Sunday Summary: Finding a Home for Signature’s Loans

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It would have been a pretty newsy week anyway, even without the first-ever criminal indictment of a former U.S. president. 

Things kicked off on Monday when Commercial Observer learned that Empire Capital Holdings is buying 529 Fifth Avenue for $105 million from Silverstein Properties. Which is always a nice way to begin things.

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However, the lead brokers on the sale — Newmark (NMRK)’s Adam Spies and Doug Harmon — had considerably bigger dynamite they were waiting to detonate.

Two days later we learned that Spies, Harmon and their colleagues Dustin Stolly, Jordan Roeschlaub and John Howley had been tapped for maybe the best assignment in commercial real estate ever: They’re selling $60 billion in loans that had been originated by the recently deceased Signature Bank (SBNY).

In the three weeks since Silicon Valley Bank (SIVBQ)’s implosion, we had been making nervous comparisons to the Global Financial Crisis (GFC) of 2008 — the last time the economy fell off a cliff. Every new development raised the same uncomfortable question: Could we be reliving the same haunted history?

With $936 billion in commercial real estate and multifamily debt due to mature in the next two years, what’s going to happen to the CRE market?

Actually, we might have had the wrong paradigm in mind. Maybe instead of the GFC, the better comparison is probably with the savings and loan crisis of the 1980s. Because it looks like the Fed is not aggressively cutting interest rates like we saw in 2008; if anything, the central bank is still going in the opposite direction, with its eye steadily on limiting inflation.

Of course, some argue that the hand of outsiders — be it the Fed or regulators — might be responsible for the whole imbroglio in the first place.

During my 10-plus years at Signature, we originated over 7,000 CRE loans totaling over $35 billion,” George Klett, the former head of Signature’s real estate practice, wrote in a column for CO. “We had zero losses.”

It was, according to Klett, only when regulators insisted on diversifying Signature’s portfolio that trouble came.

“We were told that we were heavily concentrated in CRE loans and that that was extremely risky. … As Signature decided to diversify its business, I became concerned. When they opened offices in California and other states, and began accepting deposits from crypto companies, I sold all of my remaining SBNY stock.”

Klett was proven painfully correct in that call.

Lots of tough news

The first Q1 data has started to come in, and it does not paint a rosy picture of the Manhattan office market.

About 4.6 million square feet of office space was leased in the first three months of the year, leaving Manhattan with a vacancy rate of 16.1 percent, according to JLL (JLL).

More worrying, trophy space — the one asset that had been weathering this storm relatively unscathed — started to see its first cracks, with rents dipping from $105.74 per square foot on average in the previous quarter to $103.49, and Class A space going from $88.54 to $85.09.

This, according to JLL’s head of research Andrew Lim, “has a lot to do I think with the fact that there’s a lot of trophy sublease space on the market right now. When the macroeconomic headwinds got really strong towards the end of the year, there was a lot of trophy sublease space that was put on the market, which I think is just working its way through that.”

Some of the older, iconic properties of New York (think Chrysler Building, Empire State, 1271 Avenue of the Americas) have been hustling to stay relevant. But even a marvel like, say, the Flatiron Building has been empty for months and was sent to auction thanks to litigation amongst the owners. (To add insult to injury, Flatiron was essentially left at the altar by the winning bidder, who failed to pony up a required 10 percent deposit.)

Less architecturally and socially important properties than the Flatiron have been selling at what look like great prices for buyers. These include 650 First Avenue, which Lalezarian Properties bought from Princeton International Properties for $33.5 million with plans to convert the office building to residential. And the Chetrit Group is selling 850 Third Avenue to HPS Investment Partners for $266 million — which was $156 million less than they paid for it four years ago.

The discounts are coast to coast

KBS didn’t quite have it as bad as Chetrit, but the REIT nevertheless sold the Union Bank Plaza tower in Downtown Los Angeles to Waterbridge Capital for about $100 million less than the company originally paid. (KBS bought it from Hines in 2010 for $208 million, and the current deal is somewhere between $105 million and $110 million. Oh, and KBS sunk about $20 million into renovations.)

Also, Torchlight Investors sold HHLA, the 2001 retail hub that includes Cinemark theaters, a Dave & Buster’s, an Islands Fine Burgers & Drinks and other tenants in L.A.’s Westchester to TTM Real Estate Capital, for about $80 million, a discount of about 28 percent from its 2015 sale for $111 million.

Two good asset classes

Multifamily and affordable housing remain strong asset classes (despite some bumps along the way) and in a tight market like South Florida that remains all the more so.

This explains why the Florida legislature just passed a sweeping “Live Local Act,” by a lopsided vote of 103 to 6, which will pour $711 million into development programs and incentives for developers — and which also will ban rent control.

And while nobody in their right mind would categorically say that retail has turned it all around, there has been some interesting growth in the right places.

Discount retail is doing fairly well. And one needs only look around the Crossroads of the World (aka Times Square) to see that the right kinds of retail are thriving.

“Times Square is a great location in the sense that you get a lot of not only tourist traffic but it’s very close to the heart of the city for analysts and investors to visit,” Colleen Baum, a partner at McKinsey, told CO. “A lot of the real estate within Times Square is going to be more experiential in nature. It’s going to have the best inventory and have the best product, so in a lot of ways it is the best expression of what a retailer is hoping to accomplish within the four walls of a store.”

Retail is, we’re sure, very much on the mind of the MTA. Having just opened the $13 billion, 700,000-square-foot Grand Central Madison, which connects Grand Central Terminal to the Long Island Rail Road, the transit agency has some 25 retail slots to fill and is on the hunt for a master tenant to curate something that can turn a profit.

Heading out for the week?

It’s school vacation time, and that means travel.

If you are planning something more adventurous than staying at your mother’s house in Pennsylvania, you should read Ben Weprin’s interview with CO.

Weprin is the CEO of Adventurous Journeys Capital Partners, which just launched its outdoorsy hotel venture Field & Stream Lodge with Starwood.

Happy travels — and, for those observing, Happy Passover. See you next week on Easter Sunday.