Sunday Summary: What Is Happening With Government Office Space?

Washington, D.C., has long been a company town. The company, of course, being the U.S. federal government.

Sure, there are plenty of lobbyists, diplomats, banks, law firms and much else hugging the Potomac, but most of them are there because they want to be near the seat and machinery of power. That machinery has historically needed a lot of office space.

But will that continue to be the case?

Elon Musk’s Department of Government Efficiency has been on a cutting spree since February, canceling hundreds of federal leases — and not just in Washington. Since the Trump administration took office, DOGE has already walked away from eight leases in Downtown L.A., for example.

However, things leaped a DefCon or two last Tuesday when the administration announced that the General Services Administration was putting hundreds of underutilized assets across the United States up for sale comprising nearly 80 million square feet in 47 states, D.C. and Puerto Rico. Some 443 properties were listed on the GSA’s website as essentially on the market.

To give some sense of the scale, Hudson Yards is only 18 million square feet. Imagine 4.5 empty Hudson Yards.

“Decades of funding deficiencies have resulted in many of these buildings becoming functionally obsolete and unsuitable for use by our federal workforce,” the GSA’s Public Buildings Service office said in a statement. “We can no longer hope that funding will emerge to resolve these long-standing issues. GSA’s decisive action to dispose of non-core assets leverages the private sector, drives improvements for our agency customers, and best serves local communities.”

Still, 80 million square feet might have been too great a shock to the system. By Wednesday the administration reversed course, removing the list of properties from the GSA website but promising a “non-core property list (coming soon).”

“GSA is taking swift, common-sense action to solve the nation’s toughest problems of reducing the federal deficit and increasing government efficiency,” the agency said in a statement. “That’s why we’re exploring innovative approaches — including public-private partnerships, ground leases, sale leasebacks and interagency coworking agreements — to optimize our real property portfolio in support of the administration’s [executive order].”

Indeed, optimization is not all about cutting. Last Monday the agency launched a program called Space Match that would essentially sublet space from one under-officed agency to an agency that has square footage to spare.

Nevertheless, a lot of Washington real estate insiders will no doubt be chewing on their fingernails as they await a revised list of which properties will go on the chopping block.

Back to Manhattan

D.C. office might not have had a good week, but that was definitely not the case in Manhattan.

The Japanese bank Mizuho Financial Group took a seven-year, 151,409-square-foot sublease at RXR’s 1285 Avenue of the Americas. (Speaking of RXR, they also inked an impressive 61,396 square feet with Davis Polk & Wardwell at 237 Park Avenue.)

Newmark renewed its lease and tacked on another 31,000 square feet at their current office at SL Green’s Pershing Square Building at 125 Park Avenue, bringing their footprint up to 184,239 square feet.

But the big kahuna of the week would have to be Universal Music Group, which is nearing a deal for 300,000 square feet at Vornado Realty Trust’s Penn 2.

It’s interesting noting where these tenants landed or are likely to land: Midtown.

It’s Midtown that’s been driving much of New York City’s office recovery, with financial companies in particular leading the way.

“Post-pandemic, financial services has been a leading driver of demand in Midtown,” said Reed Hatcher, senior research manager at Cushman & Wakefield in CO’s story about Midtown’s tenant mix. “That’s come as TAMI has fallen off somewhat in recent years.”

None of which is to say that Midtown is out of the woods or that the lower-quality buildings haven’t been trading at deep discounts. For example, back in 2017 Investcorp purchased two buildings at 229 West 36th Street and 256 West 38th Street for $157 million — and last week Empire Capital Holdings picked up both for a little over $50 million.

However, when it comes to the trophy assets, there simply aren’t enough to go around. The moment SL Green announced new investment in 245 Park Avenue, the leasing began at the property.

“We were able to lease it up before we meaningfully started physical construction,” said Steven Durels. “There’s just an insatiable, insatiable demand for high-quality Park Avenue product.”

And, given the fact that few developers were able or willing to break ground in the last few years, means that there is a real drought of trophy offices in those prime corridors.

It seems like a fortuitous moment for the “Queen of Skyscrapers” to make a move.

Indeed, Darcy Stacom (the holder of the crown) and Wendy Silverstein (aristocracy in her own right, having done stints with Vornado, WeWork and as CEO of New York REIT) recently formed StacomSilverstein, a boutique capital markets real estate advisory firm.

“A lot of companies are back to five days a week, and a lot are four days a week,” Stacom said in a joint interview with Silverstein in last week’s CO. “Five days a week is great for the office market. Four days a week you still have to have office space, and even three days a week you really still have to have office space. It was the top 5 percent of the space. It’s now the top 20 percent of the space that’s getting real demand. I’m hearing in the Class B sector that the top 20 percent of B is getting real demand.”

They both had a lot more to say, and you can read the rest here.

Let’s talk inside baseball

StacomSilverstein are not the only real estate vets starting a fresh venture.

We also learned last week that Robert Ferman has ditched Newmark and Jake Movsovitz left Blackstone to form Sollevare Group, which will be looking to purchase properties in Brooklyn and Manhattan.

Moreover, right out of the gate the two twenty-somethings raised $17 million!

Speaking of raising money, the artificial intelligence platform Uniti AI, which automates lead engagement for brokers, raised a nice $4 million in its seed round.

Joseph Fingerman left his role at A&E Real Estate Finance (AEREF) to plot a glorious return to banking, in the form of president of commercial real estate lending at Peapack Private Bank & Trust. (Peapack later picked up a second AEREF alum when they nabbed Zachary Bermudez for a position as senior managing director.)

But the big insider/money raised move landed on Friday when Blackstone announced that its real estate debt fund Blackstone Real Estate Debt Strategies V had raised an ungodly $8 billion to buy performing and nonperforming loans on commercial real estate.

Speaking of purchasing and financing assets

In Southern California’s South Bay, the Irvine-based Bascom Group plunked down $127 million for the Highridge Apartments in Rancho Palos Verdes, consisting of 257 units.

That was not the only deal made in SoCal last week. SoLa Impact got $34.8 million in construction financing for the five-story, 188-unit affordable housing development 4301 Vermont that SoLa is building in the Vermont-Slauson area of L.A.

Rabsky Group scored a whopping $140 million in construction takeout financing for 240 Willoughby Street, the 463-unit apartment complex in Fort Greene, Brooklyn. (The originator of the loan was Madison Realty Capital, which, incidentally, was hit with pre-foreclosure actions on eight residential buildings in Brooklyn and Manhattan after supposedly defaulting on $76 million.)

But the one that really wowed us was CIM Group and Novva Data Centers landing $2 billion in construction financing to build a 175-megawatt data center near Salt Lake City, courtesy of J.P. Morgan Chase and Starwood Property Trust.

On a sad note

Those who know and love New York undoubtedly know and love the High Line.

The mile-and-a-half stretch of elevated train tracks along 10th and 11th avenues were built in the 19th century but went into a long period of neglect and disrepair beginning in the mid-20th century. That ended in 1999, when the Friends of the High Line and others got the idea of repurposing it as an elevated park.

One of the key figures in bringing this pedestrian park to life (and bringing with it all the development that would surround it) was Ricardo Scofidio, who along with his wife Elizabeth Diller founded the firm Diller Scofidio + Renfro.

Scofidio died last week at the age of 89.

To honor this great man’s legacy, one needs only to take a walk by the Museum of Modern Art (Diller Scofido + Renfro designed the expansion and renovation), Lincoln Center (they also designed the redevelopment and expansion of the campus) and many more of the city’s great structures.

Speak to you next week.