Sunday Summary: Defaults, Downgrades and ICSC


We hope you’re away this Memorial Day weekend, grilling burgers and dogs, or out on a sailboat on tranquil azure seas somewhere, and decidedly not thinking about real estate.

But the folks at Commercial Observer are thinking about it for you.

SEE ALSO: Queens Condo to Pay $119K for Underpaying Workers’ Wages

Indeed, we’re doing a little bit of cowering in our boots as we wait for some sort of resolution on raising the federal debt ceiling…

While there are plenty of sanguine people who are betting that a resolution will be reached before the debt ceiling is breached in June (“All of us are just assuming they’re going to solve it because there’s nothing else we can do,” GFP Real Estate’s Jeff Gural told CO earlier this month) the top three rating agencies are already talking about downgrading the nation’s credit rating.

Last Wednesday, “Fitch placed the United States’ long-term foreign currency issuer default rating on watch for a downgrade, threatening to downgrade its AAA status prior to the ‘X date,’” CO reported

“This is really, really dangerous,” said Robert Hockett of Cornell Law School. “A downgrade of Treasurys … heightens the possibility of a deep, deep recession that could spiral into a depression.”

It doesn’t really need to be mentioned that the current economic situation is not going so swimmingly for real estate. “Deep, deep recession” would not be helpful, if we may be allowed to talk euphemistically.

Speaking of which, there were also a few other alarm bells we heard this week.

EY Plaza, the 41-story office tower in Downtown L.A., went to a special receiver after its owner, Brookfield (BN), missed payments on its $275 million in commercial mortgage-backed securities financing.

And, after threatening it would do so months ago, RXR is walking away from 61 Broadway, where it defaulted on a $240 million loan on May 1.

Keeping your cool

Of course, there are plenty of those who are keeping their heads as all about them are losing theirs. The aforementioned Jeff Gural is one. Last week (on his second attempt) Gural and his partners purchased the entirety of the Flatiron Building for $161.5 million (dropping Nathan Silverstein, with whom the relationship was contentious, from the partnership).

“It’s a relief, we finally own the whole building and buy out Nathan’s share, so it’s a good day for us,” Gural said after the auction.

This comes after Gural was edged out of a winning bid for the famed property when a figure named Jacob Garlick showed up on the courthouse steps and bid $190 million for the property two months ago before mysteriously vanishing when the $19 million deposit was due.

This should serve as an example.

“There is also the old saying that ‘When there is blood in the street, buy property,’” wrote Bob Knakal in his column for CO this week. “Although different sectors of the market are performing differently today, for a number of sectors there is blood in the street.”

Knakal notes that prices have fallen to levels that haven’t been seen in 15 to 20 years in certain asset classes … and yet there is still an intense reluctance to buy as investors wait for absolute bottom.

Lidl big deal

You know who had a pretty good week last week?


Earlier this month the Germany-based grocer announced that it was taking 23,000 square feet at MAG Partners’ 335 Eighth Avenue, its second location in Manhattan … and then this week they announced yet another 41,561-square-foot deal at the Feil Organization’s Glen Oaks Shopping Center in Queens.

This isn’t so crazy. Grocery-anchored retail has been remarkably resilient throughout the pandemic.

“There are very few real estate sectors right now where you can buy with positive leverage,” Ron Dickerman, president and founder of Madison International Realty, told CO. “It’s kind of the holy grail for real estate investors: They want to invest at a higher cap rate than the cost of borrowing. And this is one of those sectors that would allow you to do that.”

Retail has perhaps been on our minds a lot because last week more than 25,000 people descended on Las Vegas for the ICSC conference.

Those who were there should take note of Bob Knakal’s words above when they consider what Hessam Nadji, president and CEO of brokerage firm Marcus & Millichap (MMI), said at the conference: Single-tenant properties have dropped roughly 10 to 15 percent in value, and multitenant properties have fallen 15 to 20 percent!

“If those price reductions are being applied, any product that’s coming to market is getting multiple offers, despite the finance being very tight and despite interest rates being much higher,” Nadji said.

That’s good for a buyer. (Not so good for a seller.) And there was a mishmosh of good / bad signals we also picked up from the conference.

The rising interest rates that have been affecting every other aspect of real estate are, indeed, taking their toll on entertainment-focused retail, despite the fact that this has been one of the aspects of retail that has been holding its own.

And smaller retail tenants are being scrutinized extremely carefully.

“Looking at the credit quality of our cash flows is a big focus, certainly in this environment,” said Blackstone’s Stephanie McGowan during a panel titled “The Future of Capital Markets.” “We’re watching really closely the increasing cost of debt for these mom-and-pop businesses, which is a real challenge for them.”

But there was also plenty of good news on the ground.

Newmark’s Jackie Totolo noted that she is pretty optimistic on the topic of Manhattan.

“We’re seeing a lot of activity in some of the core luxury areas of New York City, which is great. Madison Avenue is a really great market. It’s super strong right now. We’re excited to see what’s going on.

“I think from a consumer perspective [it’s easy] to walk down some of these streets and to see so much vacancy, [and] think, ‘What’s going on?’ But what you will see over the next six months is all these brand-new stores opening because all those deals were signed already.”

Totolo’s Newmark colleague, Ariel Schuster, has reason to share in her optimism — he recently put Barnes & Noble in a massive lease on the Upper East Side.

Yes, there are things to be excited about. Like the emergence of pickleball and the fact that proptech is being used to advance retail … but not replace it.

“Online is an amazing, thriving, growing, evolving ecosystem, but there are fundamental limitations,”’s Ethan Chernofsky told CO. “The worst-kept secret in online-only is that it’s not profitable at scale.

That being said, Chernofsky added, you can’t ignore digital. But you can ignore digital for the rest of Memorial Day weekend.

Now go eat a burger and hoist the spinnaker once the wind’s at your back. We’ll see you next week.