Sunday Summary: All Hail the Lawyers!


One of the frustrations of your trusty commercial real estate correspondent was the size of the office leases in 2023 in New York.

They were kinda small.

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Not as small, perhaps, as they were in 2022 (even if the very top deals were bigger) but nothing as big as the 1.2 million-square-foot deals that Facebook was cutting back in 2019. And the market was certainly not seeing the 32.6 million square feet of overall leasing activity that it saw in 2018.

But that was early December thinking. 2023 ended with a bang that surpassed anything Andy Cohen and Anderson Cooper observed in Times Square.

In mid-December, the white shoe law firm Paul Weiss took 765,000 square feet at Fisher Brothers’ 1345 Avenue of the Americas, the biggest lease of 2023. And that just seemed to start the ball rolling.

It’s not even the first full week of January and Spotify (SPOT) scored a significant 69,000-square-foot sublease to the payroll management platform Rippling at 4 World Trade Center. The charter school Success Academy renewed and expanded to 94,000 square feet at Silverstein Properties’ 120 Wall Street. The Major League Baseball Players Association (the union representing baseball players) scored a 50,000 square foot lease at Paramount Group’s 1325 Avenue of the Americas. A block away, the corporate law firm Smith Gambrell & Russell nabbed 41,000 square feet at 1301 Avenue of the Americas. DoorDash took a whopping 115,000 square feet at 200 Fifth Avenue.

Finally, in a nice, big, six-figure square-footage deal, King & Spalding signed a 175,000-square-foot lease at Vornado Realty Trust (VNO)’s 1290 Avenue of the Americas.

One might notice aside from the fact that so many of these deals are happening within a few blocks of each other on Avenue of the Americas the preponderance of law firms among the tenants. This is probably not incidental.

Law firms were responsible for about 12 million square feet of leasing nationwide through the third quarter of last year, according to Cushman & Wakefield (CWK) (and, while the data is not final for the full year, it should surpass 2022’s record of 14.8 million square feet). Indeed, after Paul Weiss’ monster 765,000-square-foot lease, the second-largest one of 2023 was Davis Polk with 710,000 square feet at RXR’s 450 Lexington Avenue.

“We are seeing strong demand from the legal sector and from law firms,” said David Smith of C&W. “Law firms traditionally want to be in really high-quality space. They’re a little more office-centric than other industries.”

Avison Young pegged law firm activity at 14.3 percent of all leases in Manhattan — more than double what it was in 2022. And this fits a pattern: The industry seems to make its real estate moves during turbulent periods (Avison Young noted a surge in law firm leasing in 2009 and 2010 as the economy was reeling from the Great Financial Crisis).

Wait… turbulence is bad, right?

Yes, there remains quite a bit of choppiness and uncertainty in the market. And that will probably remain the case for a while.

Distress sales are happening, like In-Rel Properties buying 7500 Old Georgetown Road in Bethesda, Md., for $29.85 million — which is less than a quarter of the $133 million that Rockwood Capital and Stonebridge paid for the 16-story office four years ago.

Steve Wikoff took control of the Banyan Cay Resort & Golf Club in West Palm Beach after the property fell into bankruptcy.

In Washington, D.C., and Los Angeles, office vacancy was up from last year, reaching 21.8 percent in the former and 27 percent (if you count vacant and soon-to-expire leases) in the latter.

Contractors are starting to worry that there’s not going to be enough work in the private sector this year (although there’s general confidence in public infrastructure projects).

Heck, even TGI Fridays is closing 36 locations around the country!

But it’s not as though there aren’t people who are preparing for the turbulence and poised to make the best of it.

“We’re uniquely positioned because we’re set up to be countercyclical,” Greg Freedman, co-founder and co-CEO at the investment firm BH3 Management, told Commercial Observer in a profile of its three founders. “We’re not a fund with one mandate that can only invest in one part of the capital stack. Throughout our 14-year history, we’ve played in every single piece of it.”

A turnaround in 2024?

Indeed, there are already signs that the market has reached (or neared) bottom and that players are taking action.

Steven Caldwell, head of large loan originations at Barclays, said December was his busiest month in four years for conduit loans. “A lot of the back-ended optimism we saw was driven by expectations that rates would ultimately come down,” Caldwell said.

Certainly, real estate pros were overjoyed when the Fed said that it was pausing rate hikes.

“I think we’ve reached an inflection point where cap rates and capital markets are starting to catch up with each other,” said Mitch Sinberg, senior managing director at Berkadia South Florida. “I’m seeing transactions start to simmer again. Now, we haven’t seen them close yet, but with rates coming in as much as they have over the last 45 days, we’re starting to see a lot of activity on the acquisition side.”

And, yes, in the last week we’ve seen some money go out and some purchases which should make us all feel better: UCLA shelled out $700 million to Macerich and Hudson Pacific Properties for One Westside and Westside Two in L.A. In Beverly Hills, FanDuel plunked down $71 million for an office on Wilshire Boulevard.

In Miami, the Church of Jesus Christ of Latter-day Saints paid $174.3 million for the Beacon Logistics Park.

Even office is not quite the redheaded stepchild it was a few months ago. First Mile Properties spent $56 million to acquire a 287,392-square-foot office in Paramus, N.J.

Speaking of redheaded stepchildren (literally), if you are in need of a real estate diversion this Sunday, listen to CO’s faux pas on the matter as well as our reading of the market in the new year on our latest “Back Story” podcast here.

Happy new year!