.C.-based International Downtown Association, or IDA, says his organization is supporting the effort to reduce disused office space. He cites the Revitalizing Downtowns Act now before Congress as a key to pushing this metropolitan repurposing effort forward.
Sponsored by U.S. Senator Debbie Stabenow, a Michigan Democrat, the bill “expands the investment tax credit to add a qualified office conversion credit.” The 20% credit must apply to qualified converted buildings.
The bill defines such a pre-conversion property as a nonresidential property available for lease to office tenants; a property substantially converted from an office use to a residential, retail or other commercial use; a building initially placed in service at least 25 years prior to the beginning of the conversion; and a building with an allowable straight line depreciation.
“IDA is supporting (the Revitalizing Downtowns Act) to incentivize conversion of underutilized office space into other uses, including residential,” Mr. Downey said.“The rehabilitation concept is similar to urban warehouse conversion from recent past decades. However, downtown office asset values are significantly more expensive than vacant industrial warehousing, which is why a conversion tax credit incentive is so important.”
Acknowledging a housing shortage in many city environments, Mr. Downey considers such governmental involvement essential to pushing repurposed office use forward in many cities.
“Greater housing levels in downtowns is imperative for building inclusive and resilient cities,” he added. “Throughout the pandemic, city centers with more residents were able to sustain small businesses and remain more vibrant even when the daytime office worker traffic was diminished.”
Plus, the benefits of new housing emerging from abandoned offices are practical, enabling more residents to live and work while dramatically reducing commute time and congestion, Mr. Downey said.
Redevelopment Could Take Some Time
David Bitner, global head of capital markets insights for global real estate serving firm Cushman & Wakefield, said the concept of making abandoned urban offices into condos or rental properties remains in its infancy as the industry comes to terms with the transformational necessities.
“The reality is that it is typically difficult and expensive to convert urban office space into residential use,” Mr. Bitner said. “For many of these to pencil, you would need to have buildings that are substantially vacant and have undergone dramatic write-downs. There are certainly cases where this will transpire, but it will only ever be a marginal influence on the office and multifamily markets, respectively.”
Mr. Bitner said conversions of older warehouses to offices was a niche or opportunistic development trend driven by demand for adaptive re-use offices from top-tier tenants. The pre-divided office layouts may not lend themselves as easily into homes.
“The often unfavorable floor plates of office buildings make them potentially less attractive to tenants,” Mr. Bitner added. “An exception would be older office buildings with attractive exteriors and small floor plates, which could make them more amenable to laying out residential units, though the interior work necessary would still be substantial.”
Developers could find themselves stuck between two worlds when it comes time to market any new spaces they create, he added.
“Conversion is expensive, which suggests that a luxury price point would be necessary,” he explained. “However, the compromises on unit layout may make them less competitive in the luxury set.”
Regardless of the practical challenges, Mr. Bitner acknowledged the appeal of new urban housing in many cities.
“I think that the pandemic has brought home the importance of submarkets having a mixed composition of office, retail and residential for maintaining vibrancy,” he says. “I think that cities should encourage this development. If they really want a lot of this to happen, then they will have to offer a range of inducements.”
Office To Condo Is Challenging, But Not Impossible
Matthew Gardner, chief economist for the Seattle-based Windermere Services Company, considers it unlikely that the offices-to-homes trend will take off significantly because of very real world problems such as plumbing.
“The core depths of traditional office buildings are not suited for conversion,” Mr. Gardner said. “There are significant issues with plumbing penetration. Warehouses are far better suited to conversion and have been successful in conversion to residential spaces for decades—such as in the Meatpacking District in Manhattan.”
If a trend for office space transformation does take off, Mr. Gardner echoed others that the resulting residences need to go upscale.
“I can’t imagine that they would be an affordable option, given conversion costs would be significant,” he says.
Despite clear challenges, Mr. Downey, of IDA, said metropolitan areas should encourage more productive use of building assets.
“Pre-pandemic, employers were already relocating to the city center where the knowledge workforce preferred to live,” Mr. Downey said.
“Additionally, aging populations continue to seek walkable, amenity-rich neighborhoods with easy access to services without the use of an automobile. The Revitalizing Downtowns Act works to help finance these costly conversions as an alternative to continuing to build further out in the rural landscape.”
Foreign Investment In U.S. Commercial Property Exceeds Pre-Pandemic Levels
Overseas investors join domestic U.S. investors in focusing more on warehouses and rental apartments.
Foreign investment in U.S. commercial property surpassed pre-pandemic levels last year, as overseas investors piled back in after travel restrictions eased and the U.S. economy bounced back.
Pensions, sovereign-wealth funds and other foreign institutions purchased $70.8 billion of U.S. commercial real estate in 2021, according to data firm Real Capital Analytics. That was the highest total since the $94.6 billion invested in 2018, and nearly double the 2020 figure.
Investors from Canada, Singapore, South Korea, the U.K. and other countries joined U.S. domestic investors to drive last year’s total commercial real-estate sales to record levels.
Before the pandemic, foreign buyers tended to focus on office buildings and hotels in major cities such as New York, San Francisco and Chicago. In 2021, overseas money largely followed U.S. investors into hot sectors such as warehouses, rental apartments and specialized office buildings for pharmaceutical businesses.
These segments produced yields that have far outstripped bonds in the global low-rate environment. The U.S. economy, meanwhile, has recovered faster than others, attracting cross-border investment to a range of businesses as well as commercial property.
Foreign investors also favored the Sunbelt and smaller markets over their traditional stamping grounds in coastal U.S. cities. Last year a record 64% of foreign investments were in properties in nonmajor metropolitan markets, according to Real Capital, up from about 53% in 2019.
“It is a different world,” said Riaz Cassum, global head of international capital coverage for commercial-property firm JLL. “You’re starting to see big institutional investors looking at Dallas, Charlotte, Denver, Nashville, Austin and other high-growth, low-tax markets.”
Many foreign investors expect to maintain last year’s investment levels or even increase their buying in 2022 through direct acquisitions or U.S.-focused private-equity funds, according to overseas investors and real-estate brokers. Their appetite remains strong for logistics and rental apartments as well as the highest-quality office buildings that have seen the most leasing during the pandemic, these people said.
Nearly all overseas investors, like domestic investors, stayed out of the market during the early months of the pandemic. That created a backlog at many foreign institutions that have been allocating more capital to real estate in recent years, according to market participants. They have been under pressure to put that capital to work to hit their hoped-for returns.
As the U.S. economy recovered, many cross-border investors felt a need to get their allocation of capital out, said Mark Chu, co-head of the Asia-Pacific region for real-estate investment bank Eastdil Secured.
Foreign investors with offices in the U.S. were able to resume making deals before others because they weren’t limited by international travel restrictions. For example, Bahrain-based Investcorp, which has a New York office with a real-estate staff of about 25, restarted its acquisition strategy in mid-2020.
Investcorp purchased about $1 billion in property in 2020 and $2.5 billion last year, mostly industrial and multifamily property in Sunbelt markets. “We got out there,” said Michael O’Brien, Investcorp’s co-head of North American real estate.
After buying no U.S. real estate in 2020, Commerz Real resumed investing last year with its $850 million purchase of the Manhattan office tower at 100 Pearl St. Because of travel restrictions, the real-asset investment business of Germany’s Commerzbank AG focused primarily on its home market during the first year of the pandemic, according to Maja Procz, Commerz Real’s global head of transactions.
But that put a hold on Commerz Real’s strategy to increase its U.S. holdings. “As soon as [travel] became possible in the early summer last year, we started our international activities,” Ms. Procz said.
Commerz Real plans to open its first U.S. office in New York later this year and is considering expanding its U.S. portfolio—which now consists of office, hotel and retail assets—to include rental apartments, as well.
“As soon as we have the office on the ground, we will have many more possibilities,” Ms. Procz said.
Investors from some countries have yet to show up in big numbers since the pandemic. For example, in 2021, Chinese investors purchased $534 million worth of property compared with a record $19.1 billion in 2016, according to Real Capital.
Chinese appetite for U.S. real estate fell in the years leading up to the pandemic as investors came under pressure from Beijing to bring money back home for political and financial reasons. In 2019, Chinese investors unloaded $20 billion of property more than they bought, Real Capital said.
New York Apartment Building Sales Jump In A Bet On The City’s Comeback
* Transactions Totaled $8 Billion Last Year, Up 72% From 2020
* Investor Appetites Are Reawakening With Rents On The Rise
The market for New York City apartment buildings reignited in 2021 as a glimmer of normalcy appeared on the horizon for investors.
There were 386 multifamily transactions, up 53% from 2020, according to a report by Ariel Property Advisors. The dollar volume of those deals was about $8 billion, a 72% increase.
Investor interest in NYC apartment buildings picked up last year.
In Manhattan, buyers took advantage of prices that remain low relative to the past decade, even as rents jumped 24% from 2020, nearing pre-pandemic levels, the brokerage said.
Demand for rental buildings is bouncing back from the depths of the pandemic, when New Yorkers left the city in droves. Investor appetites also dimmed after the passage in 2019 of restrictive state laws governing older, rent-stabilized buildings.
Last year’s gains, which came as the city’s apartments filled up again, show buyers are throwing in their lot with those betting on New York’s comeback.
“The multifamily market in 2021 has really done a 180,” Shimon Shkury, president of Ariel, said in an interview. Demand has increased dramatically and investors expect prices in 2022 to jump far above last year’s, Shkury said.
In Manhattan, smaller deals dominated: About 57% of transactions involved buildings priced from $5 million to $20 million.
Individual international investors played a particularly active role, jumping on the chance to buy while the dollar is relatively weak. Institutional investors are expected to return in a big way this year as prices appreciate, Shkury said.
Market-rate buildings were the more-popular trade, with affordable housing accounting for about 25% last year’s dollar volume. That share may rise now that investors have pricing clarity under the new rent laws, according to Ariel.
Citywide, multifamily deals are still well below the $11 billion mark reached in 2018, before the current rent rules were enacted.
Why Commercial Landlords Will Give You Months of Free Office Rent
Deals in Dallas, LA, and Denver highlight how crazy the market has gotten.
Across the U.S., just 2 in 5 white-collar employees make it to their desks on any given day. Office vacancies are at 16%, and in many cities they’ve doubled in the past two years. And yet it’s not uncommon for bidding wars to break out over commercial real estate, at least for the best properties.
What gives? “It’s a tale of two cities,” says Gabi Koshgarian, chief operations officer of real estate brokerage Vicus Partners in New York. “The supernice offices are getting rented by superfunded fintechs.” Perfectly acceptable—but less flashy—spaces, she says, “are sitting stagnant, and you can get them for a steal.”
The pandemic forced many companies to abandon their offices midlease, leaving behind fully furnished, wired spaces renovated in the past few years on seven-figure budgets. At the same time, executives say plush digs can attract talent, boosting demand for “Class A” buildings—techy, new, high-end—and firing up competition in the normally muted sublease market.
Landlords of Class B and Class C buildings have been forced to offer sweeteners such as free rent (a month or two for every year of the lease), funding for renovations, and such extras as parking or lobby accommodations. Many will also throw in a Covid-19 clause, which defers rent in the event of new lockdowns.
In big cities, prospective tenants might look at 30 spaces, quickly winnow that to 10, then play three or four finalists off one another; established tenants start two years in advance, allowing time to reconsider their options or go radio silent as a negotiation ploy. Here’s a peek at how three of them navigated the turbulence.
① The Bank
August 2020–February 2022, Dallas
● The Tenant: A regional office for a national bank, previously in 34,000 square feet, seeking space with high foot traffic and the possibility of ground-floor retail. “They really wanted a cream-of-the-crop building,” says Walt Batansky, chief financial officer of Avocat Group, which served as the bank’s agent. The bank also hoped to downsize to more-flexible, use-it-as-you-need-it space to accommodate its daily employee occupancy of 70%.
● The Hunt: Batansky presented a dozen properties, all mapped to show rivals’ locations. “A bank wants exclusivity—they don’t want their customers walking past a competitor,” he says. That narrowed the search to five “hot targets.”
● The Negotiation: Two landlords offered suboptimal expansion and renewal terms, so Batansky pursued deals with the other three. Competition among owners has eased in the past year or two, because after the turmoil of the pandemic, “they’re cautious about getting bluffed into significantly lower prices,” he says. “No one wants to see these rates drop.” All three landlords showed scant flexibility on the rent but gave way elsewhere, offering months of no rent and money for reconstruction.
● The Deal: A 10-year lease of 24,000 square feet. The winning landlord doubled its funding toward renovations, and the first eight months were rent-free.
② The Law Firm
Early 2018–February 2022, Los Angeles
● The Tenant: Buchalter, a growing practice with 135 attorneys in 95,000 square feet across several floors of a 22-story building where it’s headquartered. Buchalter wanted to bid adieu to the classic layout of secretarial pods surrounded by lawyers’ offices and downsize by almost a third, as more staff worked from home much of the time.
● The Hunt: Even before the pandemic, renters had the stronger hand in downtown LA. In 2018 one landlord sent Buchalter an unsolicited offer to hold space for more than three years until the firm was ready to move. “When landlords eat that much downtime, it’s a soft market,” says Steve Walbridge, the West Coast lead at SquareFoot, an agent on the deal. He requested proposals from various properties, including the building featured in the 1980s NBC series L.A. Law.
“We actually thought the spaces might be too nice,” says Adam Bass, Buchalter’s chief executive officer. “There should be some humility in our space—certainly very nice and professional,” he says, but offices that are too flashy can set the wrong tone in a service business. The company’s architect ascertained space needs and costs, and the firm surveyed attorneys to determine their office desires. “Nobody admits that they don’t want to come in at all,” says Walbridge. Every lawyer got a private office.
● The Negotiation: The existing landlord swooped in, and counteroffers flew back and forth. To compete, one building offered a dedicated ground-floor private lobby. “The landlords got much more aggressive, because we were one of just a handful of tenants on the market,” says Walbridge. The three finalists offered similar rates but showered the firm with a variety of concessions such as free rent, large improvement budgets, and the ability to return unused space. In the end, the existing landlord beat the other offers by about 10% over the term of the contract. “We just couldn’t say no,” says Bass.
● The Deal: A 12-year lease of 87,000 square feet across four floors (one with an outdoor area), with almost two years of free rent, plus free space on other floors during construction. Other perks included extra parking for clients and Wi-Fi in the garage (a must for lawyers on billable conference calls). “It was multiple millions of dollars better to stay put,” Walbridge says. “We got a much better deal because of the pandemic.”
③ The Junk Hauler
Summer 2021–December 2021, Denver
● The Tenant: The Junk Trunk, a 20-employee company that will haul away everything from furniture to construction debris. It had a coworking space but wanted to upgrade to 2,000-3,000 square feet of its own, aiming to offer employees ample room for pingpong, lounging, and eating.
● The Hunt: Owner Nathan Schweid spent a half-year viewing spaces, particularly rentals with protected parking for his trucks, several of which had recently been vandalized. Then Aviva Sonenreich, managing broker at commercial firm Warehouse Hotline, posted a place offered at $2,900 a month on her Instagram feed, and Schweid messaged her.
● The Negotiation: Sonenreich says three-year leases were the minimum pre-pandemic, with two-year renewals. As a newcomer, Schweid wanted just one year in case his business ended up on the scrapheap. Sonenreich says the pandemic has hastened the pace of negotiations, with landlords offering a modest increase in sweeteners. “It’s like, ‘We will give you concessions—pick A, B, or C and don’t ask us for more,’ ” she says.
● The Deal: A one-year lease of 2,400 square feet for $2,450 a month, including 13 parking spaces (10 more than typical) for Schweid’s fleet.
Amazon Aims To Sublet, End Warehouse Leases As Online Sales Cool
* Company Wants To Shed At Least 10 Million Square Feet Of Space
* Amazon Spooked Investors Last Month After Saying It Overbuilt
Amazon.com Inc., stuck with too much warehouse capacity now that the surge in pandemic-era shopping has faded, is looking to sublet at least 10 million square feet of space and could vacate even more by ending leases with landlords, according to people familiar with the situation.
The excess capacity includes warehouses in New York, New Jersey, Southern California and Atlanta, said the people, who requested anonymity because they’re not authorized to speak about the deals.
The surfeit of space could far exceed 10 million square feet, two of the people said, with one saying it could be triple that. Another person close to the deliberations said a final estimate on the square footage to be vacated hasn’t been reached and that the figure remains in flux.
Amazon could try to negotiate lease terminations with existing landlords, including Prologis Inc., an industrial real estate developer that counts the e-commerce giant as its biggest tenant, two of the people said.
In a sign that Amazon is being careful not to cut too deeply should demand quickly rebound, the 10 million square feet the company is looking to sublet is roughly equivalent to about 12 of its largest fulfillment centers or about 5% of the square footage added during the pandemic. In another signal that Amazon is hedging its bets, some of the sublet terms would last just one or two years.
The company declined to say which space it plans to sublet or confirm the amount.
“Subleasing is a very common real estate practice,” spokeswoman Alisa Carroll said. “It allows us to relieve the financial obligations associated with an existing building that no longer meets our needs. Subleasing is something many established corporations do to help manage their real estate portfolio.”
Prologis declined to comment.
Amazon spooked investors last month after reporting slowing growth and a weak profit outlook that it attributed to overbuilding during the pandemic when homebound shoppers stormed online. At the end of 2021, Amazon leased 370 million square feet of industrial space in its home market, twice as much as it had two years earlier.
In the April earnings report, the company said it expected the excess space to contribute to $10 billion in extra costs in the first half of 2022. The company didn’t divulge how much over-capacity it had, where it was located or what it planned to do with it. Subleasing surplus space is one way for Amazon to trim costs on space it no longer needs.
Amazon tasked the real estate firm KBC Advisors to evaluate the warehouse network and determine where to sublet and where to terminate leases, two of the people said. Both options carry costs.
Subletting warehouse space requires Amazon to remove all of its equipment so the new occupant can tailor it to their own needs. Lease terminations typically require the tenant to pay a percentage of the rent that would be due over the full term of the agreement.
It shouldn’t be hard to find tenants. The vacancy rate for industrial space is below 4%, an all-time-low, and rents were up 17.6% at the end of 2021, according to a February report from Prologis.
Surging Retail Inventories Are Swamping U.S. Warehouses
Logistics real-estate giant Prologis predicts the growth in inventories could lead to a need for another 500 million square feet of warehouse space.
Retailers and logistics operators are struggling to find space to store the flood of goods that have swamped warehouses and weighed on their balance sheets.
Warehouse owners say more retailers are looking to add storage capacity, both for goods now reaching their networks of stores and distribution centers and as they prepare to keep more inventory on hand long-term to guard against stock-outs.
Prologis Inc., the world’s biggest owner of warehouses by square footage, said in a recent market analysis that it expects an additional 800 million square feet of warehouse space to be needed beyond earlier projections to handle the excess inventories, about 300 million square feet of which has already been leased by tenants.
“We have specifically heard from customers who are looking at carrying more inventories and are leasing space,” said Chris Caton, managing director of global strategy and analytics at Prologis.
Retailers including Walmart Inc., Bed Bath & Beyond Inc. and Best Buy Co. have reported they are coping with an unexpected glut of casual clothes, kitchen appliances and electronics as consumers have pivoted away from spending on goods while the highest inflation in decades has crimped household budgets.
Persistent supply-chain bottlenecks have also led many retailers to stretch out buying cycles, bringing in goods early to ensure shelves are stocked during the critical fall sales season. Some retailers have also bulked up orders to be prepared in case of supply-chain disruptions, part of the shift from “just-in-time” inventory management to “just-in-case.”
The inbound shipments are stacking up at seaport docks, filling up warehouses near gateways and clogging distribution networks across the U.S.
Melinda McLaughlin, senior vice president and global head of research at Prologis, said across the company’s some 5,800 customers, the increased demand amounts to an average of about 138,000 square feet per client.
Prologis’s biggest customers include companies such as Amazon.com Inc., FedEx Corp. , Home Depot Inc. and United Parcel Service Inc.
The demand is also growing among discount retailers and liquidators as the country’s biggest merchants look to offload excess and out-of-season stocks.
Chris Caplice, executive director of Massachusetts Institute of Technology’s Center for Transportation and Logistics, said forecasts for more storage capacity may be overblown since retailers are also cutting prices and canceling orders to cope with excess stocks.
“I don’t think it’s going to be like, we need to double the amount of warehouse space,” Mr. Caplice said.
The industrial real-estate market remains extremely tight by historical standards, with demand for e-commerce along with upheaval in supply chains during the pandemic driving the vacancy rate for warehouses across the U.S. down to 2.9% in the second quarter, a drop from 7.7% 10 years ago, according to real-estate services firm CBRE Group Inc.
The addition of new space has been held up by labor shortages and supply-chain disruptions.
Developers completed 78.6 million square feet of new industrial space in the second quarter, down 6.9% from the previous quarter because of materials shortages, according to CBRE. A record 626.6 million square feet is under construction.
Some retailers have turned to flexible warehousing amid the tight real-estate market to handle increased inventory, said Karl Siebrecht, chief executive of Seattle-based Flexe Inc., which connects businesses to warehouses with shared space.
“We do see this dynamic happening across many of our customers,” Mr. Siebrecht said. “When you increase inventory, you must increase the capacity of warehouses to hold that inventory.”
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