Sunday Summary: Can You Afford to Rent to Me?

It was always a fairly standard question any landlord would ask:

Can a tenant afford the rent?

But in the last couple of years, the shoe has increasingly been on the other foot. Can the landlord afford to keep the tenant?

Is the landlord going to be able to fix the heaters in the winter? Do they have enough capital to deliver on promised improvements? Are they going to be able to negotiate rent, keep the janitorial staff on payroll, and a hundred other things without first getting permission from their lender?

David Hoffman at Cushman & Wakefield (CWK) was privy to exactly this kind of thing when a client wanted to upgrade their sublease to a full-on permanent home in their Midtown office. But guess what? The lender balked.

“The lender was not approving any deals as a method to pressure the owner into agreeing to better terms,” Hoffman explained. “And the tenant is like, ‘You mean to tell me that we want to stay, and it’s in the lender’s and owner’s best interest to keep the building active with rent-paying tenants, and we can’t make a deal with anybody?’ And I’m like, ‘Yeah. That’s it.’”

This is precisely the reason landlords are getting a lot more scrutiny from tenants before they even look at a property.

“I don’t ever remember a period where a basic filter was the viability of the entity that owned the building,” said CBRE (CBRE)’s Mary Ann Tighe. “We would look at what was available: location, pricing, condition of the building. But it wasn’t standard operating procedure to say, ‘What is going to happen with this building? When does this financing expire?’ ”

Just last week RFR was evicted from the Chrysler Building after failing to pay its ground lease. So, yeah, even the owners of marquee properties are going to come in for greater attention.

One wonders if the kinds of creative ways to make use of an office will be open to landlords that are in mid-dispute with their bank. Because, actually, some offices have been extremely imaginative about how they’ve used empty space in off hours.

Take Bell Works. It’s a massive office and R&D complex in Holmdel Township, N.J. where 1.2 million square feet of its office space is 98 percent rented. But as a kind of side-hustle Bell Works is where the Apple TV show “Severance” is filmed.

Or look at CP Group’s 1.7 million-square-foot Boca Raton Innovation Campus, a former IBM research facility that can be rented out for weddings, bar mitzvahs, and anything else a space hungry non-tenant wants.

Plus, this week offered a cold bucket of water to anyone tempted to think that money is going to get cheaper in the near future. Those hoping that the Fed would continue on its interest-cutting ways of 2024 was disabused by Jerome Powell’s announcement that benchmark interest rates would remain between 4.25 percent and 4.5 percent thanks to a strong labor market and the remaining threat of inflation.

“With our policy stance significantly less restrictive than it had been, and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance,” Powell said. “If the economy remains strong and inflation does not continue to move sustainably toward 2 percent, we can maintain policy restraint for longer.”

The one piece of news that could be positive for office landlords in the last week was the fact that demand might increase no matter how rocky finances are, given that New York’s pipeline (and the country’s pipeline writ large) is becoming so dry.

In New York there was a 58 percent year-over-year drop off in the number of new building filings in the fourth quarter of 2024, according to a new report from the Real Estate Board of New York.

“The data on new building filings in Q4 2024 shows that the city is trailing production goals and historical development trends, which should be a concern for those focused on solving our housing supply crisis and keeping New York City’s economy moving forward,” said REBNY’s Zachary Steinberg.

Nationally, it’s also not a great story for development. Office construction dipped 44 percent in 2024, to the lowest it’s been in 10 years, according to a report from Yardi Matrix.

Earnings season!

Last week earnings calls were in full flower, and the news was positive for some of the calls CO listened in on.

The big cheese, Blackstone (BX), “just reported one of the best quarters in our history,” said the company’s CEO Stephen Schwarzman. To wit, Blackstone reported net income of $1.3 billion last quarter and $5.4 billion in all of 2024 which was more than double what it was back in 2023 ($2.4 billion).

“We raised $28 billion in private wealth in 2024, including $23 billion in the perpetual strategies, nearly double — let me repeat, nearly double — what we raised from individuals in these strategies in the prior year,” Schwarzman said on the call. “All signs point to further acceleration in 2025.” 

That activity is happening soon. As in right now. Just last week Blackstone secured $90 million to purchase a 21-story residential tower in Downtown Boston called One Greenway.

Likewise, on BXP’s call they reported that their fourth quarter numbers showed the strongest leasing they’ve had in five years, with 83 deals closed worth 2.3 million square feet of office space.

But, honestly, much of the real estate that we’ve been interested in of late has not been office – it’s been other asset classes.

Like, say, trucking space.

The $200 billion sector is a “beautiful ugly duckling” in the words of Green Street analysts, and has attracted massive institutional players like J.P. Morgan Chase.

“No one ever thinks about this, but there’s four times as many delivery trucks on the road as there were 20 years ago,” said Chad Tredway in an interview late last year. “Those trucks have to go somewhere to get packed with those goods. So, we’re buying truck terminals all around the United States.” 

Industrial Outdoor Storage in general has been attracting some of the best young brains in the business. Justin Horowitz, for one, has made a very decent living for himself in this asset.

“Once I started to get into the weeds of what IOS actually is, who was buying these deals and the really smart, institutional players that were leaving these big institutions to start their own firms for an asset class where the average deal size was only $7 million, I was really intrigued,” Horowitz told CO. “These deals weren’t really being looked at at the beginning of COVID, whereas there’s a huge aggregation play today.”

Sunday reading

We’re getting sick of winter, and maybe that’s why we were so interested in news from the warmer parts of the country like the tidbit that Ken Griffin just tapped Related Companies to build his Citadel HQ in Miami (specifically, Brickell.)

It might also be why we were interested in Jamestown’s sale of the Publix-anchored Village Commons in West Palm Beach to Kite Realty Group for $68.4 million.

Or Equinox’s 36,700-square-foot lease for a new luxury gym at the mixed-use campus in Boca Raton being developed by Related Group, BH Group and PEBB Enterprises that used to be Office Depot’s HQ.

But either way a good way to keep one’s mind off the cold is to curl up next to the fireplace and read our recent interview with Affinius’s Craig Solomon.

See you next week!