Sunday Summary: Uncertainty Is Everywhere

One might be able to best sum up the mood in today’s real estate market from Prologis’ earnings call last week.

The industrial behemoth had by all rights an excellent quarter. In the first three months of the year, it leased 58 million square feet, expanded its data center reach, boasted a 94.9 percent occupancy rate by April, and deployed an impressive $650 million for new development.

“Prologis delivered a very strong quarter,” said CFO Tim Arndt on the call. “We outperformed expectations on earnings, occupancy and rent.”

And yet… tariffs are still front and center for the discussion.

“While the instability created in the last two weeks may disrupt logistics and supply chains, it will certainly slow decision-making,” Arndt said. “Many companies now question where to source, manufacture, or where to sell their goods. Let’s be clear, the range of outcomes is wide: We see potential for a recession, inflation or possibly both.”

A similar story played out on Blackstone’s earnings call.

“Blackstone reported strong first-quarter results,” said Stephen Schwarzman, the company’s chairman, CEO and co-founder. “I’d say that $62 billion in a quarter is worth noting.”

However, Schwarzman also acknowledged the U-word.

“Uncertainty around tariffs, and their potential impact on economic growth and inflation, has dramatically impacted investor sentiment,” said Schwarzman. “It’s too early to assess the full implications of tariffs, which depend on the outcome of unprecedented multilateral negotiations with perhaps over 100 countries around the world.”

Yes, “instability” and “uncertainty” are the words that have been buzzing about in the last few weeks, and not strictly about tariffs. (Let’s not mention “inflation” or “recession” right now, but J.P. Morgan Chase’s Jamie Dimon is done beating around the bush.)

For instance, there’s affordable housing. The federal government pumps billions of dollars into this asset class, which local developers and municipalities depend on to finish their projects.

But earlier this year Shaun Donovan (the former secretary of the U.S. Department of Housing and Urban Development who now heads Enterprise Community Partners) received a notice that his former agency planned to kill off $60 million in grants under its Section 4 program, most of which were going to Donovan’s group.

After some back and forth the money was reinstated, but this is the kind of story that has led some in the affordable housing trade to question the business model itself.

“They’re not entirely sure whether they should give up ever getting money or hold out hope,” said Deborah VanAmerongen with Nixon Peabody’s affordable housing practice. “I know of some developers who decided they will never get this money, so they are restructuring their financing to see if they can get work done on their properties.”

Of course, affordable housing is a big topic with a lot of players who are not going to simply abandon plans the moment the first sign of uncertainty rears its head.

City of Yes is still a big, powerful arrow in the quiver of those who are looking for ways to build affordable housing in the five boroughs specifically.

“City of Yes was a massively innovative change,” said Slate Property Group’s David Schwartz in last week’s cover story. (It should be noted, developers like Slate have found partners beyond the federal government for their ambitious plans.) “I think we’ll look back on this as one of the smartest things that we’ve done in housing. Generations from now, people will be teaching classes about what they did in terms of the zoning side.”

And (at least up until recently) there was keen investor demand for affordable housing. Ariel Property Advisors, for one, is marketing some 3,500 units of affordable housing across 14 projects, with Ariel partner Vic Sozio telling Commercial Observer that in the course of the company’s life they’ve sold more than 350 buildings comprising 18,000 units, worth about $3.4 billion in total.

But, again, uncertainty is probably not going to help their future sales.

“Affordable housing properties take a long time to close,” said Sozio. “You often need multiple layers of consents, so you have to be mindful of that when you’re structuring a contract in order to give yourself the best chance of actually getting to the finish line. And, even when you are, sometimes policy changes that are out of your control can potentially blow up the deal.”

Beyond affordable housing, there are plenty of other areas where the feds are upending the previous order. Transportation? The U.S. Department of Transportation is taking the reconstruction of Pennsylvania Station out of the hands of New York State. Central business districts? The federal government is no longer prioritizing leasing in empty offices in those areas.

And that was just last week!

And yet…

Nothing has stopped. There are still big deals crossing the finish line, or in the works.

The deal the folks at CO were most wowed by last week was Amazon’s whopping 330,000-square-footer at Property & Building Corporation’s 10 Bryant Park.

While it’s tough to compete with that, it wasn’t the only six-figure lease last week. Apollo Global Management finalized a 100,000-square-foot deal for the 10th through 13th floors at the State Teachers Retirement System of Ohio’s 590 Madison Avenue.

Even the smaller leases were impressive, like Shopify expanding to nearly 60,000 square feet at 85 10th Avenue; Gerson Lehrman Group renewing its 77,382-square-foot space at Empire State Realty Trust’s One Grand Central Place; or Ferrari zooming into a new showroom at L&L Holding’s 425 Park Avenue.

Sales and financings continued athwart the trends, too.

Norman Braman, the billionaire behind Braman Motors, is looking to redevelop a section of Miami’s Edgewater into two 60-story, mixed-use towers and an 11-story parking garage; and CIM Group is planning to convert a 12-story office building near Gramercy Park at 67 Irving Place into 11 luxury condos.

In financing, Fortress Investment Group, Bizzi & Partners and Bilgili Holding were able to nab $350 million in refinancing from Starwood Property Trust for their planned condo called the Greenwich by Rafael Viñoly at 125 Greenwich Street; and Chartwell Hospitality caught $100 million in CMBS financing originated by Citigroup for its 362-key Marriott New York JFK Airport Hotel.

And, while real estate nervously explores what a recession would mean for it, the recent stock performances of real estate investment trusts gives a bit of confidence. (Although, yes, it depends on the REIT in question.)

“REITs have bounced around with the broader market, but they continue to be something of a safe haven,” said John Worth of Nareit. “As of the close Friday [April 11], REITs were still outperforming the S&P 500 by about 350 basis points at 3.5 percentage points or so. Because they are companies that own U.S. properties, by and large they’re going to reflect broader trends in the economy. They’re not going to be as immediately related to trade-based volatility as other sectors.”

Which doesn’t mean that some of the biggest players were immune: SL Green, Empire State Realty Trust, Simon Property Group and Paramount Group all saw declines in the value of their stock, but REITs that were heavily invested in data centers and cellphone towers performed relatively well.

All of which is to say, things are a little manic out there. There are highs, and lows. Hopefully, the highs are sustainable.

For those who are observing, Happy Easter!

See you next week.