Sunday Summary: Our Thoughts Are With Los Angeles

For the last week, the nation has kept its attention on the tragic conflagration that has been consuming much of the Los Angeles area.

By Wednesday some 23,000 acres of the city had been burned, reaching populated enclaves like Pacific Palisades, Malibu, Pasadena, Altadena and Sylmar, and forcing hundreds of thousands of people to evacuate, many of whom will return to find ashes where their homes once stood.

“There’s no water in the Palisades,” said developer Rick Caruso, who built the Palisades Village retail center and ran for L.A. mayor in 2022. “There’s no water coming out of the fire hydrants. This is an absolute mismanagement by the city. It’s not the firefighters’ fault. It’s the city.”

While it is still early to calculate what the final damage is, there are estimates that the price will be over $50 billion, making it the most expensive disaster in California history — and one of the most expensive ever in the U.S.

Many thousands of homes, businesses and other structures have already been destroyed, including schools, shopping centers, churches, synagogues and restaurants. But, of course, there’s the real estate toll and then there’s the personal devastation that  simply cannot be tallied.

There’s little doubt that a region that had already been underserved in its housing will now have a far bigger problem on its hands. But, for now, all we can do is keep our attention on a great metropolis that’s going through a terrible nightmare.

Curveball

Getting our mind off Los Angeles hasn’t been easy this week, but one thing that we think about a lot at Commercial Observer are interest rates.

And one of the things the real estate industry had been waiting for like a kid waiting on Christmas was rate cuts.

Rate cuts would mean interest rates coming down. Interest rates coming down would mean cheaper borrowing costs, refinancing opportunities, and a general easing of market conditions. Most CRE professionals have spent 2024 holding their breath.

The Fed has cut rates now three times in the last year. Since July of 2023 — when the short-term benchmark federal funds rate was 5.25 to 5.5 percent — the rate has gone down a full point. And when Fed Chair Jerome Powell last spoke to the press in December he said he anticipated another two rate cuts in 2025. Which is great news, right? Right?

Well, if it’s so great why has the cost to borrow remained so stubbornly high?

“It’s not that the federal funds rate is the most material number for the commercial real estate industry, but what the industry has responded to is we’re now in a new phase in the monetary policy cycle,” NYU’s Sam Chandan told Commercial Observer. “We moved past that peak in the influence that monetary policy has on our cost of capital in the industry, but what’s critical here is longer-term rates have not gone down — in many cases they’ve gone up.”

Still, 2024 was a much better year for borrowers than 2023. (Originations were 26 percent ahead of where they were the previous year.) And, despite the persistent sluggishness of rates, many are cautiously anticipating a busy 2025.

“For 2025 I think people are fairly optimistic, and we are already seeing a lot of first-quarter deals coming in at the end of the year,” said Laura Swihart of the law firm Dechert. “I don’t think it is going to slow much at all.”

Happier days

While we worry about our friends in Southern California and while we’re still queasy on interest rates, there’s a lot to be excited about in New York City real estate.

Fourth-quarter numbers are starting to roll in, and the numbers are good.

Manhattan’s office leasing activity, for example, is not just good by post-COVID 19 standards — it was better than pre-2020 numbers!

According to Colliers, 33.3 million square feet were rented in 2024, which is better than the leasing average of 32 million square feet prior to the pandemic. (Every week more firms are issuing back-to-work orders. J.P. Morgan Chase was the latest.)

You saw some of this play out last week with big leases like the 139,377-square-foot one the U.S. Customs and Border Protection signed at One Aviation Plaza at 159-30 Rockaway Boulevard in Jamaica, Queens, and law firm Davis Wright Tremaine taking 53,000 square feet at 1251 Avenue of the Americas.

Speaking of 1251 Avenue of the Americas, a block away RXR made a big move at 1211 Avenue of the Americas, taking a 49 percent stake in the building from Ivanhoé Cambridge and taking over the management of the property.

This is another positive development: There are a lot of sales and investments happening, too.

Sometimes the sellers are taking a haircut, as SJP Properties and PGIM Real Estate did at 470 Park Avenue South, which just sold to Williams Equities for $147.5 million, which is almost $100 million less than they paid the Teachers Insurance and Annuity Association of America for it in 2018.

Either way, big numbers are being bandied around, like 3333 Broadway, a 1,193-unit Manhattanville multifamily complex that Brookfield Properties has sold its share in to Alicia Glen’s MSquared and a consortium of investors for $323.5 million.

Even bigger, Camber Property Group purchased the 11-building, 1,527-unit Linden Plaza apartment complex in East New York, Brooklyn, for a whopping $845 million.

And, while this is all fine and good for New York, it’s not solely New York where this activity is happening.

The Housing Authority of Los Angeles closed out last year with a big 335-unit purchase in the San Fernando Valley from Amcal Housing for $141.9 million.

And industrial and logistics remains extremely robust, with Realterm shelling out over $277 million to Brookfield Properties’ Brookfield Asset Management for a 631,604-square-foot outdoor storage portfolio consisting of 13 single-tenant truck terminals and low-coverage industrial assets.

It’s certainly good enough to lend money on, which Blackstone Real Estate Debt Strategies did for KKR’s self-storage investment platform Alpha Storage Properties to the tune of $185 million.

Speaking of Blackstone (BX)…

Without question, Blackstone was not shy in putting money out in the market 2024. Its public debt platform alone lent about $22 billion last year. Last week, CO published a sit-down interview with Tim Johnson, the man who has been loaning all that money.

“We had an unbelievably productive year in what — looking backward — was a fantastic investment environment,” Johnson said. “We developed conviction that real estate values had bottomed early in the year and that liquidity was going to return to the market, and we fortunately had capital to deploy into that type of an environment.”

For a leisurely Sunday read, check out the whole interview here.

And be sure to check on your friends in L.A.