Real Estate Weekly
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Re-capitalizing office for the future

By James Nelson & Scott Singer

Manhattan office leasing activity has no doubt been impacted by Covid, presenting significant challenges for existing office landlords, as well as great opportunity for entrepreneurial purchasers.  To truly understand the dynamics of the office market, one must interpret the data as this market cannot be painted with one brush.

Avison Young is committed to being a thought leader in Real Estate Data Analytics – including the  recent development of Avison Young’s Return-to-Office Vitality Index which currently shows Manhattan’s return to office at -63.5% compared with 2019 levels. The good news is that we are the number three performing city, only behind Boston and Austin, and well above the national average which is still 70.8% off. Furthermore, the Finance sector is now only off 49.2% from 2019 in Manhattan.  70% of tenants surveyed nationwide have embraced a hybrid work model, according to a recently released report from Avison Young.

As a result, the amount of Manhattan office space leased in the first three quarters of 2021 is down 42.4% from the same period in 2019. This has led to a total availability rate of 18% which encompasses roughly 100 million square feet. That said, there have been some clear winners such as One Vanderbilt which is expected to soon be beneficially fully occupied having achieved rents in some cases over $200/sf. Clearly there has been a flight to quality.  Avison Young’s analysis of the 17 lease renewals YTD over 50,000 square feet show that every tenant either stayed in the same quality building or upgraded.


Concessions to major tenants remain at unprecedented levels. This occurred in the multifamily market earlier in the pandemic but has already reverted to a tightness that exceeds pre-Covid terms.  Such a positive rebound has not yet occurred in the office market – although average Class A direct relocation rents have already rebounded to pre-COVID levels at $83 psf, our data analytics team shows the average net effective rent at -9.9% pre-COVID peak-to-present and one of our tenant rep brokers is involved in an outlier lease negotiation that will include three and half years of concessions on a ten-year lease. For the moment the office world remains a tenant’s market. 

Class B and C office buildings, many with higher existing leverage and lower current occupancy, face the biggest current challenges.  Some of these buildings will likely be repositioned to alternative uses, but the reality is that zoning may not allow. Our former Governor had proposed allowing flexible zoning including conversion to residential, but the percentage of affordability required made this prospect infeasible for many properties.  In addition, the returns from repositioning may not be worth the cost and risk as most office buildings still have inherent value, especially given the pent-up demand we believe exists from tenants who can now afford to have a presence (or an increased footprint) in NYC neighborhoods they have aspired to – and as shown by well-capitalized groups such as Facebook, TikTok and Beam Suntory making sizable long-term commitments to this office market as a talent attraction and retention mechanism.


From a landlord’s perspective, what is the best way to weather this storm?

Some NYC owners have concluded that a near-term exit is the preferred course of action.  Avison Young’s Tri-State Investment Sales team has executed dozens of building sales in 2021, with dozens more in contract and/or with contracts out.  In short, we have seen purchaser interest on every transaction we have brought to market (including properties with low occupancy and other challenges), with bids from both end users and operator/developers.  End user buyers have included CBS on the West Side and several schools taking advantage of today’s lower prices. One example includes the Shefa School at 17 West 60th Street.

For the many owners who are expecting and planning for NYC’s recovery, Avison Young’s Tri-State Debt & Equity Finance team can execute on multiple recapitalization strategies including:

  1. Senior, mezz and preferred equity refinancing’s – these are recapitalizations in which a “lender” provides debt (or debt-like) funds while control of the property is retained by current ownership;
  2. JV equity (aka “Partial Sale”) investments including LP and Co-GP structures – these are recapitalizations in which an investor/partner will participate in profits and may seek to share or control major decisions and/or day-to-day operations;
  3. Ground Lease bifurcations – this is a new name for an old strategy that has been successfully executed for many decades, dating back to Harry Helmsley.  In simple terms, a sale of the land under a building is utilized as a low-cost ultra-long-term financing vehicle.

The best execution for office owners might be a multi-prong approach. Receiving purchase offers can help establish fair market value to base a JV or ground lease on. Above all, creativity will be required to navigate through these unchartered waters.

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