Sunday Summary: The Fed Gets in the Giving Spirit

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Did Jerome Powell, who’s not exactly the most beloved guy in commercial real estate, just give the industry the biggest and best item on its Christmas list?

The Fed chair essentially telegraphed that the long era of interest increases is over. (More or less.) After raising rates at 11 out of the last 12 Fed meetings, the central bank announced it was keeping its benchmark rate at between 5.25 percent and 5.5 percent, with the expectation that rates would drop to 4.6 percent at the end of 2024, 3.6 percent in late 2025 and 2.9 percent in year-end 2026.

SEE ALSO: As ICSC Las Vegas Wraps, Attendees Lament Too Many Deals and Not Enough Space

“Given how far we have come along with the uncertainties and risks that we face, the committee is proceeding carefully,” Powell cautioned. “We will make decisions about the extent of any additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook and the balance of risks.”

Words of warning aside, these were the signs that commercial real estate executives had been praying for since the Fed began its rate raising spree.

“I think [the pause] reflects that the market sees those inflationary pressures moderating and it does believe that the Fed has reached the peak of the rate-tightening cycle,” said NYU’s Sam Chandan. “If we continue along the baseline path, that will take some of the pressure off of the 10-year [treasuries] and afford us a little bit more flexibility in the refinancing market in 2024.”

Because whatever else can be said about high interest rates, they have certainly left their mark on the commercial real estate market.

With the new year looming, Commercial Observer took a look at the overall state of the market, and the results weren’t pretty. Not that this had to do exclusively with interest rates, but the market has decidedly not recovered from COVID. Manhattan office has a 17.9 percent vacancy rate, as per Colliers (CIGI). Last year it was 17 percent, and pre-pandemic it was 10 percent. The deals that are getting done have been in a lot of cases smaller.

“We see demand but not at the level we expected,” said Sage Realty’s Jonathan Kaufman Iger. “We have done a few full-floor deals, but we are leaning more into where we see the demand, which is breaking those floors into smaller suites, from 2,000 to 4,000 square feet.”

To be clear, it’s not exactly as if there have been zero big deals. In fact, when CO looked at the top 10 New York City leases of 2023 (so far) the biggest one (Davis Polk & Wardwell’s 710,000 -square-foot deal at 450 Lexington Avenue) towered over 2022’s top deal (KPMG taking 456,518 square feet at 2 Manhattan West).

That being said, Manhattan office leasing was down 33 percent annually in the third quarter.

Sales was also a disaster. In 2022, there were three deals in New York City in excess of $1 billion; in 2023, there were zero. (Although SL Green (SLG) came pretty close when it sold a 49.9 percent stake in 245 Park Avenue to Mori Trust for $998 million.)

And, while we’ve been talking about New York here, this is a trend that isn’t exactly exclusive to Gotham.

Just last week in Glendale, Calif., the Beverly Hills-based Kennedy Wilson sold its office property at 400 and 450 North Brand Boulevard for $60 million which is less than half of what it bought it for back in 2017 ($144.1 million). Over in Orange County, Harbert Corporation and Cypress Office Properties sold their 10-story office at 3 Hutton Centre Drive in Santa Ana for $28.9 million — they paid $50.5 million for the property in 2016.

There’s a similar story to tell in Florida, where PGIM Real Estate unloaded a Trader Joe’s-anchored strip mall called RK Centers for $38.4 million, even though it paid $49.2 million in 2017 for the property.

But, forget markets for the moment and forget the major real estate players. The pause/reversal on rates is one thing that can really help homeownership in a market where existing home sales are at their lowest levels since 2010. It has gotten so bad that homeownership is becoming out of reach for a lot of Americans, especially younger first-time buyers.

“Buying a house is exceptionally difficult,” Andra Ghent, professor of finance at the University of Utah, told CO. “Is the American Dream morphing? I do think that it’s especially difficult to become a homeowner right now, both because of high home prices and high interest rates.”  

Nobody believes that we’re out of the woods yet, but, hey, thanks, Chairman Powell. We needed a holiday break.

Other holiday goodies

While we’re thinking about the year that was 2023, it’s worth going back to talk about one big sale that happened.

This was Wells Fargo (WFC)’s September decision to shell out $550 million for the old Neiman Marcus space at Hudson Yards to turn into office space. It was the third biggest deal of the year, and it was the kind of explosive news that gets the juices flowing of everybody in real estate.

Richard Henderson, Wells Fargo’s head of corporate real estate and facilities, spoke to CO about how it came together, what Wells is planning on doing with the space, the decision to buy instead of rent, and more.

And, while it was not really a sale of a single property, Blackstone’s Signature loan purchase, along with Related’s own Signature loan buy, were both made official by the FDIC on Thursday and Friday, respectively.

There were other items in our stockings — Rockrose Development landed a $293 million loan for its 590-unit apartment building at 555 West 38th Street last week (yes, Rockrose isn’t only in Queens, people — but if you do want some Queens news Blumenfeld Development Group purchased a pair of self-storage buildings for $122 million); Soundview Investment Partners put forth its plan to build a 17-story mixed-use tower in Beverly Hills; and there were leases!

Big leases like Los Angeles County’s 207,289-square-foot lease at 1500 Hughes Way in Long Beach (the Department of Public Social Services will operate out of the property); prominent leases like Stanley Druckenmiller’s Duquesne Capital Management’s 44,569-square-foot lease at 40 West 57th Street; and there were luxurious retail leases like Rolls Royce’s new plans for a “VIP Experience Center” in the Meatpacking District.

Hooray!

Please stay home for Christmas

We can’t say that Washington, D.C., is feeling too jolly this Christmas.

On Dec. 12,  state lawmakers in Virginia approved an 8 million-square-foot sports and mixed-use campus in Alexandria (on land owned by JBG Smith Properties) in the hopes that they can lure the Washington Wizards and Washington Capitals to the suburbs. (The project will still need approval from the Virginia General Assembly and Alexandria City Council, who are both scheduled to hold votes in 2024.)

Indeed, while the deal is not a (ahem) slam dunk, Ted Leonsis, the CEO of Monumental Sports & Entertainment, which owns both franchises, has indicated he’s open to the idea — that is, if the District doesn’t OK the $600 million in public funding Monumental has requested for the renovation of the Capital One Arena in Washington proper.

“We are hoping to undergo major redevelopments soon that will change much of the external part of the building,” Leonsis wrote on his Ted’s Take blog earlier this year. “The visions and plans for Capital One Arena 2.0 are major, but the fans, players and employees deserve it.”

After the news of this broke, D.C. Mayor Muriel Bowser and D.C. Council Chairman Phil Mendelson made Leonsis an immediate offer of $500 million in city funding if he would keep the teams at the Capital One Arena.

“Downtown D.C. is the District’s economic engine that provides revenue resources to support important programs in the city,” Bowser said in a prepared statement. “Mr. Leonsis and Monumental Sports have been critical partners in keeping our downtown thriving, especially after the pandemic.”

But she wasn’t the only one pleading with Leonsis to reconsider.

“We recognize that Monumental must consider offers from other jurisdictions in order to make the best possible business decision for their operations, but we strongly believe that keeping these teams in the city will yield the highest regular attendance of any site in the region,” said Gerren Price, president and CEO of the DowntownDC Business Improvement District.

Green shoots

There’s been a lot of talk in commercial real estate about adaptive reuse. Can the overbuilt offices be turned into apartments?

Possible. Difficult, but possible.

But there’s another conversion idea for fallow office that we found intriguing: Office to farm.

Yes, there are several “vertical farms” nationwide, where, rather than taking a nice horizontal piece of land and farming it, a firm goes up to the sky. And what better space than in an empty office? That should scratch your CRE curiosity itch this Sunday.

See you next week.