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Weekly Market Report - July 30, 2024

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Tony Malkin, owner of Empire State Realty Trust, is ready to make another deal for any kind of real estate, despite paying $195 million for retail space on North Sixth Street in Williamsburg. His family-controlled business reported another quarter of above-average leasing volume and occupancy rose by 90 basis points to 88.5%. Malkin paid a considerable $2,575 per square foot for the Williamsburg retail properties, located on North Sixth between Berry Street and Wythe Avenue, plus another unidentified location. His firm has the most risk-averse balance sheet of any publicly traded New York landlord, with half a billion dollars parked in cash and no floating-rate debt. The price Malkin paid in Williamsburg means the property could yield as little as 2%, which is not an attractive return when a 2-year U.S. Treasury bond yields 4.4%. Empire State Realty's stock price was little changed Thursday, at $10.50 a share.


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MillerKnoll, after a two-year rut, saw orders grow from corporate customers in the Americas as well as retail shoppers


MillerKnoll, a global furniture maker, has seen organic order growth for the first time in a couple of years. The company, which sells various furniture items under brands like Herman Miller, Knoll, and Design Within Reach, has been working to spur orders, with revenue down 7% in the latest quarter from the previous year. The company is adapting to new customer needs and expanding its offerings. Companies in the Americas saw organic order growth of around 5%, stretching beyond desks, filing cabinets, and office chairs to items for healthcare facilities. The company also managed to eke out an $11 million profit, an increase of 1.2% over the year-ago quarter. MillerKnoll is investing in design services and increasing its number of stores and products to keep customers' interest.


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Socceroof has secured a 20,000 square foot deal at Fosun Hive's 28 Liberty St. in Manhattan, marking its first location in the city. The indoor soccer facility will offer recreational leagues and lessons for children and adults, and will be part of the new 200,000 square feet of retail space at the base of 28 Liberty St. The building, which stands 60 stories tall and spans 2.5 million square feet, is 89.5% leased with estimated office asking rents of $60 to $74 per square foot. Major tenants include the New York Attorney General's office and HelloFresh. American International Group, an insurance giant, announced in 2020 that it would move its city headquarters to 325,000 square feet and consolidate its remaining 450,000 square feet of office space in the metropolitan area. The neighborhood's office market is still struggling to recover from the pandemic, with a 20.4% availability rate during the second quarter of 2024 and an average asking rent of $57.08 per square foot.


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SL Green Realty, the largest office landlord in Manhattan, is targeting the Seagram Building on Park Avenue, a 30-story 1958 building with $1 billion in debt. The firm, which has acquired a portfolio of about 50 buildings encompassing 30 million square feet of office space, is ready to magnify its bet on the city's office future when rivals are retreating. SL Green has bought out doubting partners at low prices, and overleveraged owners may be forced to sell at fire-sale prices. Office landlord SL Green faces mounting financial pressures due to rising occupancy rates and mortgages. The company is investing in Manhattan buildings, which have seen occupancy rise to 86.7% last quarter. SL Green has borrowed heavily to bet on Manhattan, with its $11 billion debt burden 11 times higher than operating earnings. To ease the burden, it plans to sell buildings, including 625 Madison Ave. and 245 Park. Despite its success, 20% of its shares have been sold short, the most of any office landlord. Bears believe that unless interest rates decline dramatically, SL Green will be stuck with a pile of office mortgages that it cannot roll over and will be forced to sell properties at depressed prices.


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J.P. Morgan provides construction financing for planned 104-unit building 


John Catsimatidis, owner of Red Apple Real Estate, has secured $57 million in construction financing for a 12-story mixed-use project in Chelsea. The 100,000 square-foot building will include 104 residential units, a community space, and ground-floor retail. The project, designed by SLCE Architects, will include amenities such as a fitness center, media room, and rooftop garden. Catsimatidis, best known for operating supermarket chain Gristedes, has also been involved in development, having completed a 32-story tower at 86 Fleet Place in Downtown Brooklyn in 2017 and owning the 22-story Ocean Drive rental complex in Coney Island. He has considered changing his party affiliation to run in the Democratic primary for New York City's 2021 mayoral race but chose not to do so.


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Low unemployment, rising wages and lifestyles of millennials have increased dining-away-from-home spending


The restaurant business is becoming the hottest corner of retail real estate, with food services accounting for over 19% of all retail leases last year. This rise is attributed to Americans spending more time and money at restaurants, from fine-dining hot spots to fast-casual chains. Low unemployment, rising wages, the rise of "foodie culture" and millennials' tendency to marry and have children later than previous generations have likely contributed to increased restaurant spending. Total restaurant sales have never been higher, and they are on track to top $1.1 trillion this year, a 5.4% increase from 2023's record-high level. Property owners have been wary of food tenants, but an increase in creditworthy chains and data showing that food establishments boost foot traffic to nearby businesses have made landlords eager to sign restaurant leases.


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Lender portfolios of foreclosed and seized office buildings, apartments and other commercial property grew 13% in the second quarter


Banks and lenders are seizing control of distressed commercial properties at the highest rate in nearly a decade, signaling the sector's next phase and approaching a bottom. Portfolios of foreclosed and seized office buildings, apartments, and other commercial property reached $20.5 billion in the second quarter, a 13% increase from the first quarter and the highest quarterly figure since 2015. Defaults and other types of distress have been steadily building in the commercial-property market to near historic levels due to high interest rates and the slow return of workers to office buildings. However, lenders are now recognizing that obsolete office buildings won't recover their former value, even when interest rates decline. This is leading to sales of foreclosed properties and distressed mortgages, as well as an increase in short sales. The market is expected to be prolonged, and the Federal Reserve's decision to cut interest rates is expected to further complicate the situation.


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The lender anticipates its office credit portfolio to remain under pressure in the second half, despite some signs of stabilization in the U.S. commercial real estate sector


Deutsche Bank has increased its guidance for full-year credit losses, warning of continued pressure from exposure to commercial real estate, as high interest rates begin to unwind. The bank expects its office credit portfolio to remain under pressure in the second half, despite some signs of stabilization in the U.S. commercial real estate sector hit hard by the pandemic and higher borrowing costs. Deutsche Bank's multiyear turnaround effort got a boost in recent quarters from higher interest rates, but that tailwind is now losing steam as central banks move to cut rates and the commercial real estate sector remains under stress. The bank now expects provisions for credit losses to represent more than 30 basis points of its average loan book this year. Deutsche Bank's provisions for credit losses amounted to 476 million euros ($516.7 million), up 19% compared with the year earlier. Despite the revised projection for credit losses, Deutsche Bank is on track toward hitting its 2024 revenue guidance of €30 billion and that its quarterly adjusted costs remain in line with its target for the year.


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While smaller banks are doing the bulk of lending, bigger banks’ loans are the ones showing signs of strain


Commercial real estate (CRE) loans are facing challenges, with smaller banks facing the most evident scars. The KBW Regional Banking Index is down around 12% this year, while the KBW Nasdaq Bank Index of larger lenders is up nearly 9%. Regional, community, and smaller banks represent more than a quarter of commercial real estate and multifamily property debt in the U.S., which is more than twice the share for the top 25 biggest banks. The problem is at big banks and their loans to properties intended to be leased to third parties. The difference in performance can be attributed to higher interest rates, geographic differences, and the likelihood of balloon repayments of principal at the end of their terms.


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Drop in values caused by higher interest rates and a rise in defaults exposes more schemes


US prosecutors are cracking down on commercial mortgage fraud, which has been increasing due to the rise in property loans based on doctored building financials and valuations. This type of fraud became more widespread between the mid-2010s and 2021, when commercial property prices surged to new highs. The drop in property values caused by higher interest rates and a rise in defaults are exposing more of these schemes, dealing another blow to the commercial real-estate market suffering through its worst stretch since the 2008-09 financial crisis. Federal prosecutors are working together with investigators at the Federal Housing Finance Agency’s Office of Inspector General to root out fraud. Since last fall, at least five different landlords of properties, mostly apartment buildings, in cities including Cincinnati, Hartford, and Little Rock, Ark., have pleaded guilty to federal fraud charges. Government-backed mortgage enterprises Fannie Mae and Freddie Mac are cracking down on questionable practices in their rental-apartment lending business.


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Developer failed to repay $28M loan after being stiffed by tenants


Real estate developer Michael Shah has been sued by Wells Fargo for failing to repay a $28 million mortgage against two commercial properties in the Meatpacking District. The lawsuit alleges that Shah took out the mortgage in 2017, consolidating a preexisting $20.5 million debt with an additional $7.5 million loan. The new loan matured in August 2022 but Shah failed to repay it in full. Wells Fargo is seeking repayment with interest. Negotiations are ongoing, and Shah's attorney, William Savino, does not expect the action to result in a foreclosure. Shah's property at 58-60 Ninth Avenue has been embroiled in litigation for much of the past year, with commercial real estate agency Avison Young alleged that Shah paid less than half of the $220,000 he owed for brokering commercial leases.


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President spent 10 years at company


Meridian Capital, a mortgage-broker company, is set to leave its president, Yoni Goodman, due to the fallout of a broker scandal. Goodman, who spent a decade at the company, said he would leave for other opportunities. He expressed his hope for Meridian's success and the success of its founder and senior chairman, Ralph Herzka, CEO Brian Brooks, and the talented brokers, analysts, and employees. Meridian, which has expanded into retail leasing and investment sales, partnered with Barings in 2021 to launch a multifamily lending platform. However, higher interest rates have strained dealflow and Meridian has been cut off from a key line of business. The company's deals primarily came from brokering loans for Fannie Mae and Freddie Mac. The scandal led to Meridian hiring Brian Brooks as CEO in April, with Goodman playing a key role in recruiting him. Brooks expressed gratitude for Goodman's time at Meridian and said progress has been made to get things back on track with the agencies.


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