Sunday Summary: The Heat Has Gotten To Us
By The Editors July 9, 2023 9:00 am
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It might have been a slow week because July 4 fell on a Tuesday and pretty much the whole country took off Monday, too.
Or, it might have just felt slow because temperatures on Monday reached levels not seen on Earth in 125,000 years. This ignoble record was eclipsed a day later, when it was even hotter.
However, if we may sound a pragmatic note, it would seem that all this irradiance presents an unrealized opportunity. Solar energy is not always afforded the same respect as oil or nuclear energy, but it is an honest-to-goodness untapped asset for a lot of real estate companies. Moreover, on the path to net-zero emissions, solar-generated electricity can be credited to developers who feed it into a power grid.
“If you have assets in the right geographies, there’s some cases where you can host more solar than your buildings and tenants even utilize,” said Victoria Stulgis, senior vice president of client operations at Black Bear Energy, an energy advisory company that was recently purchased by Blackstone (BX), in an interview with Commercial Observer. “As long as you’ve got the renewable energy credits to back up the megawatts on your roof [a landlord can] be able to take credit for … bringing additional renewables onto the grid.”
Because, honestly, landlords need all the help they can get.
A report came out last week showing that there was more vacant office space in Manhattan than since records have been kept — 70 million square feet, or 19.7 percent of the total inventory. It’s not any better in Los Angeles where availability has reached 26.6 percent, also the highest figure recorded in that region. Adding to that grim statistic is about 10.8 million square feet of space available for subleasing in L.A., which is 20 percent higher than it was this time last year.
Oddly, in both areas, this hasn’t much affected asking rents. In L.A. it’s $3.84 per square foot (only 3 cents lower than it was last year); in New York rents actually rose on average 0.7 percent to $78 per square foot. (L.A. rents are calculated monthly, New York rents are calculated annually.)
A lot of it still comes down to the property. Law firm Sidley Austin, for instance, ditched its offices at Brookfield’s Gas Company Tower (currently in receivership) and took a 57,148-square-foot lease at 350 South Grand Avenue; at the same time, Brown & Riding Insurance is leaving 777 Tower (also in default) for Silverstein’s recently renovated U.S. Bank Tower.
And subleasing has, indeed, become attractive. Last week Comcast secured a subtenant (a New York-based production company called The Switch) for a 66,700-square-foot space it has at 1840 Victory Boulevard out of the 500,000 square feet of space it’s currently trying to sublease nationally.
The crux of the problem for both L.A. and New York remains too much outdated office stock and not enough housing stock.
“Subway ridership is up, crime is down, but there is a reset that needs to happen, particularly in Class B and C buildings that were underperforming even before COVID,” New York Economic Development Corporation CEO Andrew Kimball told CO. “For those buildings, there are multiple strategies, a number of them were part of the mayor and the governor’s state legislative package. Unfortunately, the legislature decided not to act, but that would have given the city and landlords the flexibility to convert 20 to 30 million square feet of space from commercial to residential. We’re going to continue to push that agenda at every level, on the regulatory side, and some of that can happen through the City Council. We’re going to continue to work with folks in Albany to try to get that done.”
We wish him godspeed. However, even if the politicos found religion and began converting offices tomorrow, it probably wouldn’t solve the nation’s real estate problems.
It’s true, multifamily hardly has the same problems and dilemmas as office, but it’s beginning to show cracks. While the average U.S. monthly rent has reached an all-time high of $1,716, property sales have seemingly fallen off a cliff in the first half of this year due largely to high interest rates. While there were $226.5 billion in multifamily sales in 2021 and $194.7 billion in 2022, there were only $23 billion in sales through the middle of last month, according to a recent report from Yardi Matrix. And, as per Ariel Property Advisors, investment sales in both office and multifamily tanked in New York in the first half of 2023.
Religion is unlikely to come to New York
We also lost some puff last week when we learned the upshot of Eric Adams’s $107 billion budget negotiations with the City Council.
The long and short of it: nobody’s happy. (Except, perhaps, the NYPD. They got an extra $320 million.)
Adams backed off on some of his steeper cuts, but in an effort to close a $3 billion deficit the administration is slashing educational programs and a program for ex-Rikers Island inmates re-entering the city. But if the city is going to tackle the two most immediate problems — affordable housing (which the mayor got $4 billion for) and emergency asylum seekers — it’s going to need help from Albany and/or Washington.
“Spending seems to be the solution to every problem,” said Partnership for New York City’s Kathy Wylde. “The mayor is trying to contain costs but encounters resistance from council members and advocates. The projected budget deficit should force us all to think about spending more wisely.”
C’mon guys — cheer up!
Of course, there’s always something to be happy about. While we were certainly very concerned about the record temperatures last week it’s not as if the whole world is twiddling its thumbs.
In Norway, for instance, a grand experiment is underway to make both private and public transportation completely electric.
The Norwegian parliament had set a goal of making every single new car sold in the country electric by 2025, and public transit zero emission by the end of 2023. And it is not coming at the problem with indifference to the needs and wants of its citizens.
“All around Norway, the car has an important place,” said Cecilie Knibe Kroglund, Norway’s state secretary in the Ministry of Transport, in an interview with CO. “So to be environmental, we have to choose the electric car because public transport is not always an alternative for most Norwegians.”
And, while the July 4 box office performance was largely disappointing, there’s at least one theater we can get excited about.
We’re talking about TSX Broadway. This is the legendary Palace Theatre that owners L&L Holding Company and Fortress Investment Group have literally raised in the air as part of their 550,000-square-foot, 46-story Times Square extravaganza.
CO spoke to L&L’s new chief operating officer, Jamil Lacourt, about this and more. Makes for some good Sunday reading.
See you next week!
