Sunday Summary: Google Pulls Back

Job cuts could roil the tech sector, but Alphabet (Google (GOOGL)’s parent company) still had a market cap of $1.4 trillion (more than the GDP of Mexico) and as of last fall was named by Business Insider the fourth-largest company in the world.

Moreover, while other tech companies like Facebook might pull back on their real estate footprint, Google had made a decision in 2021 to plunk down more than $2 billion to cement themselves on the Far West Side of Manhattan. That should mean something.

It was nice while it lasted.

Last week, Ruth Porat, the chief financial officer for Alphabet, said on an earnings call that the company was planning to spend $500 million in “exit costs” on their current offices and lease obligations, mostly involving underutilized offices in the Bay Area.

This shouldn’t be too surprising; the company announced last month that it was cutting approximately 6 percent of its workforce (around 12,000 employees). Nevertheless, it hurts to hear. (And if you wanted to take the edge off, sorry. We got a report that New York City is going to force landlords to evict illegal weed stores from their properties.)

We’ll always have multifamily…

Well, maybe that pillar is also a little less sturdy than we had all assumed, too.

After a pandemic in which multifamily housing proved safe and resilient with rising rents and low vacancies, some cracks are starting to show.

The average monthly rent in the U.S. slid in December. (Only by $4, but still.) And it was down (by $10) over the course of the last quarter of 2022. This is still up significantly over the course of the year, but Paul Fiorilla, director of U.S. research at Yardi Matrix, predicted that 2023 would see only modest growth.

“We have seen a huge exit of renters in the gateway cities, so I expect to see investors follow renters to the growing areas located mostly in the Sun Belt region,” Mitchell Hunter, global chief commercial officer at Trimont Real Estate Advisors also told CO. “Cities like Dallas, Houston and Atlanta have seen an influx of renters over the past couple of years.”

We’ll always have hospitality…

One of the big success stories of the last few months has been the extraordinary rebound in hotels.

When the February employment numbers were released, the big winner was leisure and hospitality, boasting 128,000 new jobs in January. We can understand why firms like Colliers are beefing up their hospitality teams.

However, there’s a catch.

“The hospitality industry is recovering in virtually every aspect,” said Bryan Younge, an executive vice president at Newmark (NMRK) Valuation & Advisory, “except transactional volume.”

Indeed, the market for buying and selling a hotel is a lot less active than one would expect given the demand for the asset. And securing capital is extremely difficult.

“A lot of the big banks are on hold with hospitality,” said Alessandro Colantonio, the chief investment officer of Gencom. “Some won’t even look at a deal for the next 90 days.”

This isn’t to say that it’s frozen completely. For the right asset, at the right price, there are buyers and financing.

The former New York Marriott East Side, for instance, sold to the Beverly Hills-based Hawkins Way Capital and Värde Partners for $153.4 million — which was nearly $117 million less than its previous owners, Ashkenazy Acquisition Corporation and Deka Immobilien Investment GmbH, paid for it in 2015.

And Hilton Grand Vacations picked up the 161-key hotel, The Central at 5th, at 12 East 48th Street from private equity firm 54 Madison Partners for $136 million. (Both hotels had legal spats or bankruptcies to contend with.)

But some hotels are getting love (and financing) before they’re forced into sale or foreclosure. We also learned that the legendary Ian Schrager and Ed Scheetz have stepped in to help turn around the Chetrit Group’s historic Bossert Hotel in Brooklyn Heights, which has a $112 million loan on it currently in default.

We’ll always have Disney…

Not if Ron DeSantis has something to say about it, you won’t!

As part of the tit-for-tat battle that has been raging between the governor of Florida and the Walt Disney Company, state lawmakers unveiled a bill to strip Disney of the autonomy it’s enjoyed over Walt Disney World Resort and the surrounding area.

For more than half a century Disney has controlled the Reedy Creek Improvement District, giving the company a special tax status over the 25,000-acre site and allowing the company to run sanitation, transportation, zoning and security as it saw fit.

The lease among us

While confidence among office brokers nationwide is low these days, one thing to turn that attitude around is a look at the deals that are being inked. In terms of New York leasing we learned that Junto Capital Management is taking 25,000 square feet at Olayan Group’s 550 Madison Avenue, and the nonprofit Oliver Scholars, which provides support for high-achieving Black and Latino students preparing for college, took 12,832 square feet at 14 Wall Street. A couple of law firms were on the prowl: Polsinelli PC extended its lease until 2036 at 600 Third Avenue and added 13,129 square feet to its footprint, bringing it up to 52,516; and Kudman Trachten Aloe Posner (KTAP) took 10,593 square feet at The Feil Organization’s 488 Madison Avenue.

There was a lot of retail activity with Veronica Beard and Tanya Taylor taking storefront space at 980 Madison Avenue; Esprit, the fashion and footwear company, taking 38,000 square feet at 160 Varick Street for corporate offices, Zadig and Voltarie grabbing 5,000 square feet at 845 Madison Avenue, and Kura Sushi announcing its first New York location at Tangram in Flushing, Queens.

Speaking of retail, there were interesting deals in the Washington, D.C., area. Uniqlo, Gold’s Gym and Nike Unite all took space at Peterson Companies, Foulger-Pratt and Argo Investment Company’s shopping complex in Downtown Silver Spring. (Does this make up for the fact that 10 Loyal Companion pet stores in Northern Virginia and one in Washington, D.C., are closing due to their parent company’s bankruptcy? Probably not, but it’s better than nothing.)

And in Miami, the owners of Gaia are apparently planning a new restaurant in Miami Beach’s South of Fifth neighborhood at 801 South Pointe Drive.

Looking ahead

One of the big questions for the real estate business (as well as for America in general) is the question of a recession.

The more histrionic predictions of last year seem to be on the wane.

One of the things that CO wondered was what would happen to all the ESG and DEI initiatives that had been promised with such fanfare and such sincerity over the last couple of years once cash is not as available as it was in the past.

“It’s not so much that we’re just hearing rumors [about the economy’s impact on ESG],” said Josh Richards, corporate director for ESG at Transwestern. “We’re actually seeing some of our clients taking those measures preemptively.”

But the good news is some organizations like Project Destined, which prepares underserved youth for careers in real estate, have not seen the financial spigot abruptly shut off. According to Project Destined’s chief, Cedric Bobo, 90 percent of the real estate firms the organization partners with actually increased their contributions for 2023.

“I think [the people who pull back] never had clarity of purpose for why they were doing it,” Bobo told CO. “They were just reactionary. They didn’t have a plan. They set up a DEI committee. The DEI committee didn’t have any clear goals. And then they ran into a downturn, and they just wiped it away because frankly it didn’t have substance to start.”

The other recession-related question that has been on a lot of real estate pros’ minds has been if there’s an opportunity with distressed assets.

“The wave of distressed or forced selling that we expected hasn’t happened yet,” Morgan Stanley’s Lauren Hochfelder said in an interview with CO published last week. “I think as debt maturities loom and other liquidity needs arise, it will start to come. But, in the meantime, where we can buy the best quality real estate at dramatically reset pricing — and attractive pricing — we are taking advantage of that moment in time when others are not there.”

Makes sense.

Hochfelder’s whole interview is worth a read as you enjoy a nice, leisurely Super Bowl Sunday.

See you next week!