Sunday Summary: Let’s Talk About Earnings Calls

This shouldn’t have exactly been the surprise of the century for those paying attention to Vornado’s stock price and some of its recent moves. A year ago, the REIT was trading at $40 per share and, as of Friday afternoon, it was around $14. Moreover, Vornado was removed from the S&P 500 in January. Plus, the company’s most enticing project, the redevelopment of the neighborhood around Penn Station, remains on hold.

But Vornado wasn’t the only one with bad news. Revenue dropped by 4.5 percent at CBRE compared to the first quarter of 2022, according to the company’s earnings call.

Even some companies that touted gains during their earnings calls, like the life sciences REIT Alexandria Real Estate Equities (ARE), which took in $701 million last quarter (an almost 14 percent increase year-over-year), are being conservative in their approach to the market. Alexandria also announced on its call that it was putting a pause on $250 million in development.

But we were surprised (in a good way!) by at least one call.

“How pleased we are to report solid first-quarter results to start the year,” Anthony Malkin, Empire State Realty Trust’s chairman, president and chief executive officer, told investors. “We are in a great position with a differentiated balance sheet and multiple value drivers.” 

Malkin’s firm grinded out leases despite the turmoil that office in particular (which is so much of ESRT’s portfolio) has gone through in the last three years.

Hats off to ESRT, because there’s so much of the office market that is still unknown in this strange moment. For example, how much of the “record” figures in the market for shiny, new Class A office space are offset by concessions like several months of gratis rent? Good question!

For the time being, we expect more of these earnings reports to remain uninspired. Don’t forget, we’re still absorbing the dissolution of Silicon Valley Bank and all the collateral damage, which happened near the end of the quarter.

Not great news beyond the earnings calls…

It was a bit of a downer week for others in CRE, too.

Meridian laid off approximately 5 percent of its workforce last Wednesday. (It was largely the debt and investment sales brokers who felt the pain.) This comes about a week after Walker & Dunlop announced even deeper cuts of about 8 percent of its staff.

Brookfield’s 54-story Gas Company Tower in Downtown Los Angeles, which the REIT defaulted on earlier this year, was put into receivership on Tuesday.

And, after trading at less than $1 per share for more than 30 days in a row, it looks like Sonder, the short-term lodging company, is in danger of being delisted on the Nasdaq. (WeWork is in a similar kind of pickle.)

One could feel some of that negativity/anxiety at Commercial Observer’s 2023 Spring Finance Forum at the St. Regis Hotel.

“From a general dislocation standpoint, risk is being repriced before our eyes,” said Morgan Stanley’s Lauren Hochfelder.  “I think we’ll need some price stability or at least some conviction around where rates are and the economic outlook, etc., to bring people back to the table.”

The question of where money comes from (and who it eventually gets lent to) was a big one.

“I think new pools of capital will form to provide credit to this market, but I’m not convinced that the market generally — asset allocators and lenders — are going to have broad access to capital,” said KKR’s Ralph Rosenberg. “The epicenter of this problem might be antiquated office, but the tremor is going to be felt by every asset class, everywhere in the world.”

Of course, some believed that price stability wasn’t as far off as others.

“It feels like we’re starting to turn the corner and the corner is not going back to where we were, the corner is stability,” said Acore’s Tony Fineman. “All sides of the transaction have to understand where we are in order for transactions to take place.”

Let the sunshine in!

Yes, there are still happy stories to tell in commercial real estate — particularly, it would seem, in warm climates like, say, Florida. And especially if said real estate is close to a body of water.

To wit, last week David Martin’s Terra announced that he was putting down $1.225 billion for a waterfront site near Downtown Miami.

This is unbuilt land … for $1.225 billion??

To be honest, we don’t know what to think. That’s a lot of cheddar for 15.5 acres. But it’s not as if Martin doesn’t have a pretty good track record.

“The scale and location of this site offers the opportunity to do something spectacular, something that all Miamians can take pride in, and we will deliver nothing short of that,” Martin told CO in a statement. “For now, our team is focused on understanding the full potential of the property and the surrounding area. Our vision will evolve as we learn more.”

Perhaps even more of a shocker (even though the price tag is less than half of Martin’s purchase) was that The Kolter Group offered $503 million for the Briny Breezes trailer park in South Florida … and was turned down!

As James Arena, an area broker, put it: Kolter “thought they were going to eat us like lunch meat. But $500 million is a joke. We literally laughed at them.”

Apparently, Related tried to buy the land in 2007 for $510 million, but the deal fell through because of the Global Financial Crisis.

(Who knew that trailer parks fetched so much money?)

Plenty of others are certainly fleeing to sunnier climates.

Tiger Woods, Justin Timberlake, Ernie Els, Joe Lewis (the billionaire British owner of Tavistock Group) and Mark Bellissimo (owner of Wellington Lifestyle Partners) announced that they were building a mega-complex in Wellington in South Florida. (Jeff Skoll, the founder of eBay, is also an investor.)

The complex will double an already extant equestrian showground, and include hotels, apartments, parks and an 18-hole golf course.

And, while it’s not Florida, it’s certainly got sand and good weather: Silverstein Capital Partners liked what they saw at Nan Chul Shin’s 4-acre, 972-unit Park on Keeaumoku in Honolulu, Hawaii, and wrote a $528 million construction loan.

Finally, on our sunshine kick, it’s looking like Beverly Hills has recently seen a real surge of development along Rodeo Drive and throughout the Golden Triangle.

“I don’t know if I’ve ever seen Beverly Hills stronger than it is today,” said CBRE’s Andrew Turf. “Across all streets, not just Rodeo. Beverly, Cannon — they’re all doing extremely well.” And vacancies have plunged; on Rodeo Drive the vacancy rate is 0 percent!

One more downer for the road

For New Yorkers, maybe the biggest reason to feel downcast is that the state’s $229 billion budget was agreed to on Thursday night … and the 800,000 new housing units Gov. Kathy Hochul promised seem to have fallen by the wayside.

There was no extension of 421a, there was no action on local zoning to encourage development, there was no raising of FAR.

“The budget is an embarrassment and a collective failure,” Cea Weaver, campaign coordinator with Housing Justice For All, said in a statement on the group’s website. “In the face of a record affordability crisis that’s driving New Yorkers out of our state in droves, our state’s leaders put their head in the sand instead of reaching a deal to protect millions of renters and provide a pathway for housing for our state’s homeless neighbors.”

Finally, speaking of budgets, Mayor Adams is instituting a 4 percent budget cut at the Department of Buildings … and this is happening as construction fatalities are at their highest number in years. We think it’s fair to say that having fewer inspectors on site won’t increase safety.

Next week will be better — have a great Sunday!