Sunday Summary: The Distress Is Here
By The Editors February 26, 2023 7:10 amreprints
There’s no denying that the distress that the market was beginning to see in the last couple of weeks has stayed. If anything, it looks like it’s getting worse.
The latest among the star real estate figures to have defaulted on a loan is the Chetrit Group.
The $85 million loan package at 545 West 37th Street in prime Hudson Yards territory consisted of a $53.7 million senior loan and a $31.3 mezzanine loan that were originated by JPMorgan Chase and Mack Real Estate Credit Strategies and is currently being shopped around by Newmark super brokers Dustin Stolly, Jordan Roeschlaub, Doug Harmon and Adam Spies. (And this is not Chetrit’s only property in trouble. The company just tapped Ian Schrager and Ed Scheetz to try to turn things around at the historic Bossert Hotel in Brooklyn Heights.)
Another floating-rate loan with a $140 million outstanding balance is also being shopped around by the same Newmark team for the McGraw-Hill Building at 330 West 42nd Street.
And, as one might expect smaller, less high-profile buildings are in trouble, too.
A $38.1 million CMBS loan at 717 14th Street in Washington, D.C. (a building which doesn’t exactly have a tenant problem; the U.S. Department of Treasury is one of the renters) is headed to special servicing.
The cherry on the week was Cushman & Wakefield’s oh-so-cheerful report that by the end of the 2020s 1.1 billion square feet of office space would likely be vacant and 1.4 billion square feet (more than 25 percent of the office space in the country) would be considered obsolete.
Of course, many owners had been grappling with just this kind of thing for a while. Tech, the tenant that had carried the office market through the first two years of COVID-19, has slowly started to unwind its grand office designs, and the savvy landlords have been preparing for this.
“Obviously, tech is not going to be in a great place this year,” Ryan Masiello, co-founder and chief strategy officer of VTS, told CO, “or even early next year. However, what is starting to change is return to office. The first part of returning to office is getting people back in seats.”
And some are finding that, yes, more old school FIRE tenants have been taking the place of TAMI tenants.
This is probably something that people who are invested in healthy (maybe even overly healthy) asset classes should consider.
Take industrial real estate. Rarely has the market seen the kind of explosive growth that the sector has experienced over the last three years. Which is something to be slightly wary about.
“Some markets like Southern California have seen 12-month rent growth at 70 percent,” said Mark Russo, senior director and head of industrial research for North America at Savills, the real estate services firm. “To say they’ve had a good run is an understatement. It has been an unbelievable ride in terms of rent growth. … Certainly, in some markets — South Florida, Northern New Jersey, Southern California — we are hitting a bit of an affordability wall.”
We hope we didn’t just ruin your Sunday
The truth is that crisis is also opportunity and there are plenty of shrewd operators who are taking a deep look at the landscape and scouring it for interesting possibilities.
Andrew Farkas appears to be very much in the market, for one.
Farkas largely sold off C-III, his collection of businesses over the last 12 to 18 months — the timing of which was pretty inarguably perfect. And since then he has plunked down $185.6 million for the Lexington Hotel in Midtown and $373 million for the Sheraton Times Square.
Today, Farkas told CO in an interview, the Lexington “is 95 percent occupied. And the average daily rate was around $300. So, it’s just — it’s killing it.”
He’s also been scouring the country for garden apartments and grocery-anchored retail. So take heed, readers, where the smart money is going.
And while we stand by what we said earlier about being somewhat mistrustful of crazy good success (yes, everything good comes to an end) while the ride is going, data centers have been performing excellently.
“In general, demand is stronger than it has ever been,” said Jim Kerrigan, managing principal of North American Data Centers, an industry consultancy.
And they might do even better in coming months and years as buildings and tenants look to reduce their server footprint.
CO says relax
One final asset class that bears consideration: cannabis.
The legal cannabis market is still fairly new in New York City. So far, only 66 retail licenses have been approved by the Office of Cannabis Management, and the city has been flooded with illegal headshops.
To wit, the Manhattan D.A. Alvin Bragg sent a letter to 400 illicit smoke shops around the city in February with the warning that if they don’t shut down the D.A. will demand that their landlords evict them.
But once these are shut down cannabis could mean big money for the city and for retailers.
“I think it’s going to be a $5 billion market,” the OCM’s head Chris Alexander told Commercial Observer in the Sit Down, “so we can expect hundreds of millions dollars coming back to the community.”
Something to consider on this leisurely Sunday.
See you next week.