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T I M E AT 2 0 0 L I B E RT Y S T R E E T

IS T I M E W EL L SPEN T

CONTACT LE ASING M I K AEL NAH M IA S //

2 12- 417-7032

mikael.nahmias @ brookfieldproperties.com

DAV I D M C B R I D E

//

212 - 41 7-7014

david.mcbride @ brookfieldproperties.com

The #1 Place to Ice Skate in NYC

PAUL N. G L ICKMAN //

212-418-2646

paul.glickman @ am. jl l.com

JOHN WHEELER

//

john.wheeler @ am.jll.com

212-812-5906

AN U RBAN OASIS


U N IQ U E O PP O RT U N ITIES

NEW LOBBY COMMENCING SPRING 2019

200 L I BE RT Y ST R EET The modernization of 200 Liberty marks the continuation of the multi-million dollar, large scale redevelopment of Brookfield Place.

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THIS ISSUE

Finance • CLOs are on the rise. Are they just as dangerous as their CDO ancestors?

DECEMBER 4, 2018

ICSC / CMBS ISSUE

• With retail CMBS floundering bondholders are suddenly getting extremely picky about where they invest. • Credit ratings bigwigs look into their 2019 crystal ball.

P35

Uh Oh

The stock market has been having a rough couple of months. Is this a bad sign for real estate?

A LEGACY OF SUCCESS

COM M ERCIAL

|

RESIDENTIAL

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R E TA I L

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FI NANCE

N E W YO R K C I T Y ’ S L A R G E S T O W N E R O F C O M M E R C I A L R E A L E S TAT E SLGreenRealtyCorp

SLG-2497 SL Green - Corporate Ad Art Update CO - 2018-CO_9.5x2.5_V1.indd 1

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SL Green Realty Corp.

slgreen.com

11/28/18 12:21 PM


SL Green Realty Corp. New York’s #1 provider of real estate capital is pleased to announce the following representative transactions: GRAMERCY SQUARE

$380 Million Mortgage & Mezzanine Loans Clipper Equity, Chetrit Group and Read Property Group

196 ORCHARD ST

$222.3 Million Mezzanine Loan Magnum Real Estate Group

245 PARK AVE

$148.2 Million Preferred Equity HNA Group


Over $1 Billion of Preferred Equity and Debt Investments in 2018

888 BROADWAY

$132.9 Million Mortgage & Mezzanine Loans Normandy Real Estate Partners and Invesco Real Estate

550 WASHINGTON ST

$100 Million Mortgage Loan Oxford Properties Group and CPP Investment Board

ONE WEST END AVE

$69.5 Million Mortgage & Mezzanine Loans Silverstein Properties and El Ad Group


TABLE OF CONTENTS 1 WHITEHALL STREET, 7TH FLOOR NEW YORK, NY 10004

24 6 NEWS BRIEFS

Max Gross Editor-in-Chief — Lauren Elkies Schram, Deputy Editor Cathy Cunningham, Finance Editor Matthew Corkins, Managing Editor

Columns Robert Knakal and Ariel Schuster

Bed-Stuy Retail Finally Happening? Bed-Stuy has long resisted becoming Williamsburg II.

October Surprise After a grim couple of months the economy looks less bonny.

Lonely Island Staten Island retail is doing just fine, thank you very much!

30 LEASES

drive

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Ready to unleash the power of your data? Visit digital.withum.com/RE-Insights for more information.

Leases of the Week

34 FINANCE Debt Deals of the Week Column Catherine Liu

CLO Story, Bro

Credit Check The credit ratings agencies weigh in on how CMBS will look in 2019.

The Sit-Down

Why CLOs are nothing like CDOs. (Right?)

Natixis’ Emmanuel Verhoosel and Greg Murphy

Foul Mall

Takeaway

CMBS is looking at retail a lot more skeptically

WRITERS Rebecca Baird-Remba Mack Burke Matt Grossman Rey Mashayekhi Nicholas Rizzi Alison Stateman Christina Sturdivant-Sani — Robyn Reiss Executive Director — SALES Barbara Shapiro, Associate Publisher Brigitte Baron, Sales Director Shannon Rooney, Account Executive — MARKETING & EVENTS Lauren Bell, Marketing Director Ashley Roseman, Events Manager — DESIGN, PHOTO & PRODUCTION Jeffrey Cuyubamba, Art Director Kaitlyn Flannagan, Photo Editor — OBSERVER MEDIA Joseph Meyer Chairman James Karklins President

ChartFinance

TO SUBSCRIBE, CONTACT SUBSCRIPTIONS AT SUBSCRIPTIONS@OBSERVER.COM,

64 FEATURES

OR CALL 888-793-5585. FOR REAL ESTATE ADVERTISING,

GSA Propeties 2.0

CONTACT ROBYN REISS AT

What do years of cutbacks mean for DC CRE?

RREISS@OBSERVER.COM, OR CALL 212-407-9382. FOR FINANCIAL ADVERTISING,

Power Player

CONTACT BARBARA GINSBURG SHAPIRO AT BSHAPIRO@OBSERVER.COM,

Michael Kirchmann (right)

OR CALL 212-407-9383.

MAPIC 2018

TO RECEIVE COMMERCIAL OBSERVER

32

All that CO learned on the ground in France

FINANCE WEEKLY, COMPANION NEWSLETTER TO THE COMMERCIAL OBSERVER, DELIVERED DIRECTLY TO YOUR INBOX EVERY FRIDAY, CONTACT SHANNON ROONEY AT

END NOTES 76 ChartLease / Sale

digital.withum.com/RE-Insights

78 The Plan

77 Party Circuit FROM TOP: NATE KITCH; EMILY ASSIRAN/ COMMERCIAL OBSERVER COVER ILLUSTRATION: NATE KITCH

4 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

SROONEY@OBSERVER.COM, TO RECEIVE THE COMMERCIAL OBSERVER EMAIL NEWSLETTER, DELIVERING THE LATEST UPDATES IN COMMERCIAL REAL ESTATE DIRECTLY TO YOUR INBOX , TUESDAY — FRIDAY CONTACT SHANNON ROONEY AT SROONEY@OBSERVER.COM


EXCEPTIONAL TOWER FLOORS STEPS TO GRAND CENTRAL Open layout Exposed ceiling Operable windows Robust infrastructure Wired Certified Silver Landmarked lobby

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Tara I. Stacom, Executive Vice Chairman 212-841-7843 | tara.stacom@cushwake.com

Justin Royce, Executive Director 212-841-7764 | justin.royce@cushwake.com

Barry J. Zeller, Executive Managing Director 212-841-5913 | barry.zeller@cushwake.com

Connor B. Daugstrup, Director 212-841-7964 | connor.daugstrup@cushwake.com

SLGREENREALTYCORP

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9,884 RSF

Elliot Karp, Leasing Associate 212-356-4106 | elliot.karp@slgreen.com Elaine Anazagasty, Vice President 212-216-1751 | elaine.anazagasty@slgreen.com

@SLGREEN

Larry Swiger, Senior Vice President 212-216-1628 | larry.swiger@slgreen.com

SL GREEN REALTY CORP

SLGREEN.COM


BRIEFS

News GONE, BAILEY, GONE

The former head of acquisitions for Thor Equities’ New York City office, Morris I. Bailey, has left the company to start the new investment arm of his family-run JEMB Realty, Commercial Observer has learned. Bailey, the nephew of JEMB co-Founder and Chairman Morris Bailey, will head Bailey Acquisitions and target new assets to help bolster JEMB’s portfolio, focusing mainly on commercial properties valued at $30 million and more. “[JEMB] has got an incredible, incredible reputation in the business,” said Bailey, 38. “You take my track record of acquiring property and you couple that with its incredible track record and reputation in the market and it’s a really great combination.”

Under the new venture, Bailey hopes to increase the acquisition activity for the family-owned company and plans to first focus on properties in Manhattan, Brooklyn and Queens. Eventually, he wants to expand its focus to other markets around the country. Bailey will work with his cousins JEMB Principals and brothers Louis Jerome, Morris Jerome and Jacob Jerome under the new venture and will eventually hire a team under him. The Brooklyn native joined Thor a little more than seven years ago and eventually was promoted to be in charge of all acquisitions in the city for the company, Bailey said. While Bailey was in charge at Thor, the retail-centric firm picked up several

COURTESY JEMB REALTY

Thor’s Head of NYC Acquisitions Leaves to Start JEMB Venture

NO MOE: Morris I. Bailey left Thor to join JEMB, run by his (extremely similarly named) uncle. properties in Soho and on Fifth Avenue including the Scribner Building at 597 Fifth Avenue and the assemblage at 562-568 Fifth Avenue. He later shifted to focus on dispositions for Thor, a spokesman for Thor said. “Morris has been an amazing executive, both in our acquisitions department and more recently in the disposition department,

and we wish him the best of luck in his new venture,” Joseph Sitt, the chairman of Thor, said in a statement. Thor is promoting Colin Bahor to take over for Bailey, under the title of director of acquisitions, where he’ll help expand the company’s global portfolio, according to the spokesman.—Nicholas Rizzi

Long Island City Hotel-Turned-Homeless Shelter Sells for $36.5M A hotel-turned-homeless shelter in the tiny Blissville section of Long Island City, Queens, sold to a Brooklynbased developer for $36.5 million, property records show. Shulem Herman bought the Fairfield Inn at 52-34 Van Dam Street between Starr Avenue and 34th Street from the family-run Lam Group in a deal that closed on Nov. 16, according to property records made public last week. Lam and Herman did not immediately respond to requests for comments on the sale and it wasn’t clear who brokered the deal. Herman financed the deal with a $23.2 million mortgage from Sterling National Bank. It was also unclear in property records when exactly the Lam Group bought 52-34 Van Dam Street, but the company and Sing May Realty first took out a $12 million mortgage on the property in 2006. Sing May Realty picked up the property for $2.3 million a year before. Sing May transferred the property to the Lam Group in 2012, property records show. The 12-story hotel began housing up to 154 homeless families in March as part of Mayor Bill de Blasio’s Turning the Tide plan to fight back against the city’s rising homeless rates, The LIC Post reported. As hotel development around New York City hit a

6 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

fever pitch, the city started to house homeless families in ones in Brooklyn and Queens to ease overcrowding in homeless shelters, as Commercial Observer reported. Currently, the city has nearly 7,500 homeless people in hotels around the city, The New York Times reported. The practice came under fire from community members and de Blasio promised to phase it out in 2016 after a man brutally murdered his girlfriend and two children in a Staten Island Ramada Inn being used as a homeless shelter. However, the city quietly restarted the practice in 2017 and it plans to spend $364 million per year to house homeless people in them over the next few years, Politico reported. Aside from the Van Dam Street hotel, the tiny Blissville neighborhood currently has two other hotels being used as shelters, NPR reported. The property is also a block away from 52-02 Van Dam Street where developer Sam Chang plans to build a 14-story hotel with 282 rooms, The Real Deal reported. Aside from the Long Island City hotel, Herman recently bought the historic Pitkin Theater in Brownsville, Brooklyn, for $53 million in December 2018 and is planning on building a five-story mixed-use project at 137 Frost Street in Williamsburg, Brooklyn.—N.R.

ALL’S FAIRFIELD: The Lam Group’s Fairfield Inn has traded hands to Shulem Herman.


v s i r s e i t m here u s n o c

Reasonable divisions considered

Thank you for the opportunity to compete for your business. RETAIL.ESBNYCLEASING.COM • 100% COMMISSION ON LEASE SIGNING Fred C. Posniak • 212-850-2618 fposniak@empirestaterealtytrust.com

Joanne Podell • 212-841-5972 | joanne.podell@cushwake.com Mary Clayton • 212-841-7650 | mary.clayton@cushwake.com


BRIEFS

SCOTT OLSON/GETTY IMAGES

Sears Shedding 500+ Stores as Part of Bankruptcy Proceedings

SEARS TEARS: Sears is selling four New York locations.

Sears plans to sell or auction off more than 500 of its best performing locations around the country as part of the 131-year-old retailer’s efforts to survive. In a filing last week in White Plains, N.Y. bankruptcy court, Sears—which also owns Kmart— included a list of stores it hopes to auction off or sell outright to avoid liquidation. It includes four Kmart locations in New York City: 1998 Bruckner Boulevard, which opened in 1999, and 300 Baychester Avenue, both in the Bronx, as well as 250 West 34th Street between Seventh and Eighth Avenues and 770 Broadway between East Eighth and East Ninth Streets in Manhattan. The Manhattan stores opened in 1996. The Illinois-based retailer filed for Chapter 11 in October after years of losses and declines in sales, as

Commercial Observer previously reported. The company listed $6.93 billion in assets compared with $11.34 billion in debt and announced plans to shutter more than 200 stores across the country. Revenues have fallen 11 years in a row for Sears and in its most recent results, posted in September, reported a loss of $508 million with a 3.9 drop in sales. The retailer also needed a $350 million loan to keep its outposts open through the holiday season, Fortune reported. Sears was founded in Minnesota in 1886 by Richard Sears as a watch company and after hiring Alvah Roebuck in 1887, moved to Chicago and began selling its wares via mail order catalogs. Its initial public offering in 1906 was the first in the country by a retailer and raised what would today amount to more than $1 billion.—N.R.

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8 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

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COLUMNS CONCRETE THOUGHTS

Investment Sales Ticked Up in 2018 and Look Good in ‘19 billion, roughly a 30 percent increase over last As we head towards the end of the year, it is year. The volume metrics are indeed performa great time to examine supply and demand ing as expected. drivers in the New York investment sales With regard to property values, they have business. been experiencing downward pressure since Thus far, the year has been playing out as 2016. Fortunately, on average, valexpected. Our forecast was that ues have only fallen by about 8 the volume of sales would increase percent on a price-per-square-foot and that underlying fundamentals basis from their peak. The investwould firm up to stop the downment sales market correction that ward slide in property values. Both we are in is now 37 months runof these forecasts are on track. The ning and it appears to be in the cyclical peak in the number of proplate stages. Tangible traction in erties sold occurred in 2014 when the economy has been bolster5,534 properties traded in the city, ing underlying fundamentals. an all-time record by more than Robert Knakal. Notably, in the residential sector, 10 percent. Since then, that metconcession packages are no longer ric has been in retreat with a total growing and in some areas are being reduced. of about 3,660 last year. Tracking this year’s Further, in neighborhoods where there are no activity through the end of October, the marsupply issues, rents are rising. This is importket is heading toward 3,800, about a 4 percent ant because changes in residential rents have increase over last year. historically preceded changes in commercial With regard to the dollar volume of sales, rents. Value could be poised to begin increasthe cyclical peak occurred in 2015 at $80.1 biling. We do not anticipate significant growth lion citywide, also an all-time record. That in values in the short term. However, we do metric has also been in retreat since then and expect them to increase. finished last year at about $36 billion. This The supply of available properties is year the market is tracking toward about $47

ROOTS 140+ years

expected to increase in 2019. This is based upon the number of valuations we are doing for clients who are considering a sale. For the past several years, we have averaged 1.35 valuations per working day and for the past three months that number has been 1.92. While this is a relatively small statistical sample, it is a barometer for expectations moving forward. This represents a potential 42 percent increase in the stock of available properties. Because supply is king in the supply/demand dynamic, this could have a profound impact on the market moving forward. On the demand side, the most talked about trend is that large Chinese institutional capital has all but exited the market. However, this is only one slice of the total demand that exists for New York commercial real estate. Local and domestic core, core-plus and opportunistic buyers are still aggressively looking for places to park their cash. There is a virtual ton of dry powder looking for real estate investments from these institutional buyers. Highnet-worth individuals and old-line New York families have been very active, particularly in the multifamily sector. And foreign investment is by no means dead because Chinese

OUTLOOK

Pragmatic & progressive

PROOF

Storied Wall Street name

Stroock & Stroock & Lavan LLP New York | Miami | Los Angeles | Washington, D.C.

10 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

institutions have pulled back. Other countries have been picking up the pace. This is particularly true for foreign high-net-worth investors who seem to be coming into the market in increasing numbers. These investors are attracted to the relative political and economic stability that the U.S. offers. New York remains at or near the top of the list for almost all of these investors. And a new demand drive has been created by all the excitement about investing in Opportunity Zones. Opportunity Zone investing should prove to be robust as commercial real estate market participants’ activity is highly correlated to changes in tax policy. These current dynamics lead to an outlook that is relatively positive for the local sales market in 2019. The volume of properties sold and the dollar volume should increase and, based upon strengthening fundamentals, values should have upward pressures exerted on them. The one caveat is: what will happen in the multifamily sector with rent regulation up for renewal in June and a swing in the balance of power in Albany. All-in-all, it is easy to feel good about where the market in heading in 2019.


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INDUSTRYINSIGHTS

PARTNER CONTENT

Retailers need an integrated, multi-faceted approach that embraces both online and physical spaces

Going Omnichannel Why It’s Crucial For Business

Retailers need an integrated, multi-faceted approach that embraces both online and physical spaces

A

t least 18 companies that began as online-only retailers now have at least one physical location in Manhattan, including Warby Parker, UnTuckIt, Casper, and the travel-related lifestyle brand Away. Integrated efforts online and in brick-and-mortar stores, known as omnichannel retailing, is quickly becoming retailers’ premier method for maximizing sales. CBRE, the world’s largest commercial real estate services and investment firm, believes that omnichannel retailing is the way of the future. The firm recently created The Definitive Guide to Omnichannel Real Estate, which is available at cbre.us/ omnichannelguide. “There is a lot of talk about e-commerce retailers competing with brick-and-mortar retailers, and the conventional wisdom is that e-commerce is winning. We know it’s not an ‘either/or’ issue, but a ‘both/and’ approach that seems to be evolving and driving success in the retail business,” said Nicole LaRusso, Director of Research & Analysis for

12 | DECEMBER 4, 2018 | COMMERCIAL OBSERVER

CBRE Tri-State. “An omnichannel strategy means that retailers need an integrated, multi-faceted approach that embraces both online and physical spaces. People want to migrate seamlessly from online to mobile technology to in-store and back again—embracing this omnichannel strategy is how retailers are meeting their customers’ needs.” Omnichannel shopping takes many forms. For example, customers can research items online and order them for in-store pickup, a profitable option since, according to a 2017 Harvard Business Review study, prior online research led consumers to 13% greater in-store spending. A retailer can also sell online only, but still employ a brick-and-mortar showroom where sales reps can interact directly with customers and customers can have a hands-on experience with the merchandise. This too can lead to greater sales, as the study showed that omnichannel customers make 23 percent more repeat shopping trips to a store within six months of an omnichannel experience.

The key to success is for the process to be intuitive and seamless for customers. Omnichannel customers (those who shop across multiple channels) spend four percent more in-store and 10 percent more online than single-channel shoppers; they are also more likely to recommend a brand to friends and family when compared to single-channel shoppers. In fact, the study found that the more channels a customer used, the more money that customer spent in-store. Closing a brick-and-mortar store, meanwhile, has been found to decrease a business’ online sales by up to 20 percent. Retailers are using new ideas for retail store layouts, including “reconfiguring their stores so the checkout area is smaller. Instead, they have employees roaming the store with handheld devices,” said CBRE’s LaRusso, who notes that this leads to shorter wait times, better approximating the online experience. “If people can’t find the merchandise they want in the store, the clerk has a Wifi-enabled handheld device to look up where that merchandise is or see if it’s available online. They

can do mobile checkout on the spot, and have the product sent to you at home with no shipping cost. It’s a quicker process,” she continued. Many brick-and-mortar retailers in 2018 already have an online presence of some kind. But for e-commerce merchants looking to broaden their customer base and embrace the world of omnichannel, the segue into brick and mortar can be daunting. Andrew Goldberg, a vice chairman in CBRE’s retail group, suggested that merchants seeking a brick-and-mortar presence can take advantage of another current trend to lessen some of the risk: the pop-up store. “Most of the e-commerce businesses coming to street retail are opening as pop-ups or with short-term lease obligations,” said Goldberg. “Operating in New York City is expensive. Short-term leases give retailers the ability to see how they’re doing in the brickand-mortar world.” Goldberg also noted that e-commerce merchants are already well-versed in accumulating and interpreting data. This will help them


INDUSTRYINSIGHTS evaluate the effectiveness of a brick-and-mortar outlet. “Online businesses are not necessarily tracking just sales – they are gathering a variety of information from their online customers, like what area of the county they live in or what type of products they purchase most frequently,” he said. “When retailers open a store in a particular location, they can see how it’s affecting their online business. Are they getting an increase in users and sales? If so, is it an increase from existing customers, or are they seeing new customers? Are the existing customers buying different merchandise than they were previously, or more of the same? They get to really understand the analytics of the business—what the brick-and-mortar store is telling them versus what they know from the online business.” In New York, e-commerce retailers testing the brick-and-mortar waters have some advantages, as the city’s shifting retail landscape means opportunities for flexible leases, lower rents, and greater concessions. “There has been a decline in the price of retail space here,” said LaRusso. “Landlords are not only dropping their rents, they are negotiating or giving free rent. They’re giving allowances in bigger numbers than they had before, and that has created new opportunities for retailers.” “A lot of online-only retailers are looking at the New York market and saying, ‘This is a great place for me to have one or maybe a handful of real-life storefronts where I can connect to my customer, in a place that has high visibility and a lot of foot traffic.” On this front, CBRE has made significant investments in new technology to provide potential brick-and-mortar retailers with information to help them take that next step. Mobile Insights is part of that new technology. Mobile Insights is a proprietary system, developed by CBRE and available to the company’s Manhattan retail brokers and their clients. The technology uses publicly available data from cell phones and wearable GPS devices to provide street retailers, and those evaluating opportunities for such, with comprehensive data on how people interact with specific locations. “Mobile Insights allows you to analyze data to paint a picture of demographics, shopping patterns, pedestrian foot traffic and more. You can go into some very granular detail,” said Matt Chmielecki, a senior vice president in CBRE’s retail group. “By focusing on a specific site—say, a storefront on Madison Avenue between 60th and 61st Streets—Mobile Insights can determine how many people walked by, how much time they spend on the block, where they’re from, and the ratio of local vs. non-local passersby. If your target market includes Asian consumers, for example, you can identify how many Asiabased tourists walk by. You can also analyze the strength of a location by seasons or even months. These are all things tenants look for. Mobile Insights takes the guesswork of site selection and marries that with solid data.” Mobile Insights also allows retailers to follow the path customers and potential

PARTNER CONTENT

customers took on their way to and from the store. “You can not only find out where they were, you can identify where they went next, and where they were two hours before,” he said. “You’re actually able to track groups of anonymous users that have  passed, in what we call a ‘shopper’s path of purchase.’ If you realize that, ‘our Union Square store has a huge amount of people from Williamsburg coming to it,’ then perhaps it makes sense to have a store in Williamsburg.” By using data to make site selection that much more exact, e-commerce merchants newly embracing omnichannel can make the move to brick and mortar in a way that will ease the trepidation for the retailers, landlords, and investors alike. The widespread adoption of omnichannel has vast implications for retail real estate, as CBRE lays out in the Omnichannel Guide. For many retailers, it means adapting to a new way of working, often maintaining smaller inventories and using more of the brick-and-mortar space for experiences, like Capital One’s recent addition of coffee shops, known as Capital One Cafes, or the ability for customers in Adidas stores to print custom clothing. For landlords and investors, it means evaluating tenant or investment merchant mixes for those susceptible to online penetration, such as clothing. Shopping malls are particularly vulnerable here via soft goods categories and should look for more brick-and-mortar-reliant business categories like food and beverage or beauty. Lease terms and clauses should also be evaluated. For retailers online or on the ground, omnichannel marketing will be the key to maximizing sales and customer satisfaction in the years to come. “We think that omnichannel retailing is the future,” said Goldberg. “The new crop of stores is coming from e-commerce. The omnichannel business is where we’re going to be finding the new tenants.”

CBRE KNOWS RETAIL

CBRE offers industry leading perspectives, deep retail expertise and robust analytics to help brands adapt and plan for growth. Whether online, or brick and mortar, smart retailers are building successful omnichannel strategies to increase speed and improve service. A nimble real estate portfolio that can quickly respond to rapidly shifting consumer demand is essential. How can we help transform your real estate into real advantage? Visit us at ICSC NewYork Deal Making Booth 621 cbre.com/retail @cbreRetail

COMMERCIALOBSERVER.COM | DECEMBER 4, 2018 | 13


COLUMNS RETAIL REDUX

The Trends That Will Dominate ICSC report higher average order values in their The nexus of technology and retail. physical store locations than online compared Technology is making shopping easier with their single-channel competitors. These from the comforts of your home—but it’s also are all proof positive that bricks matter. making a visit to a brick-and-mortar store betOnline businesses that have successfully ter, too. From image and facial recognition to jumped offline include: Everlane, Allbirds, robotics and chatbots, technology will conKith, Untuckit, Adoreme, Farfetch, Brideside tinue to offer more opportunities to retailers. and Koio. They are redefining retail in some Apparel retailers are leveragof New York’s most interesting submarkets. ing technology to help improve fit, and color and beauty brands are The future of retailtainment. suggesting products by skin type The last decade has seen experiential retail prior to any purchase. Alternative retail. become the new industry standard, with From cashier-less stores to stores While retail is experiencing a experiential/entertainment retail setting new that only use the click-and-collect “have” and “have-not” discrepancy standards for engaging consumers. Leading model we are seeing the perfect between brands that remain stagglobal entertainment companies are just the marriage of physical meeting dignant and those that have adapted tip of the iceberg. ital, resulting in a positive brand and modernized their approaches, Ariel Schuster. It is my belief that in five years, every brand retail interaction/experience. the industry is also welcomwith significant intellectual property will ing new, alternative tenants (those famed enter the experiential retail market. Major Online brands go offline. “disruptors.”) In 2019 the industry will see film studios, networks and toy companies Just a few years ago, physical retail and quick-service, flexible spaces open up across will dot the landscape with immersive, intere-commerce were considered two very disfrom unusual industry sectors. One example: active spaces that will be available locally, not tinct concepts, but now it is proven that no Americans are seeking health care services— app can replace a customer’s desire to interact. T:9.5” just at Disney World or Times Square. Minidental, veterinary, even total-care facilities— Disneyland’s are looking to saturate the U.S. Multi-channel retailers with a physical similar to how we experience retail. Patients presence are organically driving traffic to demand convenience and efficiency, which is Healthy clusters. their sites, with lower customer acquisition driving health care providers to set up shop in Health and wellness is still one of the costs. BaubleBar and Rent the Runway both alternative spaces in retail-dense populations. While store closures and bankruptcies get the most press, what is often overlooked and underreported are the new innovative retail uses we see emerging. That is why I anticipate that there will be a lot to talk about beyond the headlines at this week’s International Council of Shopping Centers (ICSC) in New York. Here are some of my predictions for the buzzworthy topics at ICSC.

fastest growing sectors, especially among millennials. This segment of the market shows no signs of slowing down, which is great news for landlords with spaces to fill. Gyms, boutique fitness concepts, healthy food eateries and ath-leisure retailers continue to increase in popularity—and that includes the ultra-niche fitness concepts like “unplugged” meditation studios, cryotherapy spas and stretching studios. Yes, the market correction will come up. Landlords are continuing to offer flexible lease terms, creative concessions and less rent in an effort to fill space. Strategic retailers are taking advantage of this market correction and are signing long-term leases to solidify their positions in the market. The viability of successfully entering the U.S. retail scene is stronger than ever. Not too long ago, retailers were postponing brick-and-mortar moves due to where rents were. Now, landlords are creating opportunities for retailers to take advantage of the robust market in most urban settings. Ariel Schuster is a vice chairman at retail brokerage RKF, a part of Newmark Knight Frank.

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Keep Watching the Stuy

Fulton Street has long been one of the central retail strips of Bed-Stuy.

By Larry Getlen

M

edina Sadiq, the executive director of the Bedford-Stuyvesant Gateway Business Improvement District, recalled a day early this year when a ripple of excitement surged through the BID. “One of my staffers ran into the office yelling about a bagel store,” she told Commercial Observer, referring to Bagel Story at 1237

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Fulton Street between Bedford and Nostrand Avenues. “He was like, ‘Oh my god, the neighborhood is changing. We have bagels!’ ” An all-hands-on-deck response to a bagel store might sound like an overreaction; it’s not as if Brooklyn—and even Bed-Stuy—hasn’t seen a bagel place. But a store selling bagels that are baked right before your eyes and freshly brewed coffee from Brooklyn’s Cocoa Grinder is a real sign that change is afoot. Over the last few years, Bed-Stuy has felt

ripe for the kind of retail resurgence that other areas of Brooklyn, like Williamsburg, have long experienced. However, it has taken much longer to acquire the signifiers of retail upgrade. There are still a lot of vacancies and still a lot of low-end retail. But, for those keeping score, Bed-Stuy keeps racking up interesting shops and restaurants: a dog grooming place, a vintage clothing store, independent coffee shops, vegan restaurants, and so on. For a long time, Sadiq said, the area’s retail

was about 40 percent beauty shops. “Nail shops, beauty supplies, beauty parlors, barber shops, hair stores—that was a big amount of it, and there were a lot of discount stores, 99-cent stores, too. All that is changing now,” she said. When retail broker Shlomi Bagdadi from Tri State Commercial Realty began doing business in Bed-Stuy in late 2015, he was unimpressed by the area’s retail landscape. “They had your standard deli on the corner,

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Bedford-Stuyvesant’s long expected gentrification might be happening—albeit very, very slowly


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GETTING TO BED: 1134 Fulton Street (left) currently under construction (above) is adding another factor into the mix, namely, new market-rate housing. a laundromat on the other corner, a closed-up liquor store, and that was basically it,” said Bagdadi, the company’s president. “There was no restaurant scene. If you wanted to grab something to eat or a cup of coffee, you bought the 50-cent cup of coffee from the corner deli. As far as food, you’d have to travel.” Then, as now, the area’s shopping centered around Fulton Street, which is home to local shops and national chains including The Children’s Place, Planet Fitness, Papa John’s, GNC and Mattress Firm. But according to Andrew Clemens, the managing partner at Ripco Real Estate’s Brooklyn office, Fulton is not likely to be the driver for the new Bed-Stuy. “While some of the national brands have taken space along Fulton Street because they see the foot traffic, a lot of local restaurants that are trying to keep a certain look and feel to their establishment don’t want to go to 18 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

there,” Clemens said. “The rents are higher on Fulton, and also, there hasn’t been enough turnover,” he added. “I saw the same thing in Bushwick on Knickerbocker Avenue. There’s too much of the check-cashing places and fast-food restaurants still there, and [new businesses are] afraid of being overlooked.” Rather than be transformed by a single change agent, Bed-Stuy has seen individual entrepreneurs set up smaller shops throughout the neighborhood, often on quieter streets, giving the area more the appearance of a touch-up than a complete re-do. “For Bed-Stuy, it goes block by block. There’s not necessarily one retailer or restaurant that shifted the entire neighborhood. On Malcolm X Blvd., the turning point was the high-end dog grooming shop, Dog Wash & Go,” said Avi Akiva, Tri State’s vice president who brokered


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Michael Stoler New York Real Estate TV, LLC

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Insights from Industry Leaders

Panelists — Alternative Lending in Commercial Real Estate ‘WE HAVE BAGELS!’: Members of the Bedford-Stuyvesant Gateway Business Improvement District were beside themselves with joy when they got a new bagel store.

Michael Maturo Martin Nussbaum RXR Realty Slate Property Group

Leor Siri Silverstein Properties

Robyn Sorid G4 Capital

Peter Sotoloff Mack Real Estate Group

Friedman Speaker — Tax Reform Update

Steve Bokiess

November 29th, 8:00am-10:30am To request an invitation to this exciting and exclusive event, contact jkrumholz@friedmanllp.com. Space is limited 20 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

that deal at 233 Malcolm X Boulevard at Hancock Street, which opened in 2016. “They were one of the first businesses that took a chance and realized there’s upside here,” Akiva said. Since late 2015, Tri State has signed leases for 15 businesses to come to Bed-Stuy, including the vegan restaurant Buntopia, which opened early last year at 994 Broadway between Vernon and Willoughby Avenues; the vintage clothing store Mirth, which opened at 275A Malcolm X Blvd. between Macon and MacDonough Streets last October; and the Japanese restaurant Trad Room, which opened at 266 Malcolm X Blvd. at Halsey Street earlier this year. Still, for those paving the way, new retail can’t come quickly enough. Jay Chan and his wife, Kristin Chan, opened their 40-seat eatery Fancy Nancy at 1038 Bedford Avenue and Lafayette Avenue in August 2015 in a deal brokered by Clemens. The veteran chef and restaurant manager, respectively, had lived in the neighborhood for over five years by then, and were tired of having to venture outward to find worthwhile dining.

“We had a lot of other restaurant friends who were sick of going to other neighborhoods. We would always have to meet up in friends’ neighborhoods to go out to eat,” said Jay Chan. “So, we just banked that people who also lived here felt the same as we did, which is—we just want something around that’s close, and we don’t want to have to take the train.” While Chan said the business is thriving, having developed a regular local clientele, Fancy Nancy has not exactly been part of a restaurant wave. “There are more cafés, but still not a lot of restaurants,” he said. “There used to just be a Chinese place on the corner and a couple of taco places. Now there are more bars. The residents are moving in quicker than the businesses.” Indeed, the local population is growing; just over the past 15 years, the number of people living in Bed-Stuy has grown by 25 percent, according to data from the New York State Comptroller’s office. Tibetan restaurateur Amadeus Broger previously owned the now-shuttered Le Philosophe and Extra Place in Manhattan. When he


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founded his 40-seat eatery L’Antagoniste at 238 Malcolm X Blvd. off Hancock Street threeand-a-half years ago, he did so because, like Chan, he wanted to a place close to home, as he lives a block and a half away. He found the experience tougher than most. “In the beginning, there were animosities,” he said. “People would throw stones at my window—people who live here—and I would get racial slurs [yelled at me].” In time, Broger volunteered his venue for block association meetings, where he would offer free appetizers and booze, and sponsored a local soccer team. Business picked up—and then did so even more when he received a positive review from the New Yorker last year. Now, he’s scouting locations for a second restaurant in the neighborhood that he hopes to have open mid to late next year. But overall, Broger thinks Bed-Stuy retail may have even less buzz now than it had when he opened. “I see a lot of empty locations, and I’m surprised it takes a long time for them to get leased,” he said. “At the moment, it’s not as hot as it was maybe three years ago. You need enough cash flow for breathing room for two years. I think a lot of people don’t want to risk it. Now’s the best time, because the rents are still affordable.” Leila Noelliste, who creates and sells

22 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

beauty products out of BGLH Marketplace, which she opened in September 2017 at 358 Kosciuszko Street at Marcus Garvey Blvd., considered Flatbush Avenue first. While notably cheaper—she would have paid around $1,100 a month there, compared with the roughly $2,300 per month she pays now for a comparable space—both personal and business considerations led her to her current location. In addition to being closer to her home in the neighborhood, she thought a Bed-Stuy location would bring her in touch with her desired millennial demographic. “A friend told me that Bed-Stuy would be more trendsetting—that people in Flatbush might enjoy my business, but not really spread the word. Bed-Stuy is different,” she said. “Stuff that takes off here tends to have stronger word of mouth, because it’s more trend-focused.” While she considers her current location a success, this is due in part to doing much of her actual selling online. Bed-Stuy foot traffic, she said, has been disappointing. “When I moved here, my business was 100 percent online and nothing in-store,” she said. “Over the last calendar year, it started to creep up to around 20 percent in-store, and this year it’s 25 to 30 percent in-store. Our online numbers have stayed stable, so the business is picking up. But because most of my business

was online, and with online revenue alone I could afford the space, I didn’t have as much pressure to get people through the door.” Like the others, she is less than enthusiastic about the retail scene around her. “I notice a good amount of vacancies,” she said. “Even now, there’s a retail vacancy across the street from me that’s been there the whole year I’ve been here.” If there’s anything giving people optimism about Bed-Stuy retail, it’s the influx of residents, a new population for the area that will need new retail outlets sooner than later. “The potential for Bed-Stuy is really high,” Bagdadi said. “There are a lot of commercial spaces still sitting vacant, unfortunately. But there are a lot of developments on Bedford Avenue taking shape and almost complete, and then you have a few new developments on Fulton Street that were just completed, and they’re going to be filled with residents. That’s going to attract new businesses to come to Fulton Street, off Bedford Avenue, to fill those spaces.” Both Sadiq and Clemens pointed to the development at 1134 Fulton Street at the corner of Franklin Avenue. As of earlier this year, the development was shaping up to house 116 apartments and over 18,000 square feet of commercial space, though those numbers may increase by the time of the project’s

completion. Other developments new or on the way include 1875 Atlantic Avenue, a nine-story, 118-unit luxury rental building that began leasing in January, and the seven-building Cascade condo complex, a 400,000-square-foot project that, by the time of its 2020 completion, will include 234 units and 41,000 square feet of retail. As for current luxury rental properties, the eight-story, 35,000-square-foot Marci, at the corner of Marcy Avenue and Kosciusko Street, kicked off rentals during its 2016 opening staring at $1,846 for studios, $2,862 for one-bedrooms and $2,723 for two-bedrooms. When The DeKalb at 740 DeKalb Avenue opened in early 2017, one-bedrooms started at $2,200 and two-bedrooms at $2,900. While the area’s retail changes are taking longer than many hoped and seem to be dragging behind the residential influx, that same influx gives some hope that Bed-Stuy can become a retail and dining hot spot in due time. “All this new housing signifies a lot of changes here, and it’s all luxury housing,” Sadiq said. “Before, a building would have five or six apartments. Now that same space has 20 apartments. We have apartment buildings as high as 14 stories now. That changes the look of the area. Give it three to five years. You won’t recognize Bed-Stuy.”


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COVER

Taking Stock What does October’s abysmal showing on Wall Street mean for commercial real estate? By Nicholas Rizzi

T

he last few months were bad ones on Wall Street. Since September, more than $3 trillion has been taken from the stock market, which has caused a significant 185-point tumble in the S&P 500 index, or 6.4 percent. The downturn was primarily driven by selloffs of tech stocks. For example, Facebook’s stock has dropped by 14.6 percent in October, and Apple’s stock lost 47.1 points that month. While the market has rebounded slightly since, stocks erased their entire 2018 gains on Nov. 20. So the big question is, what does this mean for real estate? Real estate in gateway cities, especially New York City, has generally been a safer asset class than others and traditionally a space in which investors focus when pulling their money out of the stock market. “New York real estate, in particular, is a much more stable commodity than almost anything else,” said Jay Neveloff, the chair of Kramer Levin’s real estate practice. “It is a narrower band of volatility.” However, this stock market downturn might impact the real estate market by driving down office and retail rents, slowing investment sales and multimillion-dollar condo buys and making it much harder overall to get financing.

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“The volatility in the stock market is going to show volatility in the economy and will affect people’s decisions on investing,” Neveloff said. While previous dips in the S&P have been linked to drops in Manhattan office and retail rents, Heidi Learner, the chief economist at Savills Studley, said there’s not enough data to definitively indicate if the most recent drop would do it again. “It’s not a particularly robust correlation,” she said. “I wouldn’t draw too much just from those prior periods.” But what should be more concerning for real estate than seeing stocks fall is what’s actually behind the sell-offs. President Donald Trump’s trade war and jockeying of words with China, along with the Federal Reserve’s hiking interest rates, create a level of uncertainty, Learner said. Last week’s market moves proved those points. Remarks from Fed Chairman Jerome Powell signaling interest rates could level off caused a spike in the markets, only to have them drop again when details of an upcoming meeting with Trump and Chinese President Xi Jinping emerged, MSNBC reported. The tariffs on Chinese goods, especially steel and aluminum, could drive up the costs to get new buildings finished and interest rates could make the cost of financing them more expensive, Learner said. “Those costs will be passed along to tenants

as well,” Learner said. “As the margins deteriorate, perhaps it could cause an investor to otherwise take on a more wait-and-see attitude.” If the market takes a nosedive, the first segment to feel it would be residential sales, especially large condo deals, according to Adelaide Polsinelli, the head of Compass’ investment sales division. “A lot of these hedge fund guys buy their apartments with their bonuses,” Polsinelli said. “If their bonuses decrease, they can’t buy them.” But despite the dark clouds over Dow and S&P the last couple of months, economists said not to fret. The major indexes can be taken as a relative indicator of the country’s economic health, but all other economic indicators, like low unemployment and wage growth, point to an expansion. “It’s not an infallible indicator by any stretch of the imagination,” said Ken McCarthy, an economist at Cushman & Wakefield. “It’s volatile, but a decline would have to be sustained and significant before we would start thinking about it.” Also, the fundamentals of real estate continue to be strong. As such market participants are struggling to pinpoint when this economic cycle will end. “I don’t see anything in the economy right now that points to an imminent slow down or decline into a recession,” he said. “This will end up being the longest expansion in history.”

McCarthy added that, since the current economic expansion started in 2009, there have been other double-digit drops in the stock market, including early 2010, but he still expects an expansion next year. Should a potential decline accelerate, real estate experts think it could actually be a benefit for the market. In the 2008’s crash, many investors, including foreign players, parked their money in New York real estate. But a new program in last year’s tax reform bill— Opportunity Zones—would make it even more attractive. Opportunity Zones can provide huge tax relief to investors who pump money into “economically distressed” areas all over the country approved by the federal government. “There is a multitude of folks cashing in on stock and they may be taking profits to investment opportunities,” said Robert Knakal, the chairman of New York investment sales for JLL. “I think it’s a net positive for real estate.” But even as these zones make it much more attractive for investors to dump their stock market gains into them, Knakal said he doesn’t expect pricing to skyrocket since deals still have to make sense. “I think that there is an impact on property values within Opportunity Zones but not to an extent that the market is going to rise too sharply,” he said. “The benefit of buying in an Opportunity Zone is only a benefit if you make a profit.”


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Gregg Rothkin

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© 2018 CBRE, Inc. All rights reserved. This information has been obtained from sources believed reliable, but has not been verified for accuracy or completeness. You should conduct a careful, independent investigation of the property and verify all information. Any reliance on this information is solely at your own risk.


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The State of Staten On Staten Island, brick-and-mortar retail bucks the national trend By Claire Wilson | Photography by Melissa Goodwin

THE EMERALD FOREST: One strip of Staten Island that seems to be thriving with a variety of different retailers is Forest Avenue which includes (clockwise from left) the Kings Arms Diner in the West Brighton neighborhood; tattoo parlors, coffee shops and bodegas that co-exist peacefully; and a variety of restaurants and stores.

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hopping malls across the United States may be shuttering stores at a rapid rate, but on Staten Island the retail scene has never been so vibrant. New stores are being added island-wide, while other, dated shopping centers are being reconfigured and refurbished. Retail brands new to the borough, like Shake Shack and Land’s End, are being added to the mix to cater to changing tastes. “Everybody likes to blame Amazon but the idea that people aren’t going to shop anymore couldn’t be further from the truth,” said James Prendamano, the vice president and CEO of Staten Island-based commercial brokerage Casandra Properties. “We were far too lazy for far too long and we failed as an industry to deliver an interesting experience.” But that doesn’t appear to be the case anymore. Prendamano brokered the $41 million sale in May of South Shore Commons, a five-building retail and commercial complex now owned by local businessman Murray Berman and his son, David. (Casandra was the listing agent for the sellers, Guido Passarelli and Sons.) Casandra is also the broker for BFC Partners’ Empire Outlets, a shopping complex adjacent to the site of the now-dead New York Wheel project along the St. George waterfront. The city’s only outlet mall, it is scheduled to open next spring after numerous delays and will be followed soon after by the opening of The Boulevard, Kimco Realty’s open-air lifestyle mall currently under construction in New Dorp. According to Josh Weinkranz, the president of the northern region for Kimco, tenants of the two-level project include a Shoprite supermarket, an Alamo Drafthouse Cinema, L.A. Fitness and numerous restaurants, all in a highly landscaped parklike environment. The retail space is 90 percent leased, Weinkranz said. The Boulevard is located in what is loosely considered the Island’s South Shore, where the population is largely homogeneous and mostly white, COMMERCIALOBSERVER.COM |  DECEMBER 4, 2018 | 27


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MALL THE RIGHT MOVES: While malls have been struggling nationally, that doesn’t appear to be the case in Staten Island where a new crop are coming up and old ones are being refurbished; The Staten Island Mall (left and bottom right) is getting coveted brands like Shake Shack; the South Shore Commons (top right) recently traded hands for $41 million. with a hefty faction of blue-collar workers. It developed rapidly after the opening of the Verrazzano Narrows Bridge in 1964 with an influx of residents from other boroughs, primarily Brooklyn. Empire Outlets is located on the North Shore, which has a more ethnically mixed and better-educated population spread across a network of long-established neighborhoods. More densely populated than the South Shore where single-family homes are the norm, the North Shore also has most of the island’s public housing. Kimco is adding Staten Island’s third Target store, in Forest Avenue Plaza at 1520 Forest Avenue in Port Richmond, on the North Shore. It will open in 2019. Not far away, the 45-yearold Staten Island Mall has added 200,000 square feet of retail, restaurant and entertainment space to the existing 1.3 million square feet and is repurposing an additional 180,000 square feet. Stores being added include Zara clothing and Ulta Cosmetics, the Container Store, Primark and German grocer Lidl. On Nov. 20, Barnes & Noble moved its only Staten Island store to the mall from a location a short drive away. According to Jim Easley, the general manager of the Staten Island Mall, which is owned by General Growth Properties, the complex is hewing to national trends and upping the experiential component to drive traffic. Dave & Busters will be on the roster, as will Chipotle and an AMC multiplex. Part of the redesign includes a plaza with outdoor restaurant seating that in milder weather is home to entertainment events like a temporary rock-climbing wall that was open during 28 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

the summer. Experiential is also what Weinkranz wants for The Boulevard, with its outdoor café atmosphere, leafy setting and the fact that it is easily accessible on foot from surrounding residential blocks or by public transportation. “The mix of tenants creates an environment people will want to go and hang out in, not just buy a single product and head home,” Weinkranz said. “People who live in the community will want to come, browse the restaurants and sit outside—something that doesn’t exist now in this area.” Retail rents in better shopping centers on the island are in the $50- to $60-persquare-foot range, up by roughly 30 to 40 percent over the past decade, according to Weinkranz. He deems current rents to be steeper than in other parts of the surrounding metro area like Long Island and New Jersey, but said prospective tenants are not discouraged even though the properties and demographics are very similar. (These rent figures apply pretty much across Staten Island, except for the older, smaller commercial drags and strip malls that haven’t yet been updated.) “They hear the buzz that tenants there are performing, they take a chance and it pays off,” he said. “Target wasn’t on the island for a long time, but they did one and it did pretty well, then came a second and now a third.” Staten Island’s first Target, in the Bricktown Center at 2900 Veterans Road West in Charleston, was opened in 2006 by Blumenfeld Development Group. Kimco opened the second Target in 2013 in the

Richmond Shopping Center at 2873 Richmond Avenue, near the Staten Island Mall. Stores along commercial drags around the Island that historically defined the borough’s retail scene until the Staten Island Mall opened in the 1970s are also doing well. Lined with one- and two-story retail buildings, streets like New Dorp Lane, Port Richmond Avenue and Forest Avenue in West Brighton have few vacancies and some new construction. Taking rents fall into the $40-persquare-foot range, making them accessible to small business owners. “We have a lot of entrepreneurs coming over from places like Sunset Park [Brooklyn] and Queens who can’t afford to go into a large mall like a Kimco property, but they can afford $40 [a foot],” said Staten Island commercial broker Michael Schneider of Schneider Realty Services. Perhaps more to the point, on Staten Island, retailers have to give shoppers a reason to stay in their home borough to shop and eat, instead of fleeing to New Jersey and Brooklyn as they have historically done. For Brooklyn, the pull is familiarity; many island residents are originally from Brooklyn and still have relatives there. For shoppers heading to New Jersey, there is the lure of markedly cheaper cigarettes, alcohol and gas in addition to no tax on clothing purchases. Some New Jersey malls also have slightly more upscale offerings for those inclined, in shopping centers like the Menlo Park Mall in Edison, Woodbridge Center in Woodbridge and the extremely high-end Mall at Short Hills in Short Hills.

Not only do shoppers pay high tolls to leave the borough, infrastructure problems now handicap the tradition of off-island shopping junkets. Traffic on the four bridges that serve the island is easily and often brought to a standstill, especially on major holidays and summer beach days. The street grid is also woefully clogged with cars, often turning a casual errand into an hours-long ordeal. Savvy local retailers see this as an opportunity to grow their business among frustrated shoppers as well as new ones, who are always coming to Staten Island. According to Easley, generational patterns give his mall a whole new group of shoppers every 10 years. He sees long-time customers now coming with their own children in tow. “This is not a stagnant market—there are new people coming in all the time,” he said. “We need to keep people on Staten Island and we need to give them a reason to stay.” According to Weinkranz, Staten Island retail is hopping now because developers finally took notice of a lack of national brands like Zara, H&M, Chick-fil-A, The Container Store, Primark and Lidl. “We see that Staten Island wants this kind of national retail and they don’t want to have to go to Brooklyn or Jersey to get it,” he said. For Prendamano, the shift is overdue in a borough where one City Council district has a household income of $116,000, the third-highest in the city. “Everything we do today is different than it was five years ago,” he said. “Why not shopping?”


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LEASES

PHOTOGRAPHS COURTESY COSTAR GROUP

Lease Deals of the Week Ralph Lauren

Syneos Health

WeWork

WeWork

350,000 Expansion

86,000 New

60,000 Expansion

51,050 Expansion

Clothing company Ralph Lauren will take another 350,000 square feet in the Starrett-Lehigh Building to consolidate several of its nearby Manhattan offices, the company announced. The 10-year deal brings Ralph Lauren’s offices at RXR Realty’s 601 West 26th Street between 11th and 12th Avenues to nearly 450,000 square feet, where it moved its North America business operations to last year, Women’s Wear Daily reported. A spokeswoman for Ralph Lauren would not provide the terms of the deal but average asking rents in the building are $39 to $48 per square foot, according to CoStar Group data. David Goldstein, Matthew Barlow, Mitchell Steir and Gabe Marans of Savills Studley represented Ralph Lauren in the transaction while RXR handled it with an in-house team of William Elder and Denise Rodriguez. Spokespeople for Savills Studley and RXR declined to comment. Ralph Lauren—which has its global headquarters at 650 Madison Avenue—will relocate employees from several of its Midtown offices, to the Starrett-Lehigh Building. The move is part of the company’s plan to put its teams closer together in larger office spaces and recently leased a full-building in Nutley, N.J., for it, the spokeswoman said.— Nicholas Rizzi

Biopharma outsourcing provider Syneos Health is bringing all of its employees under one roof in a space that spans more than 86,000 square feet at the Brookfield Place complex in Lower Manhattan, JLL announced. Syneos, the Raleigh, N.C., firm that became the second-largest company in the pharmaceutical-research industry following a $7 billion merger last year, will occupy 86,498 square feet on the 39th and 40th floors, The Real Deal first reported, in the 53-story, 2.5-million-square-foot office building at the intersection of Vesey and West Streets. The lease is with American Express, which owns 1.3 million square feet at Brookfield Property Partners’ 200 Vesey Street in Lower Manhattan, data indicate. The 10-year lease will allow the biopharmaceutical solutions organization to consolidate employees from various buildings around the borough. JLL’s Paul Glickman, Matt Astrachan, Erika Jean McNeil, Jonathan Fanuzzi and Kip Orban represented Syneos in the deal while JLL’s Lisa Kiell, Michael Shenot, Ed DiTolla and Andrew Coe worked on behalf of AmEx. McNeil said in prepared remarks: “The new flagship space supports the company’s cultural and business needs, providing two exclusive floors in a premiere building where employees can work together in a collaborative environment with state-of-the art technology and amenities.”—Lauren Elkies Schram

Coworking giant WeWork has beefed up its presence in SL Green Realty Corp.’s 2 Herald Square by taking another 60,000 square feet in the Garment District building, the company announced last week. The company inked a deal for the fifth and sixth floors of the 11-story building between West 34th and West 35th Streets for a WeWork to open in 2020, a spokesman for WeWork said. A spokesman for WeWork would not provide terms of the deal and it’s unclear if there were any brokers but asking rents in the building average between $62 and $75 per square foot, according to CoStar Group data. An SL Green spokesman did not immediately respond to a request for comment. WeWork first signed an 18-year lease for 124,000 square feet at 2 Herald Square in 2016. “We have an excellent relationship with SL Green and look forward to continuing our work with them to make this building a leading hub for companies wanting to be based in the area,” Granit Gjonbalaj, WeWork’s chief real estate development officer, said in a statement. Other tenants in the 362,191-square-foot 2 Herald Square include Victoria’s Secret, Mercy College and public relations firm Publicis.—N.R.

Coworking giant WeWork also grabbed more than 51,000 square feet for its recently launched HQ by WeWork offering for midsize tenants, the company announced last week. WeWork took 51,050 square feet on 11 floors of CIM Group’s 67 Irving Place between East 18th and East 19th Streets, a spokesman for WeWork said. The company plans to move an HQ member into the new space in February. A spokesman for WeWork would not provide terms of the deal, but CoStar Group data lists asking rents as between $58 and $68 per square foot. CIM brokered the deal with an in-house team, while WeWork’s executive vice president of real estate Arash Gohari handled it for the company. Names of the CIM brokers were not immediately clear and a spokesman for the landlord did not respond to a request for comment. In addition, WeWork inked a 28,600-square-foot deal for three floors of APF Properties’ 1156 Avenue of the Americas and 16,000 square feet in Walter & Samuels’ 225 West 39th Street. “Since launching HQ by WeWork in August, we’ve seen incredible demand from companies wanting us to create their own bespoke office space, as reflected by each of our existing locations opening at full occupancy,” Granit Gjonbalaj, the chief development officer for WeWork, said in a statement.—N.R.

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Waterfall Asset Management 44,100 Relocation Waterfall Asset Management is moving a couple blocks north on Avenue of the Americas near Rockefeller Center in Midtown. The alternative asset manager is decamping at 1140 Avenue of the Americas, between West 44th and West 45th Streets, for a larger space at Mitsui Fudosan America’s 1251 Avenue of the Americas between West 49th and West 50th Streets, the landlord announced last week. Waterfall inked an 11-year deal for 44,100 square feet on the entire 50th floor of the 54-story building, as The New York Post first reported. Asking rent for the available 37th and 38th floors is in the low $90s per square foot, per the Post. Jack Ross, one of the founding partners of Waterfall, said in a press release that the firm chose the space because “the ability to combine our growing operations onto one floor, while remaining in midtown Manhattan, is a tremendously attractive feature of this space.” JLL’s Chris Kraus and Daoud Awad represented Waterfall in the deal and didn’t immediately respond to a request for comment made via a spokesman. David Falk, Peter Shimkin, Eric Cagner and Nick Berger of Newmark Knight Frank handled the transaction on behalf of the landlord. “Mitsui Fudosan America has continually invested in building upgrades and improvements, earning 1251 the reputation of being one of New York City’s best managed office towers,” Falk said in prepared remarks.—Rebecca Baird-Remba


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LEASES

PHOTOGRAPHS COURTESY COSTAR GROUP

Lease Deals of the Week FOJP Service Corporation 41,836 Relocation Health insurance risk management advisory FOJP Service Corporation is relocating its headquarters to the Penn Plaza district after inking a lease for nearly 42,000 square feet at 111 West 33rd Street, according to landlord Empire State Realty Trust. FOJP has agreed to take the entire 41,836-square-foot eighth floor at the 26-story, 730,000-square-foot office building between Broadway and Seventh Avenue, the real estate investment trust said. Asking rent in the 16-year deal was $66 per square foot, representatives for ESRT told Commercial Observer. The risk management advisory—whose clients include Mount Sinai Health System and Montefiore Health System—will be relocating its headquarters from 28 East 28th Street in NoMad. “We’ve attracted a great roster of tenants at 111 West 33rd Street,” Thomas Durels, ESRT’s executive vice president of real estate, said in a statement. “Fully modernized with a new lobby and building entrances, 111 West 33rd Street offers fantastic light, efficient floor plates and great access to mass transportation.” Keith Cody represented ESRT in-house alongside Newmark Knight Frank’s Scott Klau, Erik Harris and Neil Rubin, while Cushman & Wakefield’s Mark Weiss, Robert Baraf, Gary Ceder and Jared Thal represented the tenant. Representatives for FOJP and C&W did not return requests for comment. A spokesman for NKF declined to comment.—Rey Mashayekhi

Insight Global

WeWork

WeWork

Signature Bank

29,401 Relocation

29,000 New

28,600 New

20,691 Expansion

Staffing company Insight Global is growing and relocating within AEW Capital Management’s 250 Park Avenue as another firm, Octagon Credit Investors, expands to take over its old space, Commercial Observer has learned. Insight Global will move from its 13,500-square-foot office on the 15th floor to 29,401 square feet on the 11th floor, according to Cushman & Wakefield broker David Hoffman, who represented the landlord in the deal. The recruitment firm inked a 10-year lease for its new space, for which asking rents were $76 a square foot, Hoffman told CO. The lease was possible because law firm Epstein Becker & Green will leave 115,000 square feet on the 11th through 14th floors in mid2019, as CO previously reported. Insight will assume its new offices in the first quarter of 2020, per Hoffman. AEW Capital plans to renovate the lobby, create a new entrance on Vanderbilt Avenue and replace the elevator cabs. “We’ve been marketing the Epstein Becker space quietly because we were waiting for the landlord to approve the final lobby redesign,” said Hoffman, who described the overhaul as a “total reimagining of how the lobby is currently organized. That along with new visual elements that are going to significantly enhance the visitor experience.”—R.B.R.

Coworking giant WeWork grabbed more space in Hudson Square, this time taking 29,000 square feet at 160 Varick Street, Commercial Observer has learned. WeWork inked a deal for the first through third floors of the 12-story building, also known as 10 Hudson Square, between Vandam and Charlton Streets, a spokesman for the company said. The company plans to open a WeWork at the spot in the third quarter of next year. The spokesman would not provide the terms of the deal but a source said asking rents in the area are in the high $70s per square foot. “Located at the intersection of Soho and Greenwich Village, 160 Varick will add to our considerable presence in the area, where we continue to see exceptional demand from companies wanting to be a part of the WeWork community,” Granit Gjonbalaj, the chief real estate development officer for WeWork, said in a statement. Michael Schoen and Harrison Katzman of Savitt Partners represented WeWork in the deal while landlord Hines had no brokers. Schoen declined to comment and a spokesman for Hines did not immediately respond to a request for comment. The building is part of a 5 million-square-foot Hudson Square portfolio owned by Trinity Church Wall Street, Norges Bank Real Estate Management and Hines. 435 Hudson Street. Last year, WeWork took 94,740 square feet at 205 Hudson Street, as CO previously reported.—N.R.

32 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

In the second largest of three deals by WeWork’s recently launched HQ by WeWork—which offers office space for midsize tenants—the coworking company inked a 28,600-square-foot deal for three floors of APF Properties’ 1156 Avenue of the Americas between West 44th and West 45th Streets for a member to move in in the first half of next year, a spokesman for WeWork said. Terms of the deal were unclear but CoStar Group data lists asking rent in the ninestory building as between $57 and $69 per square foot. Brokers from Newmark Knight Frank handled the deal for APF, while WeWork’s executive vice president of real estate Arash Gohari represented WeWork. A spokesman for NKF did not immediately provide a comment on the deal. In yet another deal for HQ by WeWork, the coworking behemoth nabbed 16,000 square feet in Walter & Samuels’ 225 West 39th Street between West 39th and West 40th Streets, as per the WeWork spokesman. The spokesman would not provide terms of the deal but the building has an average asking rent of $46.50 per square foot, according to CoStar. Walter & Samuels handled the deal in-house while Gohari represented WeWork in the lease. A spokeswoman for the landlord did not immediately provide a comment.—N.R.

Fresh off a big lease at Empire State Realty Trust’s 1400 Broadway, Signature Bank is expanding its space to more than 100,000 square feet at the Art Deco office tower near Bryant Park, the landlord told Commercial Observer. The financial institution inked a 20,691-square-foot expansion deal on the 26th floor after leasing 91,181 square feet for 15 years across the sixth, seventh and 27th floors in September. The transaction brings the bank’s footprint up to 111,872 square feet in the building between West 38th and West 39th Streets. Asking rents for Signature’s entire space ranged from $64 to $67 a square foot, as CO previously reported. Signature, which is headquartered at 565 Fifth Avenue, is consolidating its offices at 29 West 38th Street and 177 Avenue of the Americas into the new space at 1400 Broadway. “With an expansion only two months after they signed a lease for three full floors at 1400 Broadway, Signature Bank becomes the 155th tenant, totaling more than 1 million square feet, to expand with ESRT since our IPO in 2013,” said Thomas P. Durels, ESRT’s executive vice president of real estate. Colliers International’s Andrew Roos, Michael Cohen and Howard Kaplowitz handled the transaction for Signature Bank. Keith Cody and Leslie Nadel of ESRT represented the landlord in-house, along with Newmark Knight Frank’s Scott Klau, Erik Harris and Neil Rubin. —R.B.R


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Finance

48 Is CMBS ousting retail assets? 52 2019: The rating agencies weigh in 56 Natixis’ increasingly global business

Proceed With Caution?

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Are 2018’s CRE CLOs truly a different breed from pre-crisis CDOs, or should investors beware?

COMMERCIALOBSERVER.COM |  DECEMBER 4, 2018 | 35


FINANCE

Debt Deals of the Week KING OF QUEENS

166-05 88th Avenue.

M&T Lends $173M to Refi Queens Portfolio M&T Bank has provided a $173 million financing package to Zara Realty Holding Corporation to refinance previous debt on 15 Queens apartment buildings, according to records filed with the New York City Department of Finance. The financing included a gap mortgage of just over $48 million, and it replaced a range of mortgages on the locations, dating back to the 1980s—Zara purchased its first property in April 1982. The properties—including 16605 88th Avenue—are located across Jamaica, Queens, where Zara’s corporate office is located. “We are making long-term investments in our buildings in Queens, modernizing and improving critical infrastructure and adding amenities for our tenants,” Zara Realty told Commercial Observer in an emailed statement provided by its spokesman.  The building improvements will include upgrading heating and cooling systems, installing new elevators, roofs and fitness centers and renovating common areas; Zara Realty will also upgrade kitchens, bathrooms and flooring within some individual units, according to information from Zara Realty. “We have never sold a building we have purchased in Queens; rather, we put resources into creating long-term, high-quality affordable housing in the communities where we live and work,” as per the company’s statement. A spokesman for M&T Bank did not respond to an inquiry.—Mack Burke

Belay and Arc Capital Gear Up for $425M Acquisition Spree in US Southwest Belay Investment Group has provided Arc Capital Partners with a $100 million investor allocation to back the firms’ joint plans to buy up to $425 million of urban real estate in America’s sunbelt, ArcWest—a partnership of the two firms—announced last week. The arrangement allocates funds to ArcWest from California’s gigantic State Teachers’ Retirement System for future investment in unspecified properties in southwestern states like California, Nevada, Texas and New Mexico. “Belay’s partnership with Arc Capital Partners…proves out that a thesis-driven investment strategy guided by property-level execution can create value,” Barry Chase, a managing principal at Belay, said in a statement. “Belay is excited to increase its capital commitment to Arc Capital Partners, consistent with our

Downtown Phoenix. collaborative business strategy, to gain access to middle-market properties in strong urban markets.” Since its founding in 2013, Arc Capital Partners has invested in—or collaborated on—about $400 million of investment in urban real estate, the company said. Its ArcWest partnership with Belay, initiated two years ago, has invested thus far in a 45,000-square-foot retail center in Los Angeles’ Koreatown

called Chapman Market, as well as a 30,000-square-foot creative office and retail asset, known as the Jones Building, in the city’s Silver Lake neighborhood. “We are honored to have been partners with Belay since 2016,” said Quincy Allen, a managing partner at Arc Capital Partners. “We continue to see compelling opportunities in urban infill locations that have been previously overlooked and we are better positioned to pursue these

opportunities with this new allocation.” CalSTRS, as the teachers’ pension plan is known, invests funds on behalf of nearly 1 million public employees in the state. With $219.2 billion under management, it ranks as the largest retirement fund for teachers in the U.S., and the world’s 11th-biggest public pension fund overall. The fund has, at times, worn the hat of a socially conscious activist investor, divesting from gun manufacturers in the wake of the Sandy Hook Elementary School shooting five years ago. In January, the fund wrote an open letter to Apple, in which it invests, encouraging the computer company to consider the effects its ubiquitous devices have on children’s development. A representative for the pension fund did not respond to a request for comment.—Matt Grossman

Square Mile Provides $71M in Financing for Harlem Condo Project Goldman Sachs Investment Group and BRP Companies have pinned down $71 million in financing from Square Mile Capital Management  for The Rennie, a newly erected condominium building in Harlem, according to city records and sources close to the transaction. The loan pays down prior debt from Santander, returns equity to the sponsor and allows time for condominium sales at the eightstory property, located at 23412359 Adam Clayton Powell Jr. Boulevard. “We are pleased to continue our lending relationship with Goldman Sachs Urban Investment Group and develop new ties with BRP,” Sean Reimer, a principal of Square Mile, said. “The partnership has successfully sold all of the residential condominiums at the Aurum, located six blocks south, and we believe

36 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

that it is the ideal team to execute on the business plan for the property.” The 200,000-square foot building includes 134 units and five stories of community space, according to GF55 Partners, the architect behind the project. The building takes its name from the Renaissance Ballroom, a theater and event space that stood on the site of the new building from 1924 until it was torn down in 2015. BRP bought the site in 2015 for $10 million, property records show. The developer, led by co-founders Meredith Marshall and Geoff Flournoy, has more than $1 billion invested in forthcoming multifamily projects in New York City and Baltimore, Marshall told Commercial Observer. In New York City, the developer has a building in the works at 794814 Flatbush Avenue in Brooklyn,

as well as other properties either under construction or blueprinted in Brooklyn’s East New York and Queen’s Jamaica sections. “When you can go into these up-and-coming neighborhoods where there has traditionally been less investment and you create a product for [everyday] folks, the product is well received,” Flournoy told CO in a July interview. “You feel proud about what you are doing. We are not just selling $5 million condos. We are creating a need for the backbone of the city.” Spurred by continuously strong residential demand, multifamily developers have increasingly turned their attention to the upper half of Manhattan to replace older buildings with denser new construction. L+M Development Partners and Tahl Propp Equities are at work on a 400-unit

The Rennie. affordable project at 1465 Park Avenue, according to GlobeSt. com, and in another partnership, L+M has teamed up with Jonathan Rose Companies to build a 384-unit rental building at 1681 Madison Avenue. —Cathy Cunningham and M.G.


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FINANCE

CIT Provides $91M for Denver Sheraton Hotel Purchase

245 Park Avenue.

SL Green Closes on $148M Pref. Equity Investment in HNA’s 245 Park SL Green Realty Corp. has closed on the second phase of its preferred equity investment in 245 Park Avenue, the landlord announced last Friday. After making its first investment during the second quarter of 2018, this round brings its total investment to $148.2 million. The New York Post broke the news of the closing. Commercial Observer reported in June that SL Green was in the process of closing on an ownership interest in the asset, which HNA purchased in 2017 for $2.2 billion. The landlord will now serve as the 1.8-million-square-foot trophy asset’s property manager, overseeing all leasing and operations. “SL Green has an unparalleled track record in managing top commercial assets throughout New York City, with a particular emphasis on East Midtown, attracting world-renowned firms and offering best-in-class building management,” Daniel Chen, the chairman and CEO of HNA Group subsidiary HNA Group North America, said. “We are thrilled to partner with them at 245 Park Avenue, which stands at the center of Manhattan’s most prominent office corridor.” Eastdil Secured’s Benjamin Lambert, Evan Layne and David Lazarus  represented HNA on the transactions. The property was erected in 1967 and designed by Shreve, Lamb & Harmon Associates. It occupies the entire block between East 46th and East 47th Streets. It is currently 91 percent leased to a tenant base that includes Société Générale, Angelo Gordon, Rabobank and Ares Capital.—C.C.

CIT Group has provided a joint venture between High Street Real Estate Partners and Eagle Four Partners with a $91 million senior secured loan to acquire the Sheraton Denver Downtown Hotel in Denver, according to an alert from CIT. “Steady growth in Denver’s hospitality market and the property’s proximity to the downtown convention center makes the Sheraton Denver an excellent opportunity,” Chris Niederpruem, a managing director and East Coast head of CIT’s real estate finance division, said in a statement. “We are delighted to leverage our expertise to help finance this project.” The 1,231-key Marriott-branded Sheraton hotel includes 133,000 square feet of flexible event meeting room space and is the only Denver asset in Eagle Four’s portfolio. The purchase price could not be gleaned.

The property is located at 1550 Court Place in Denver’s central business district, just a few blocks from Civic Center Park, which houses the Colorado State Capitol and is nearby the Denver City Council building. The hotel features a heated rooftop pool, a fitness center and multiple restaurants on-site, including a Zoup! outpost, a Yard House and a Peet’s Coffee & Tea shop. Colorado has seen hotel occupancy climb 30 basis points on the year in June to just under 67 percent, according to a second-half hospitality outlook report from brokerage Marcus & Millichap. Denver itself has seen occupancies tick up 10 basis points to just north of 73 percent. An official at High Street Real Estate Partners was not available for comment. Eagle Four Partners couldn’t be reached for comment.—Mack Burke

Sheraton Denver Downtown Hotel.

Brookwood Scores $36M Thorofare Refinance for Dallas Office Property Los Angeles’ Thorofare Capital has lent $35.8 million to Brookwood Financial Partners to refinance its stake in an office property in Dallas, Commercial Observer can exclusively report. The three-year, interest-only debt serves to pay down a prior loan on the property, Heritage Square, from Mesa West Capital, a spokesman for Thorofare told CO. Additional proceeds from the new loan will go toward paying leasing commissions, improving tenant spaces and other capital expenses, the spokesman said. The 368,000-square-foot complex stands 10 miles north of Dallas, adjacent to an interchange on Interstate 635, which curves around Texas’ third-largest city to the north and west. Tenants at its two buildings, which Brookwood bought in 2013, include health care firm Integrated Emergency Services, home builder Dunhill Homes and Argosy University, a non-profit post-secondary school. Each building, 10 and 11 stories tall, respectively, has its own parking garage—crucial in a city where, according to The Washington Post, 80 percent of workers commute by car. Brookwood, based in Beverly,

38 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

Heritage Square near Dallas. Mass., owns a portfolio of dozens of commercial properties from Maine to California, with a focus on transitional office assets, according to its website. Other arms of the company focus on managing commercial real estate and on buying and improving gas stations and convenience stores, of which it aims to acquire several hundred over the next few years. A representative for the company did not respond to a voicemail. The office leasing market in

the suburbs north of Dallas has been on a red-hot streak, with CBRE describing demand in the city’s northernmost neighborhoods as “unprecedented” in one recent report. Over the last several years, FedEx, Liberty Mutual and Toyota have all set up major regional campuses in Plano, Texas, about equidistant from the Heritage Square property as is Dallas’ downtown core. Average asking rent per square foot per year in the city was $25.87 as of a

summertime market report from Colliers International, up more than 3 percent year-over-year. Marking another deal in a vibrant, up-and-coming commercial real estate market, Thorofare has also just closed a $17 million bridge loan on a boutique hotel in Miami, its spokesman said. Owned by Stambul USA, the city’s 126-room Langford Hotel operates in a former bank building that’s on the National Register of Historic Places.—M.G.


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B ER KADIA.COM a Berkshire Hathaway and Jefferies Financial Group company Commercial mortgage loan banking and servicing businesses are conducted exclusively by Berkadia Commercial Mortgage LLC and Berkadia Commercial Mortgage Inc. This advertisement is not intended to solicit commercial mortgage loan brokerage business in Nevada. Investment sales / real estate brokerage business is conducted exclusively by Berkadia Real Estate Advisors LLC and Berkadia Real Estate Advisors Inc. In California, Berkadia Commercial Mortgage LLC conducts business under CA Finance Lender & Broker Lic. #988-0701, Berkadia Commercial Mortgage Inc. under CA Real Estate Broker Lic. #01874116, and Berkadia Real Estate Advisors Inc. under CA Real Estate Broker Lic. #01931050. For state licensing details for the above entities, visit: http://www.berkadia.com/legal/licensing.aspx © 2018 Berkadia Proprietary Holding LLC. Berkadia® is a registered trademark of Berkadia Proprietary Holding LLC.


COLUMNS STEP BY TREPP

Can Multifamily Continue to Outperform Other Property Types? Idaho, Montana, New Mexico, Nevada, growth for the property type has since Aided by the decreasing affordability of Utah and Wyoming) and Southwest decelerated slightly (3.97 percent in 2016 single-family homes and shifting demoCentral (Arkansas, Louisiana, Oklahoma and 2.61 percent in 2017) as growth in CRE graphic preferences for renting over homeand Texas) regions came in second and sectors nationwide has decelerated. ownership, the multifamily commercial third place, respectively, in our rankFor a closer look at the sector’s perforreal estate sector has outperformed the ings. The mountain region’s growth index mance by geographic region, broader CRE market in terms of clocked in at 170 while the southwest Trepp examined its database of financial and occupancy perforcentral posted an index of 160. Regional consecutive year-end financials mance over the past two years. property improvements are supported by reported on roughly 23,223 mulIn the years following the housrecent western and southern migration tifamily loans across the nine ing collapse, multifamily proptrends, as retiring baby boomers relocate census divisions delineated by erties backing CMBS loans have out of the northeast and midwest in search the U.S. Census Bureau. consistently reported annual net of warmer weather and lower costs of livSimilar to the results from operating income (NOI) growth ing. Population growth is one factor which Trepp’s NOI research on retail figures that exceed the national drives multifamily performance. The U.S. CMBS, states in the Pacific U.S. average for all other commercial Catherine Liu. Census Bureau estimates that the Southern (Alaska, California, Hawaii, property categories. However, can states’ population grew by 8.8 million peoOregon and Washington) once the apartment sector continue to ple (+7.65 percent) between 2010 and 2017 again gained a notable lead ahead of all outperform other property types with ecowhile western states added 5.3 million peoother regions with a growth index which nomic pressures looming? ple (+7.35 percent) during that stretch. This reached 172 for the time period between The multifamily sector fared slightly compares to a more sluggish increase of 1.1 2004 and 2017. Much of the growth in better in the midst of the economic downmillion to 1.2 million people to the norththis region can be attributed to robust turn than other CRE asset classes like east (+1.95 percent) and midwest (+1.80 California markets like San Francisco, Los lodging. As a result, annualized multipercent) population counts over the same Angeles and Riverside, where skyrocketfamily NOI dipped by the second-lowest time period. ing rent and home prices have contributed amount among all major property sectors In terms of multifamily perforto major issues in available housing and in 2009. Annual growth rates exceeded affordability. the 5 percent mark between 2011 and 2012 T:9.5” mance among the 20 largest metropolitan areas by population size, the The Mountain (Arizona, Colorado, and peaked at 6.64 percent in 2015. NOI

Miami- Fort Lauderdale, Dallas-Fort Worth, and Washington, D.C., markets lead the pack with growth indexes between 189 and 207 for the 2004 to 2017 time period. All three metro areas boast stable demand and property fundamentals, aided by booming population growth, healthy job markets, and persistent investment interest. The Chicago, Seattle and Los Angeles MSAs follow closely behind with indexes all above 175 as the thriving tech scenes in those cities continue to draw millennials seeking low-maintenance housing options in close proximity to urban amenities. Looking at the multifamily sector broken out by subtype classification, apartments that fall under the mid- to high-rise housing category topped the NOI performance rankings with a growth index of 162 over the time frame that was analyzed. Specialized living accommodations, such as those constructed to meet senior and student housing needs, logged the lowest year-over-year NOI gains since they are heavily impacted by supply-side headwinds and cyclical fluctuations in demand. Catherine Liu is a research analyst at Trepp.

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FINANCE

Checking if CLOs Are A-OK CLOs are financing an astonishing volume of bridge debt. But has securitizing shortterm mortgages become any safer since the big bad pre-Great Recession days? By Mack Burke and Matt Grossman | Illustration by William Brown

E

verything under the sun.” That’s the phrase Missy Dolski used when she recalled the smorgasbord of commercial real estate loans that issuers poured into pre-crisis collateralized debt obligations (CDOs), a highrisk brand of financing that collapsed with the credit crunch of 2008. “Mezzanine, construction debt and other lower-in-the-stack bonds” were all in the CDO mix, the Värde Partners director recalled, and ravenous investors, as well the three major rating agencies, were happy to play along. It turns out that a lot of the loans that were packaged in CDOs were bad. Toxically bad. Sink the economy bad. They contained many of the high-risk mortgages and debt that, in retrospect, never should have been approved and when the financial crisis hit 10 years ago, trade in CDOs melted down completely. That is part of the reason why Collateralized Loan Obligations (CLOs), which are the more tightly regulated, higher-quality successor to CDOs, have drawn some uncomfortable comparisons to their pre-crisis ancestor. Proponents and detractors argue over how much the new instruments have evolved, but one fact is clear: CRE CLO financing has taken the transitional financing market by storm. Through the first nine months of 2018, issuers brought $9.9 billion worth of CRE CLOs to investors—a 29 percent increase over all 12 months of 2017, according to data from Kroll Bond Rating Agency In the last 18 months, Värde has been just one of the issuers in the ring. For an example 42 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

of the lift that a sponsor’s business plan might call for, look to a loan Värde made as part of its VMC Finance 2018-FL2 deal, which closed in October and securitized $462.3 million of transitional debt. The deal’s second-largest loan, a $56 million mortgage on a San Antonio, Texas, office complex, looks ambitious at first blush. The building is 82 percent occupied, and its sponsor, developer J. Richard Rodriguez, aims to raise rents at the 663,000-square-foot property as it increases occupancy to about 90 percent. And that’s with two of the building’s three largest leases set to expire in summer 2019, in a sub-par office submarket with vacancies just below 18 percent. (Rodriguez’s firm, Brass Professional, did not respond to an inquiry by press time.) The loan exemplifies the more conservative standards to which rating agencies and investors have held with issuers like Värde. Fitch Ratings, which analyzed the deal, noted that Rodriguez is an industry veteran who has worked successfully in San Antonio for 30 years. And in its financial modeling of the deal, Fitch refused to assume the success of Rodriguez’s plan for the building, instead granting him credit for the building’s value on an as-is basis. By those metrics, the loan came to Rodriguez at a debt-to-value ratio of 70.9 percent and a debt-service coverage ratio of 1.26—basically in line with the more generous end of what a borrower could expect from a traditional commercial mortgage-backed securities financing. On the other hand, Rodriguez signed up to pay a fixed interest of 7.5 percent on the three-year loan, several

hundred basis points higher than what a CMBS borrower would owe. CRE CLOs are proving to be a non-recourse financing source that serves a distinct purpose in the marketplace, solving the capacity issue around balance sheet financing. As an added bonus, when the market is functioning well, a CRE CLO is an accretive form of financing that complements warehouse financing lines nicely. The sector continues to fight off comparisons to murky, pre-crisis CDOs but issuers with whom CO spoke said there’s a clear distinction. Before the financial crisis, “a lot of those [CDO] deals were done for arbitrage,” said a CLO issuer at a prominent bank who declined to speak on the record. “Even the very bottom piece of those structures was sold—or, at most, a much thinner piece was held.” Today’s CLOs—which include only senior debt—are considerably less dicey than CDOs used to be, when a hodgepodge of riskier debt existed within the bonds. Now, it’s been left to investors to decide: Are they safe enough? When investment firm Insight Investment Management has its introductory meetings with CRE CLO managers, Richard Talmadge, a senior analyst there, said his firm spends nearly the entire meeting discussing the issuer’s “philosophy and originations approach” and deciphering the issuer’s motivation. “How aligned are [issuers] with our interest?” Talmadge said he asks himself. “It often comes down to the notion of—will that individual manager—the face of the CRE CLOissuing vehicle or the fund that’s bringing the transaction—lose [his or her] job if that

ship sinks?” Talmadge added that he worries issuers might be quick to abandon the space if deals go sideways. “All too often, you have much bigger entities [in play], where it’s too easy for them to slip into the debt world and then slip out into maybe the equity world when things go south on the debt side. Not that we want to see any harm come to them, but


if our deal is failing, we want them to feel pain—individually.” But if every financing’s terms are a gentle tug-of-war between lender and borrower, CLO arrangements have trended in the borrowers’ favor of late as a glut of capital spurs competition among financiers. Stressed loan-to-value ratios determined by KBRA—an estimate for how debt burdens would compare to property

values during times of adversity—rose sharply over the course of 2018, reaching a rolling average of 127.9 percent, up from 118.6 percent at the beginning of 2017. That trend indicates lenders have been more generous with loan proceeds. Likewise, CLO spreads have condensed as lenders have competed to bring borrowers transitional funding at a lower cost. As of the

third quarter, typical CLO loans were closing, on average, at 439 basis points (bps) above Libor, compared with 480 bps last year. Still, issuers emphasize that when it’s time to underwrite a loan, they insist on toeing the line. Daniel Vinson, the head of CMBS structured finance at Barclays—a significant CLO issuer—outlined the credit window that his and other firms have focused on.

“Ninety-five percent to 99 percent of these loans are floating-rate, generally with an initial term of two to three years, with two or three one-year extension options,” Vinson said. “They tend not to be ready for [long-term] conduit financing, perhaps because they’ve lost a tenant, or the sponsor is repositioning.” With interest rates on the rise, shorter-term debt with flexible rates is just what investors

COMMERCIALOBSERVER.COM |  DECEMBER 4, 2018 | 43


COURTESY COSTAR GROUP

FINANCE

CLO STORY, BRO: The Downtown Brooklyn office building at 180 Livingston Street is a part of the $932.4 million TRTX 2018-FL1 and the $1 billion TRTX 2018-FL2 CRE CLO transactions, which were issued by TPG Real Estate Finance Trust in February and November, respectively. The first deal marked the second largest CRE CLO to be issued post crisis and included 26 mortgages secured by 63 properties. want to see, according to Talmadge. “To be exposed to a stabilized commercial mortgage product that you’d find in the conduit world really means that you’re exposed to a one-way trade—which is that rising rates translate into lower valuations,” he said. The transitional debt in CLOs trades at higher interest rates that can float higher yet if benchmarks like Libor drift upwards—just the ticket for a large investment firm like Insight these days. “The upside-downside risk is more balanced in a commercial real estate CLO loan than it would be in a stabilized CMBS conduit loan,” Talmadge explained. Greystone & Co. has been one of the beneficiaries of that trend. A booming economy has brought a plethora of construction completions that need to be bridged to permanent financing in recent years, which has left lenders like Jeff Baevsky, a senior managing director at the firm, swimming in loans to pool into CLOs. “Greystone’s bridge line is up 150 percent from last year, and we’re looking to double the size of our portfolio over the next two years,” Baevsky said. “We’ve always seen more opportunity in the space than we can lend against as an institution.” And investors’ appetite to acquire stakes in precisely that sort of debt has had no trouble keeping pace. “A lot of institutional investors are looking for short- to medium-term investment paper,” Baevsky said. “You want to invest in a security that can go up with rates, and [CLOs are] a Liborbased investment-grade opportunity for the investors.” 44 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

Issuers of the transactions are quick to point out that the current crop of CRE CLOs reflect a much soberer approach to securitizing transitional loans than their pre-crisis CDO predecessor. For one thing, the market has found issuers’ behavior more encouraging this time around, because the institutions behind CLOs have shown a greater propensity to keep skin in the game. For both regulatory and reputational reasons, risk retention has become a watchword. And Talmadge, a veteran of Fitch Ratings, has so far found the work of ratings agencies sturdy and vigilant from the investor perspective. After all, he is one their analysis is meant to protect. “I think the ratings agencies have generally been responsible players in the rollout and expansion in the commercial real estate CLO space,” Talmadge said, adding that the inclusion of Fitch and Kroll to the duo that cornered the sector before the financial crisis, S&P and Moody’s, has inspired positive innovations in the industry’s ratings guidelines. Pre-crisis CDO issuers wanted the debt off their balance sheets fast, eyeing quick profits by trading on the difference in their capital costs and the higher returns that securities investors rewarded them. “Now, [issuers] generally hold everything below investment grade, which means they’re holding about 20 percent,” the CLO issuer who spoke to Commercial Observer noted. “If

they’re retaining the bottom and it’s a substantial piece, it’s a true financing. That’s the big difference.” The transaction parties have also been paying much closer attention to how each loan pans out over the lifespan of the CLO. “Whether you’re the lender or the servicer, the surveillance process is much more intense,” Vinson said. “When you start to see a property’s development deviate from what the business plan suggests, that could trigger conversations with the borrower, and sometimes more.” Dolski, the director at Värde, said that the company’s insistence on strong underwriting goes directly to the value of its reputation. “I think the investor reception to the Värde name was very positive,” she said of the firm’s most recent transaction, a $462 million deal that securitized 25 loans on 27 properties. “We were very happy with the execution, and I think it speaks a lot to the platform.” Issuer reputation is crucial to Greystone as well, Baevsky said, noting that investors’ hunger for its multifamily CLOs in particular has allowed the lender to structure the deals on its own terms. “We’ve basically said, if you want my product, you’re going to have to invest with me through an actively managed structure,” Baevsky said. Investors are willing to go along because “they have a good idea of what we’re investing in.” Issuers, of course, are happy to cheerlead for the sector, but


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46 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

QUEENS HIGH FLUSH: On Nov. 29, TPG announced the closing of TRTX 2018-FL2, which houses 21-00 49th Avenue (pictured), in Queens. The deal includes 24-month re-investment period; $795.1 million of bonds were placed with third party institutional investors.

COURTESY COSTAR GROUP

the investors who meet them across the table realize that a modicum of caution is in order. The amount of money chasing short-term real estate debt is unprecedented, Talmadge realizes, which forces him to consider whether it could dry up again, leaving CLO borrowers in the lurch when it comes time for refinancings they’d counted on landing. In particular, Talmadge said, in any upcycle, issuers might attempt to push a structured vehicle beyond its capabilities. “I think one thing we haven’t particularly liked is the level of modifications that we’re beginning to see built into some of these transactions,” he said, referring to a growing volume of managed deals that issuers can modify even after investors have bought the securities. He said the trend “has given increasing latitude to [issuers] to do as they see fit, which may not always be in the best interest of the bondholders. It may, [however], very well be in the best interest of maintaining an originations relationship.” Insight’s Melissa Niu, who works in structured finance at the firm, listed a couple modifications the firm has observed that it finds worrisome: “There are things like a longer re-investment period that issuers are asking for. Things like, can they sell risk credits to their affiliates; and [what are] the requirements around that? How much cushion [do] they want? Some are structured very tight, like a 1 percent cushion and some are pretty wide at like 6 percent and above.” Far from abdicating issuers of responsibility, though, questions like those make it more incumbent on CLO lenders to develop a strong underwriting brand. “Certainly, sponsor matters more than it would with respect to a stabilized loan,” Barclays’ Vinson said. “You want them to have some experience in transitional properties where they’ve proved they’ve been able to execute.” Talmadge said that “maybe a sponsor might not hit the price point they initially planned, but I think there’s an expectation that as we’re all doing our underwriting—and I’m assuming that discipline is remaining within these transactions—that it will let through the right amount of deals that have the right real estate and the right markets.” Dolski acknowledged that not all CLO loans are created equal. “There’s a wide range of what I’ll call ‘lift’ in some of these business plans. Some of them are much more transitional in nature than others,” Dolski said. “We’re very much basis-focused and focused on the downside. How much downside in cash flow and how much movement in cap rates can a piece of real estate like this withstand while we still get paid back?” Similar to Fitch’s approach to Värde’s VMC Finance 2018-FL2 deal, Kroll granted an evaluation of a loan on relatively conservative terms with the Hilton Canopy hotel in Portland, Ore.’s Pearl District neighborhood. That property’s five-year, $25 million loan, the third-largest in a CLO issued last month by New York City-based ORIX corporation, is intended to tide the newly developed property over until its up and thriving. Since it opened over the summer, it charged average daily room rates in line with other Portland hotels, but its occupancy has been just above 50 percent—well below the market average of 83 percent. Today, cash flow is $3.2 million, a number the owners—a trio of local investors—say will improve by nearly two-fifths to $4.4 million when the hotel is stabilized. Kroll gave the hotel credit for a cash flow of just $3.3 million at stabilization—just 4 percent above the current level. One challenge for rating agencies plying the waters of the CMBS market is how to deal with actively managed CLOs, which, unlike their static counterparts, can evolve significantly over time as issuers add new loans to replace landlords who may have paid off their debt early. Through this cycle, issuers and rating agencies have made significant progress in keeping a close eye on how those changes affect deals’ creditworthiness. “We have 39 different eligibility criteria,” Baevsky said of Greystone’s process for adding new loans to its active deals. “One of them is that the loan I’m putting in is rated by the rating agency, and they’ve given a no-downgrade letter.” On a recent multifamily CLO, for instance, Baevsky said that Greystone had

already turned over about 50 percent of the portfolio. “After a while, [the rating agencies] kind of get what a Greystone bridge loan looks like. It makes their life a little bit easier.” Of course, a key question remains whether CLOs will fare significantly better than CDOs should the music suddenly stop. Late last month, the major U.S. stock market indexes dipped into correction territory, and concerns about trade wars and energy prices reinforced the notion that business cycles don’t last forever. “I don’t think we want to be buying into a transitional property at the height of 2007, or the equivalent [play],” Insight’s Talmadge said. “So, I think we definitely bought some extra innings with this most recent fiscal stimulus package that we saw here in the U.S.” He added: “Just the fact that new dollars are going into a lot of these transitional product puts it in a much better position than a lot of competing product out there. And that’s true whether

it’s office, retail or multifamily. A key message from this is: if you aren’t constantly refreshing that asset with new dollars, then you’re putting yourself in a weakened position against that competitive product.” “I do think there’s decent structure within the CLOs such that investors should feel pretty comfortable about being made whole in a downturn scenario,” Dolski said. Still, the Värde executive added that her company’s risk-retention participation—a crucial difference from the tawdry tale of CDOs—is an important way to prove it’s willing to bet on itself. “We wrote the loans, so clearly we have a lot of conviction in the business plans,” she said. Talmadge set the terms out starkly. “You are observing now a wall of money that’s unlike anything we’ve seen historically in the space,” he said. “It perhaps raises a fair question: ‘Is that wall of money here to stay, or is it really just hot money that’s found a home?’ ”


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Can’t Win ‘Em Mall

Once a natural fit for Class-C and -D retail assets, CMBS is getting far pickier as sector labors By Mack Burke

MIAMI VICE: A shot of the interior of the $538 million Aventura Mall, a sprawling Class-A super regional center in Miami. It’s split among six CMBS conduits, which analysts say creates a significant amount of exposure that could maybe prove troublesome.

JEFFREY GREENBERG/UIG VIA GETTY IMAGES

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he retail sector might have high hopes for the holiday season, but that doesn’t mean it’s garnering the same enthusiasm from the commercial mortgage-backed securities market. Retail CMBS is floundering, and bondholders aren’t necessarily looking to make bets on lower-grade—Class-B, -C and -D—regional malls, which have mostly been expelled from the CMBS world; even Class-A malls aren’t considered a sure bet. “Irrespective of competition, retail investors want less than 30 percent retail [inside a conduit],” one CMBS issuer from a major investment bank who declined to be named, told Commercial Observer. “If it’s [a higher share of the loan pool], it might trade [at a] wider [spread]. They’re focused on the composition. They wouldn’t want three malls [in a conduit], even if one mall is a [Class-A]. I think two might be more than people want at this point.” The doom and gloom storylines of brickand-mortar retail that follow the bankruptcies and store closures of once celebrated anchor tenants such as Sears and Toys “R” Us, coupled with the continued insurgency of Amazon, online shopping and delivery services has CMBS issuers dramatically shifting focus. The bankruptcy of Toys “R” Us alone threatened $3.6 billion in CMBS, while the Bon-Ton stores’ closures imperiled more than a dozen CMBS deals. Matthew Masso, the head of commercial real estate finance at Credit Suisse, said that it was only a few years ago that 35 to 40 percent of CMBS conduits sported retail properties, attributing the current retail financing pullback to the lack of issuance at the height of the financial crisis in 2008 to 2009. “You don’t have that natural refinance rollout 10 years later,” he said. Still, investor aversion to regional malls is prominent. In October, the percentage of retail-backed CMBS loans that were 30 or more days delinquent climbed 38 basis points

to 5.39 percent from September, according to a November report from Trepp. In the second quarter of 2018, 106 loans liquidated during those three months contributed to an average loss severity of just under 67 percent, up significantly from 39.1 percent for the 100 loans liquidated in the first quarter, according to a second quarter report from Moody’s. Of the 106 loans liquidated, Tarentum, Pa.’s Galleria at Pittsburgh Mills, a sprawling enclosed shopping mall securitized through Morgan Stanley Capital I Trust, 2007HQ11, registered a $149.1 million loss; that’s 112 percent of the loan’s original $133 million securitized balance. To make matters worse, retail-backed CMBS loans make up the largest group of loans currently in special servicing—just under 40 percent, according to a November J.P. Morgan Chase CMBS trend report. In aggregate, retail-backed CMBS in special servicing carries a sizable balance of $7 billion across 492 loans. Overall on the year in October, U.S. CMBS delinquency moved down an average of 179 basis points as other sectors such as lodging and hospitality, multifamily and industrial—helped by the growing wave of e-commerce—have progressively performed better. Retail investment interest lies mostly with neighborhood shopping centers and grocery-anchored outposts or assets with ties to ancillary entertainment offerings. “I think the traditional neighborhood shopping centers are being done no problem— with grocery, pharmacy, or even otherwise,” a second executive at a prominent CMBS issuer told CO. “The leverage is slightly lower than [a few years ago], so instead of max 75 [loan-to-value], you’re looking at 65 to 70 percent.” So, how would lower-grade malls obtain CMBS financing? The CMBS issuer executive said the mostly likely route would be through an acquisition rather than a costly refinance. “I think it would take a sale of the asset, with

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WOE IS ME: Christiana Mall in Newark, Del. (above) Despite positive trend in retail and food services sales year-over-year, the percentage of retail-backed CMBS in conduits is trending downward. In the second quarter, 106 loans were liquidated, contributing to an average loss severity of 67 percent. And, retail-backed CMBS makes up the largest portion of loans currently in special servicing. new cash equity coming in or a large cash refinance from an existing sponsor,” he said. “If they pay down debt by 25 percent and get cash on a refinance, it can be done, but a direct refinance or cash-out for lower-end malls can’t be done right now. But unless you have a new acquisition and someone could come in and put up 30 to 35 percent cash equity, it’s not trading.” Even notes on the larger, relatively more impregnable and Class-A regional malls such as the Aventura Mall, a popular super regional outpost in Miami, or the Christiana Mall in Newark, Del., are split among a range of CMBS conduits, which has created “a lot of exposure,” according to Robert Grenda, a senior vice president of CMBS ratings analytics at Morningstar Credit Ratings. He cited the $538 million Aventura Mall, which is split among six conduits, and the Christiana Mall as examples. “Loans that have multiple A-notes—and 50 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

typically for properties like those—a portion will go into a single-asset, single-borrower transaction, but pieces of A-notes are going into conduits,” Grenda said. “But, most of the malls we’re seeing are relatively good quality, although we don’t see too many B or B- assets. Any prudent investor will be careful with B quality malls in areas where demographics might not be best.” Retail dominant conduit deals are still getting done. On Nov. 29, Bank of America closed on its $1.1 billion BANK 2018-BNK15 CMBS transaction, a conduit deal using vertical risk retention that comprises 67 loans secured by 126 properties, just under 46 percent of which is retail. But the pool of retail properties includes just two malls, one being a $100 million note on the Aventura Mall, and the other a $20 million balance on the Plaza Frontenac, a two-story enclosed mall located across the street from the St. Louis County Library in a suburb of St.

Louis. Analysts told CO that they pay attention to sales—U.S. retail and food services sales in October picked up slightly and are up 4.6 percent on the year, according to Census Bureau Statistics—and that there’s still concern over department store anchors creating stress on cash flows as well as the relatively hefty cost of malls with interior corridors. The feeling remains that customers want to see their food products before they buy them, which is good news for those grocery-anchored retail assets. Considering the use of online food delivery services is steadily on the rise, albeit slowly, it could still have long term impacts on the performance of those assets. “We haven’t seen any material decreases in sales in grocery-anchored centers yet,” the second CMBS issuer said. “Grocers are trying figure out the mix of delivery and brick and mortar, while still relying on brick and mortar, but the bigger theme on neighborhood

shopping centers is that the space is more fungible than a mall.” He added, “Shopping centers have more competition and rents are much more reasonable. Five thousand square feet may be had at $15 per square foot, whereas a regional mall may cost double that just because of the inclusion of parking and the cost of the interior corridors. Rents are higher, which means there are fewer tenants that can afford that rate; there are more local tenants that can afford the rents for $15 per square foot…like nail salons.” So what becomes of retail CMBS? “I don’t think retail properties securitized in conduits and fusion CMBS is going to change much,” Grenda said. “They typically house office and retail, but you might see more multifamily properties show up and it’s not uncommon to see a sizable component of industrial properties; hotels also have a sizable component as well.”


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CMBS and CRE CLOs 2019

The rating agencies’ predictions By Cathy Cunningham | Illustration by Kevin Fales

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ast year’s commercial mortgage-backed securities (CMBS) issuance total surpassed many industry participants’ expectations, topping out at $95.3 billion compared with $76 billion in 2016. This year has undoubtedly been another year of heightened competition between financing sources, so, has CMBS held its own, and what are the issuance expectations for 2019? We asked rating agency executives to weigh in and also opine on whether or not the booming commercial real estate collateralized loan obligation (CLO) sector—on track to almost double in size compared with 2017—can keep its pace.

the potential to reverse course if the economy sputters. Additionally, new office construction will contribute to higher vacancies and minimal effective rent growth.

Fitch Ratings

DBRS

Huxley Somerville, Head of North American CMBS, and Zanda Lynn, Head of CMBS Business Development

Erin Stafford, Managing Director and Head of North American CMBS

What were the key CMBS trends in 2018? Did anything surprise you? HS: CMBS performance has been what we expected this past year: stable overall with pockets of concern. We expect more of the same in 2019. Retail remains the most problematic of CMBS property types with Fitch placing a negative rating outlook on many lower-rated tranches of retail-heavy deals. These tranches will be tested as the loans approach maturity. We are also focused on multifamily and hotel properties, both of which are at performance peaks and have

Huxley Somerville.

Zanda Lynn.

What are your predictions in terms of 2019 CMBS and CLO issuance, and what will be the key drivers of that issuance? ZL: We project approximately $90 billion in non-agency CMBS issuance for 2019, which is in line with 2018 levels. That said, conduit issuance may decrease due to lower maturing volume and competition from other lending sources. Additionally, CRE CLO issuance will increase based on demand for floating-rate paper.

What were the key CMBS trends in 2018? Did anything surprise you? CMBS issuance in 2018 was slightly down in 2018, which was consistent with expectations at the beginning of the year. However, the market saw Single-Asset Single-Borrower (SASB) issuance overtake conduit as volume of the latter pulled back, which was a surprise. Although bankruptcy filings by large retailers were in the headlines, the CMBS default rate continued to push lower. While this is somewhat counterintuitive, the strength of the economy continues to keep most properties above water, for now. Another area that ran counter to expectations was that originations of loans on regional malls ticked a bit higher as the market becomes more comfortable in drawing a line between tier-1 properties that have lower near-term risk versus lower quality assets. What are your predictions in terms of 2019 CMBS issuance and what will be the key drivers of that issuance?

Indications from originators point toward a slower start in 2019 for conduit, but that should end up tracking 2018 volume to slightly lower. Conduit volume remains low due to intense competition in 10-year fixed-rate product at a 60 percent-65 percent leverage point. If conduit lenders adjust standards to accommodate increased leverage, borrowers may favor CMBS compared to other lending products. The trend of increasing rates will continue in 2019. This may push some borrowers to eschew shorter-term floating

Erin Stafford. rate loans and try and lock in long-term fixed rate debt. However, two factors may push conduit originations lower. The sharp reduction in lending in 2009 means that the volume of loans needed refinancing will be lower. In addition, the trend of rising interest rates may dampen acquisition volume as borrowers reduce expectations for real returns going forward. Agency issuance should remain flat year-over-year. Trends have pointed to an improvement in the national homeownership rate; but rising interest rates will continue to reduce affordability in this sector, making renting the best option for many Americans. SASB issuance is at an all-time high as a percentage of issuance; however, much of the gain was in larger floating-rate refinance transactions driven by spread compression and M&A activity such as Brookfield’s recent acquisitions.

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It is uncertain whether these trends will continue going into 2019; but DBRS does not expect higher levels of SASB issuance next year.” What can we expect in terms of CLO issuance volume in 2019? There will likely be increased issuance in the CRE CLO space in 2019; but this may also come with increased risk. The large number of new entrants in the transitional space has significantly increased competition for loans. This is analogous to 2015 in the conduit space when the volume of lenders was more than 40, which significantly increased competition for loans and raised investors’ concerns about underwriting quality. While banks may retreat from transitional lending as a result of the capital requirements that they must hold, these new lenders are rapidly filling the gap. At the same time, borrowers may be taking on additional risk in order to generate similar returns as in the past. Toward the end of 2018, the market saw more loans that have higher execution risk, including construction risk. This trend may continue into 2019. There is increasing concern among market participants about a ‘race to the bottom’ with regard to credit standards, especially by new lenders seeking to establish a foothold.

Kroll Bond Rating Agency Larry Kay, Senior Director of CMBS Surveillance What were the key CMBS trends in 2018? Did anything surprise you? The underlying convention is that when the Federal Reserve’s monetary policy becomes less accommodating, it’s a sign of a strong economy that could withstand some liquidity contraction. Although, the Fed’s rate increases do not appear to have had a meaningful impact on the economy, it does seem to be influencing investor and borrower preference for CMBS shorter-term, floating-rate debt. While the desire for floating-rate paper did not surprise us, the extent of it did. We thought more borrowers may have wanted to lock in rates considering their recent upward movement, hints of higher inflation and property prices that appear to be nearing a peak. Of the single borrower deals year-to-date November 2018, 76 percent of it consisted of floating-rate paper compared to 57 percent in 2017. The preference change could be due to that with increased market volatility and rising interest rates, a shorter time horizon is desirable to gauge the economic and commercial real estate climate. We also saw a rise in interest-only loans with full-term interest-only loans leading the charge, as well as KBRA’s capitalization rate which increased to 9.36 percent from 9.23 percent in 2017. Year-to-date, the average proportion of loans secured by assets situated in secondary and tertiary market exposure rose by 570 and 70 basis points, respectively, which likely influenced the 54 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

rate increase. What are your predictions in terms of 2019 CMBS issuance? We expect that single-borrower (SB) deals will be relatively in line with the low end of our current 2018 forecast of $35-40 billion,

Larry Kay. but conduits will experience a year-over-year decline again in the coming year to $30 billion from our 2018 forecast range of $35 billion to $40 billion. Some of the key drivers for SB issuance in 2019, we believe are similar to those in 2018 including the desire to participate in trophy properties, and a single or few assets which enables investors to better understand the quality of the collateral. In addition, investors may also want SB floating-rate paper to take advantage of rising rates/yield, as well as shorter duration periods which are less sensitive to interest rate increases, potentially limiting bond price declines. We expect conduit issuance to decline in 2019 due to fewer loan maturities, a competitive lending environment, and a continued rise in the ten-year treasury rate which could further dampen the attractiveness of loan refinancings. What can we expect in terms of CLO issuance volume in 2019? ? Considering the number of lenders that have entered the segment, as well as continued investor demand for higher yielding, floating rate paper, we are projecting that we will continue to see robust CRE CLO issuance in 2019. This year, CRE CLOs are expected to almost double 2017 levels of $7.7 billion to end 2018 at $15 billion. We are forecasting that next year issuance will be fairly flat due to a number of factors including a smaller number of new entrants to the sector, as well as the challenges with sourcing loans, which have experienced declining margins in 2018. The health of the economy and real estate markets will have a strong influence on CRE lending, but probably more so for CRE CLOs since a majority of the collateral securing the loans are on transitional non-stabilized properties.

Morningstar Credit Ratings Kurt Pollem, Managing Director What were the key CMBS trends in 2018, and what were some of the surprises? In our view, one of the key CMBS trends in 2018 was the shift in issuance between conduit/fusion transactions and CRE CLOs. Fixed-rate conduit volume is on track to decrease from 2017, while CRE CLO new

issuance has more than doubled since then. Another key trend in 2018 continues to be property type composition and performance in securitized loan pools, with the spotlight continuing to shine on the retail sector. Driven in part by ongoing retail weakness, especially in shopping centers with exposure to troubled tenants, the volume of servicer watchlist loans continues to grow. And although CMBS retail property performance has been deteriorating, the resilience of the sector has been a surprising trend this year. Larger retail loans that transferred to special servicing during 2018 included a mixture of tenant bankruptcies, such as Bon-Ton department stores and Tops grocery markets, and secondary/tertiary market enclosed malls that had long been expected to default. Countering this have been retailers back-filling the empty space. For example, the list of bidders for Toys “R” Us properties demonstrated that several local chains (Scandinavian Designs and Ollie’s Bargain Outlet, for example) needed space to expand into new markets. Moreover, we were impressed by the short lease-up time for many vacated retail spaces. What are the prospects for CMBS issuance in 2019? Conduit fusion transaction volume will likely continue to level off or even decline into 2019, influenced in part by low refinance activity. CMBS lenders still face strong competition—not only from each other but also from both traditional balance sheet lenders, such as banks and life insurance companies, and now the growing nonbank real estate finance businesses. As interest rates have been rising, there has been mounting debate as to whether rising borrowing costs

Kurt Pollem. will slow new issuance. However, the greater threat might be a slowdown in U.S. economic growth. A growing chorus of market participants are wondering not if but when the U.S. economy will slow, filtering down to commercial real estate. Single-asset or single-borrower volume has been robust in 2018, stimulated by acquisition activity. Because commercial property sales activity has slowed, 2019 SASB issuance may not match this year’s numbers. Overall, CMBS private label issuance may drop below 2018 totals, reaching only $70 billion in 2019. What can we expect in terms of CRE CLO issuance volume in 2019, and what’s driving the market’s expansion?

Barring any surprise credit market disruptions, we anticipate next year’s CRE CLO issuance to meet or exceed 2018’s volume, putting it at about $25 billion in 2019. The fundamentals behind the growth in CLOs remain positive. A volatile and rising interest rate environment creates sustained demand from investors for floating rate, short duration paper that still offers a yield increase over traditional CMBS. Typical corporate CLO buyers may also find CRE CLOs attractive from a relative-value basis and for diversification of their existing portfolios. From the issuers’ perspective, CLOs offer another financing vehicle for their transitional loan business outside of traditional credit lines and repo facilities, with competitive pricing that allows for match-term financing as well. Fueling the entire CLO machine are borrowers’ appetites for bridge loans, as they opportunistically acquire properties with plans to increase net operating income and value over a short-term holding period.

S&P Global Ratings James Manzi, Senior Director of Structured Finance Research What were the key CMBS trends in 2018? Did anything surprise you? We expect $75 billion to $80 billion in U.S. CMBS issuance for 2019, roughly flat yearover-year compared with 2018. Economic growth and stable fundamentals should support that level of issuance, as there isn’t much in the way of maturing volume to speak of. We expect the single borrower sector to account for about half of the volume again next year, as it did in 2018, up from roughly 40 percent in 2017 and 30 percent in 2016. The level of growth of the single borrower sector over the past few years came as somewhat of a surprise, especially for those of us who have been around since the [2000s], when it was a much smaller percentage of issuance! Market dynamics will continue to drive the decision to either include pari passu pieces of larger loans in conduits, or not. What are your predictions in terms of 2019 CMBS issuance? Credit trends we’re watching include the ongoing evolution of retailers’ business models, single-tenant suburban office exposures, and the length of the hotel market cycle—as occupancy is at a historical peak, supply is increasing, and revenue growth is slowing in some locations. Overall, however, we believe that CRE sector fundamentals remain generally stable, and absent a considerable external shock, rating activity should continue to remain stable in 2019. What can we expect in terms of CRE CLO issuance volume in 2019? What’s driving the market’s expansion? CRE CLOs should be flat to slightly up in 2019, in our view.


THE SIT-DOWN

An International Affair Natixis’ Emmanuel Verhoosel and Greg Murphy are busy connecting capital all over the world

By Cathy Cunningham | Photographs by Sasha Maslov

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ommercial real estate isn’t just a relationship industry, it’s an increasingly global business. From an uptick in foreign investment in U.S. capital stacks to overseas buyers eyeing domestic assets, having boots on the ground as a lender while also having the ability to reach investors in each corner of the globe is key. And Natixis has a new chief facilitating that capital flow. Emmanuel Verhoosel took the reins as the French bank’s new global head of real estate in September and—as the year draws to a busy close—he has been hitting the ground running. Previously, Verhoosel was the head of commercial banking for ING Bank Belgium, and before that its head of real estate for the U.S., U.K. and Western Europe. He therefore brings extensive international experience to the table. Verhoosel visited New York in November to further familiarize himself with Natixis’ U.S. pipeline (which totals $3 billion over the next two quarters). The bank expects to grow its U.S. real estate originations 30 percent year-overyear and—with one foot firmly in the CMBS sector—it’s also busy tackling borrower issues around the financing source as it goes. While he was in town, Verhoosel and Greg Murphy, the head of real estate finance Americas, sat down with Commercial Observer for an exclusive interview. Both are fathers of three; Verhoosel resides in Paris and Murphy in Cobble Hill, Brooklyn. They declined to share their ages.   Commercial Observer: Congratulations on your new role, Emmanuel.  How does U.S. real estate fit into Natixis’ global strategy? Emmanuel Verhoosel: Thank you! The bank has decided to focus on four sectors: The first is infrastructure, the second is aviation, the third

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is energy and commodities and the fourth is real estate. As far as what we are doing here in the U.S., that means growing our financing capability—which includes M&A, equity capital markets and debt capital markets—into a sectorial capability around the world. Obviously not everywhere, but in the countries where we’re strongest as a bank. So, the real estate sector focus is a key strategy of the bank. Describe the evolution of Natixis’ lending platform in the U.S. How has it evolved over the past five years or so? Greg Murphy: We’ve certainly grown a lot. Over the past five or six years, we’ve doubled the team size—we’re effectively over 50 professionals now—and we’ve probably quadrupled our transaction volumes over that period, too. I’d say we’ve had steady growth over the past couple of years in particular as we’ve had increased focus on the international side of the business— whether it’s finding lending capital to deploy here in the U.S. or having more touch points with foreign borrowers who are investing here.   What continues to drive foreign capital to U.S. real estate?   GM: I think the statistics would back this up, but real estate is becoming more and more international and the U.S. real estate market has really become a repository of safe capital and part of a lot of foreign investors’ strategies. EV: What we’ve seen lately is that the flow of capital—whether in investment in equity or debt—is an international arbitrage that is being done with pockets of capital chasing product according to macroeconomic events, which are not always linked to real estate. This means that you have pockets of Korean money investing in the U.S. while another location will have

a different pocket of money chasing it. So, the capital is moving around. As a bank our distinctive feature is that we have the expertise on the ground in the U.S., in Europe and in Asia. Greg, you said on a CO panel recently that you’re seeing a lot more foreign capital interested in investing in U.S. debt. Where is this capital primarily coming from? GM: We’ve had people come into our transactions from Korea, Japan, China, Taiwan, Singapore, Israel and Europe. There have been waves from different places. I think last year there was perhaps more Korean interest in mezzanine debt and this year we’re seeing domestic investors fill that part of the capital stack. I think, as Emmanuel just said, capital flows for macroeconomic reasons that we don’t necessarily know; it moves in and out and we need to be ready to quickly take advantage of this capital flow and help it go where it wants to go. We’re [a sizable but still] mid-sized big bank so I think we’re able to be a bit nimbler as a result of that. It’s not like we have to work through a complex web of a huge investment bank.   So you’re a flatter organization as a midsized big bank? EV: In real estate finance we are active across the board, including development. When we have a good opportunity to serve clients and the deal makes sense for us there are less conditions imposed by the bank. Mid-sized banks are less procedural in that sense. The second aspect is we need agility. It’s key in today’s market—the agility to react to a situation quickly. We spoke about the ability to capture capital flow in order to serve clients and it’s also true for opportunities. So even if we’re talking about a new asset class in a different part of the world, we can


Emmanuel Verhoosel (standing) and Greg Murphy (seated). |

COMMERCIALOBSERVER.COM | DECEMBER 4, 2018   57


THE SIT-DOWN

mobilize the troops quite quickly. Agility is a strength that debt funds typically boast, while banks have the reputation of being slower-moving. Is Natixis straddling both the traditional and alternative lending worlds in a way? GM: I think that’s accurate. We’re able to cover a broad array of the real estate market because we bring in capital to be partners with us, whether it’s funds or developers who are also investing in mezzanine or subordinated debt. We have very strong partnerships with quite a number of investors that are higher up in the capital stack or have certain specialties themselves, whether it’s an office or hospitality property.   So you’re able to speak to every part of the capital stack when you execute a deal. GM: That’s exactly right. EV: We have the ability to do tailored financing for our clients and to work in situations which are more complex and do not fall directly into the box of what a debt fund can do or what a traditional bank can do. We have this flexibility, which is a competitive edge for sure.   Do you envision the balance sheet or CMBS side of your business being busiest going forward? GM: As a real estate team we’re rather indifferent as to which part of the market we move our clients through. The most important thing is to get the borrower the right solution. We vary pretty dramatically from year to year. I think three years ago we were probably 75 or 80 percent CMBS-oriented. I think this year we might be 50/50 bank-syndicated loans versus loans that require some aspect of securitization. EV: The pattern in Europe is, interestingly, very different. On the CMBS front in Europe there are only 10 deals per year, so the market is very small; the depth of the market is not there on the CMBS front. In Europe it’s a 100 percent bank syndication market and very few mezzanine structuring capabilities exist, but this is coming. So that’s also an advantage of the global franchise that we have. We intend to export more of the structuring solutions we have in the U.S. to Europe. We want to further export the technology developed by Greg, especially on the mezzanine front and that’s one of the next targets in our strategy.   So you’re going to be doing a lot of transatlantic traveling, Greg? GM: Emmanuel will be doing a lot of traveling [laughs].   Will this strategy involve the educating of European investors? GM: That will be part of it. The legal technology will also have to adapt to the various local markets.   What is the reason for the absence of mezzanine debt in Europe? EV: In the European markets, the leverage 58 | DECEMBER 4, 2018 | COMMERCIAL OBSERVER

LA VIE EST BELLE: Verhoosel (left) has hit the ground running as Natixis’ new global head of real estate. With real estate being a core strategy of the French bank, Murphy (right) is leading the charge in the U.S. and expects his team’s originations to increase 30 percent year over year. was not required. So, there was no need to tranche the transaction in the same way as in the U.S. There’s so much liquidity in the market right now with the European Central Bank scheme that there’s fierce competition within the loan markets. On the mezzanine side, borrowers nowadays are quite conservative in terms of leverage, requesting generally around 60 percent. But, you now have U.S. funds developing the mezzanine capability on the debt side—which did not exist in Europe while already existing in the U.S. for a while—so they are hungry for mezzanine pieces, but no one is feeding them in Europe. So, in tranching a transaction and proposing an alternative solution to our clients than a 60 percent loan-to-value senior debt structure, it starts to make sense to the borrower. So that is why the market is shifting in Europe. The demand is there, and we need to create these products and embed them into traditional loan arrangements. It’s slow but it will accelerate in the next year or so, and we want to be ahead of the curve. CMBS servicing in the U.S. has a bad reputation from a customer service

perspective. I was interested to learn that Natixis is tackling this by carving out the controlling class and securitizing the rest, so that the bank can be the one to contact the servicer instead of the borrower. GM: That’s exactly right. The goal is to solve a problem for a client when sometimes that client may not know exactly what his problem is. Some borrowers have an aversion to CMBS and it’s largely because of aftermarket service. I think the servicers have been getting better and better at it, but they’re still very large organizations and it’s hard to get personal service that way. For a few of our clients we’ve been able to tackle that issue by becoming the intermediary between them and the servicer. By holding the piece on our balance sheet that gives us some amount of leverage. It basically gives us a phone call but that can be very, very important. We’ve been able to solve other problems too that are not servicing-related. In some cases, there’s been a need for a future funding, whether that is for capital expenditures or for tenant improvements or leasing commissions—and you can’t really accomplish that within the CMBS market very readily. We’ve been able to hold a piece outside

the trust that then provides the future funding from our balance sheet. How big a part of Natixis’ business will CRE CLOs be going forward? GM: The CLO market has grown a lot and we’ve been growing with it; we’ve been consistently in the market. We have a joint venture with the corporate mid-market CLO group so we’re actively courting clients and have a number already on board.   And how are you immersing yourself in the U.S side of the business, Emmanuel? EV: Two days ago, we went through the U.S. pipeline, which I am discovering as a newcomer, and we have close to $3 billion [in transactions] over the next two quarters. Two thirds are transactions with existing clients. I like that I see the same clients coming back, and often for different asset classes.   Do you expect Natixis’ 2018 U.S .originations to surpass 2017’s total? GM: I think we’re on schedule to surpass it. I’m actually hoping for around 30 percent higher production year-over-year.


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FINANCE

The Takeaway Data courtesy of

In October, the number of mortgages filed with the New York City Department of Finance climbed nearly 37 percent from September’s total as every borough saw a significant uptick in financings. The number of multifamily mortgages filed in October climbed 42 percent compared with the previous month to 582, while financing for industrial assets climbed just over 20 percent. The number of garages financed increased to 78 from 31 in September.

Refinances vs. Purchases The number of refinances and purchases that included financing activity soared in October from the previous month.

835 625

186

274

Top Lenders Signature Bank, the second most active lender in September, nearly doubled its volume in October, outpacing last months leader, New York Community Bank, which cut its volume by over half on the month. J.P. Morgan Chase doubled its volume to 80 mortgages, while Capital One, Citizens Bank, Greystone and Kearny Bank all broke the list after not making the cut in September. BANK

SEP

BANK

OCT

New York Community Bank

63

Signature Bank

111

Signature Bank

61

J.P. Morgan Chase

80

J.P. Morgan Chase

40

Flushing Bank

42

Flushing Bank

25

Capital One

37

New York Commercial Bank

24

New York Community Bank

30

Ridgewood Savings Bank

18

Citizens Bank

29

Dime Community Bank

18

Greystone

27

Cathay Bank

17

Investors Bank

24

Sterling National Bank

15

Kearny Bank

22

TD Bank

15

Dime Community Bank

21

Valley National Bank

14

New York Commercial Bank

19

Investors Bank

13

Cathay Bank

18

Cross River Bank

12

Santander Bank

17

Metropolitan Commercial Bank

12

Sterling National Bank

16

Most Active ZIP Codes—Financing ZIP CODE

SEP OCT

SEP OCT

REFINANCES

PURCHASES

SEP

ZIP CODE

OCT D

Total Sales by Borough Every borough saw a notable uptick in financing activity in October (Staten Island is not tracked).

10027

21

A

11222

27

11222

17

B

11221

23

10033

16

C

11206

23

10014

16

D

10458

21

10457

15

E

10023

19

10009

14

F

10025

19

11216

14

G

11216

18

11220

14

H

11211

18

11207

18

I

438

F

E

374 14T

147 74 85

57

166 96 109

78

Square Mile Capital Management provided a $43 million loan to Acumen Capital Partners to finance 497 Marcy Avenue, a 2,500-squarefoot retail building, and two other parcels in Bedford-Stuyvesant.

HS

A T

H

C

B

G

SEP OCT

SEP OCT

SEP OCT

SEP OCT

SEP OCT

ALL

MAN.

BRONX

KINGS

QUEENS

60 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

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FINANCE

ChartFinance SASB CMBS Momentum Continues, Horizontal Risk Retention Reigns “The CMBS issuance machine has generated a little more than $76 billion in private-label debt through the first 11 months of this year,” wrote Sean Barrie, an analyst at Trepp. “Single-asset, single-borrower [SASB] deals continue to take a bigger piece of the pie as they represent 44.5 percent of the year-to-date total. Conduit issues comprise

45.7 percent of the year-to-date figure. The horizontal risk retention structure remains a preferred option among issuers as 53.8 percent of the year’s deals have priced with that holding. One 2018 highlight is the $2.5 billion BX 2018-IND deal, which is the second-largest private-label transaction to price since the financial crisis.” Source:

Risk Retention Type

Deal Count

Total Balance

Weighted Average Debt Service Coverage Ratio

Weighted Average Loan-to-Value

Horizontal

70

$40,933,337,925

2.20

68.44

Vertical

50

$25,605,958,099

2.47

57.72

L-Shape

10

$9,482,971,466

2.16

57.55

Totals

130

$76,022,267,490

Deal Type

Deal Count

Total Balance

Weighted Average Debt Service Coverage Ratio

Weighted Average Loan-to-Value

Conduit

38

$34,776,097,887

2.07

57.87

Single Asset/Single Borrower

76

$33,808,599,141

2.55

65.18

Large Loan

16

$7,437,570,462

1.61

68.73

10 Largest CMBS Deals Issued in 2018 CMBS Deal

Closing Date

Deal Balance

Weighted Average Debt Service Coverage Ratio

Weighted Average Loan-to-Value

Risk Retention Type

Deal Type

BX 2018-IND

March 30

$2,500,000,000

2.09

64.03

Vertical

SASB

BMARK 2018-B2

Feb. 2

$1,507,013,898

2.36

58.94

Horizontal

Conduit

BX 2018-BIOA

March 15

$1,400,000,000

8.56

51.60

Horizontal

SASB

BANK 2018-BN14

Sept. 27

$1,379,430,107

2.28

53.73

Vertical

Conduit

RETL 2018-RVP

March 27

$1,350,000,000

2.77

57.45

Horizontal

SASB

BBCMS 2018-TALL

March 28

$1,325,000,000

3.22

74.40

Vertical

SASB

BANK 2018-BN10

Feb. 13

$1,287,148,920

2.38

60.52

Vertical

Conduit

BHMS 2018-ATLS

July 26

$1,200,000,000

3.63

48.30

Horizontal

SASB

BMARK 2018-B7

Nov. 28

$1,167,914,680

2.07

57.31

L-Shape

Conduit

BMARK 2018-B1

Jan. 31

$1,166,378,0091

2.41

57.26

L-Shape

Conduit

62 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER


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OUT OF TOWN

Rethinking GSA Properties The General Services Administration is not the tenant it once was— what does that mean for millions of square feet of property?

64 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER


OUT OF TOWN

By Christina Sturdivant-Sani

KAITLYN FLANNAGAN/COMMERCIAL OBSERVER

I

n response to the financial crisis a decade ago, the U.S. government had a simple strategy: spend a lot of money. As a result, the General Services Administration (GSA), which handles most of the federal government’s real estate contracts across the country, received $5.5 billion of American Recovery and Reinvestment Act funds in 2009 to renovate existing federal buildings and build new federal offices, courthouses and land ports across the country, according to records from the agency. “They spent their way out of the recession,” said Lucy Kitchin, a senior vice president in the government investor services group at JLL. “The net result of that was a major expansion in federal leasing in Washington, D.C.” The stimulus package even created entire neighborhoods, she said, such as NoMa, named for its location north of Massachusetts Avenue and home to numerous federal and D.C. government agencies. D.C. alone has approximatively 115 GSA leases today. The region experienced massive growth in GSA leasing between 2008 and 2010. Then, “what we refer to as ‘the hangover’ occurred,” Kitchin continued. By 2011, Congress believed that the GSA leased and owned too much space. This scrutiny led the Obama administration to issue the Freeze the Footprint policy in 2013, which read in part: “On an annual basis, an agency shall not increase the size of its domestic real estate inventory, measured in square footage, for space predominately used for offices and warehouses.” Freeze the Footprint essentially led government agencies to give back vacant space or consolidate into existing federally owned buildings while signing a lot of shortterm lease extensions or renewals, said Matt Lynch, the managing director of Transwestern’s government services group in D.C. The shorter leases allowed agencies to revamp their plans to downsize in the future. Across the country, agencies achieved a 21.4-millionsquare-foot reduction between fiscal years 2012 and 2014, according to data from the Office of Management and Budget (OMB). In 2014 alone, for all domestic-owned building types, the government dispensed with 7,350 buildings—amassing 47 million square feet—and eliminated $17 million in annual operation and maintenance costs. On the heel of this success, the administration issued two more policies in 2015—the National Strategy for the Efficient Use of Real Property and Reduce the Footprint, which required agencies to not only freeze, but reduce, their real estate property footprint over the next several years. As a result, there was an 11.2-million-square-foot reduction in 2016 and a 1.2-million-square-foot decrease in 2017 nationwide, according to OMB and GSA data. In the D.C. region, GSA leases were reduced to about 49 million square feet from 57 million square feet between 2011 and 2018, according to GSA data. While it appears that the government is achieving its goals, it has been “a pretty steep learning curve” for both GSA and landlords to operationalize those reductions, Kitchin said. “It’s difficult for landlords because oftentimes you get these large buildings that are exclusively leased to the federal government and all of a sudden they want to reduce their footprint by 20 percent, yet maintain the security associated with a federally leased building.” In cases where GSA tenants move out of buildings, landlords change their strategies, according to Nathan Edwards, a senior research director at Cushman & Wakefield.

“Buildings that have previously leased long-term to the GSA and [that] lose those GSA tenants have often had to recapitalize [those] buildings, add amenities and do upgrades in order to transform the buildings into something that appeals to a private-sector user.” Edwards pointed to a recent example at 600 E Street NW in the East End, one of two buildings being vacated by the Department of Justice, which is downsizing to 840,000 square feet at two buildings in NoMa from about 1 million square feet across four buildings. S.C. Herman & Associates plans to renovate 600 E Street NW, as well as 1441 L Street NW, a property vacated by the Bureau of Economic Analysis, and 1125 15th Street NW after the Department of Homeland Security leaves this year as part of a consolidation plan, according to Bisnow. Brookfield Properties will also likely restructure 1200 K Street in Downtown D.C., which the Pension Tenant Guarantee Corporation is leaving for a move to Southwest. “They are currently trying to attract private-sector tenants and likely transition to a private sector building,” Edwards said. Neither S.C. Herman & Associates nor Brookfield Properties returned Commercial Observer’s request for comment. The developer that’s been the most challenged with GSA leasing over the past few years was faced with a mandate not related to Reduce the Footprint. Vornado Realty Trust, one of the nation’s largest property owners, dealt with GSA tenants leaving much of the firm’s Crystal City and Bailey’s Crossroads properties due to the Pentagon’s Base Closure and Realignment Commission (BRAC), a military consolidation process that’s had five rounds since the 1980s. According to the U.S. Department of Defense (DoD), BRAC is a congressionally authorized process that is used to reorganize the department’s military base structure to meet increased national security requirements. Headlines began to surface discussing BRAC’s impact on Vornado around August 2012, when the firm faced an estimated 2.4 million square feet of vacancies at its Northern Virginia properties. The most beleaguered asset was the firm’s Skyline portfolio, a seven-building office park in Bailey’s Crossroads. “Washington today is experiencing the perfect storm: BRAC, the GSA trying to be more efficient, a presidential election and a budget standoff creating uncertainty. But we expect that moderate growth and limited supply over the next several years will stabilize the market,” Michael Fascitelli, the former president and chief executive officer of Vornado, said, according to The Washington Post. At one of the Vornado buildings, Fascitelli said the firm was forced to transfer a $678 million commercial mortgage-backed securities loan to a special servicer. By December 2015, several of the Skyline office towers were almost entirely vacant or at least half-empty, The Post reported. The firm, however, was having better luck in Crystal City where it reportedly worked with local officials—who changed zoning requirements and improved bus service—to convert some of the vacated buildings into a technology hub including office spaces, residences and restaurants. Less than a year later, in October 2016, Vornado was in talks with developer JBG to create an $8.4 billion merger called JBG Smith Properties that gave JBG 16.2 million square feet of Vornado’s properties in the Washington region, including 26 buildings in Crystal City—many of which were emptied as a result of BRAC. Vornado did not respond to CO’s request for comment. Skyline, unsurprisingly, was left out of the JBG deal. And after occupancy rates plummeted to about 40 percent and Vornado defaulted on the terms of its $678 million

mortgage, according to Washington Business Journal, the 2.6-million-square-foot office complex was put up for auction in December 2016. Not a single developer bid on the complex, which fell to about $323.4 million in December 2016 from a $680.6 million value assessment in 2009, according to WBJ. The noteholders who held the auction ended up paying $200 million for the property. By the end of 2016, Vornado announced that the firm had “no further obligations related to the Skyline properties” and it would recognize a “non-cash financial statement gain” of roughly $486 million. In terms of the merger, JBG Smith Properties began trading on the New York Stock Exchange in July 2017. David Ritchey, an executive vice president at the real estate investment trust, told CO the firm has “placed a heavy emphasis on attracting a diversity of industry sectors such as associations, nonprofits and traditional corporate users” at Crystal City, pointing to recent successes such as Interstate Hotels and Resorts and March of Dimes selecting Crystal City for their new headquarters. Interstate Hotels and Resorts signed a 35,000-squarefoot lease at 2011 Crystal Drive, WBJ reported in March. Two months later, March of Dimes announced its lease for about 28,000 square feet of space at 1550 Crystal Drive, per the publication. Most notably, Amazon recently selected JBG Smith as its partner to house and develop a new headquarters in Crystal City and nearby areas. Though Crystal City and Skyline were both impacted by BRAC, as well as the sequestration in 2013, Skyline was most affected by a “dramatic downturn in the desirability of suburban non-transit-oriented office parks,” which was so dramatic that it could not recover under Vornado’s reign, according to Lynch and other experts. It appears, however, that the dust may have settled, and the current owners are attempting to lease at least one Skyline tower. C&W is leasing the project, but Edwards declined to speak on the firm’s strategy at this time. While downsizing has been the biggest trend driving GSA leasing in the past several years, only about half of GSA contracts have been impacted at this point, said Marcy Owen Test, a senior vice president at CBRE. That means it will be another five or six years before the government has fully adjusted all of its leases and “the market can probably adjust appropriately for the space reduction that the government took on over that 10- to 12-year period.” Still, some questions about the future of GSA leasing remain, such as whether agencies will move once their current leases expire. Newer submarkets such as NoMa, Capitol Riverfront and Southwest have been able to score many GSA tenants, as they’re being priced out of the Central Business District, said Edwards, explaining that the government caps most leases at $50 per square foot. These neighborhoods, farther from downtown, have allowed federal agencies to both reduce their footprint by 20 to 30 percent and offer rents well below GSA’s max price point, he said. But the vacant supply in those newer submarkets has nearly been absorbed, Kitchin pointed out. That means, if incumbent downtown landlords are willing to meet the market, more renewals are likely. Additionally, Kitchin said, many agencies have reduced large portions of their footprints already and “it’s easier for an incumbent to keep a tenant that is not shrinking by 20 percent.” Landlords with older buildings should prepare for changes in codes when looking to renew GSA leases, according to Lynch, who said they may face new sustainability and safety regulations that could be costly. COMMERCIALOBSERVER.COM |  DECEMBER 4, 2018 | 65


POWER PLAYER

A Developer, by Design After leaving his fingerprints on some of the city’s most affordable housing, architect-turneddeveloper Michael Kirchmann is now trying his hand at some pretty swanky condos By Rebecca Baird-Remba Photographs by Emily Assiran

W

hen developer Michael Kirchmann moved from South Africa to New York City as a twenty-something in 1997, he spent his first few nights in a wood shop on Renwick Street in Tribeca. Now he lives, works and flips real estate in the neighborhood, which has long since shifted from wood shops and artists’ lofts to condominiums and upscale restaurants. The 46-year-old married father of two spent 11 years designing office buildings in western Europe at Skidmore, Owings & Merrill (SOM), before setting off on his own to found an architecture and development firm called Global Design Strategies (GDSNY) in 2008. While he had originally planned to focus on development, the Great Recession waylaid his plans for a couple years. His small firm rode out the lean years doing architecture work, including two 34-story light installations for the 2012 London Olympics, the master plan for a mixed-use development in Bahrain and interior design for a restaurant in London. Kirchmann also got into designing products, including jets, classic motorcycles and Porsches. Perhaps his biggest coup has been a gig helping L+M Development Partners build and renovate affordable housing projects throughout the five boroughs. In Far Rockaway, Queens, he revamped a 1,093-unit Section 8 housing development, Arverne View, that had been damaged by Superstorm Sandy. His firm and OCV Architects came up with the idea that they could reclad the facades of the 11 low- and mid-rise buildings with an exterior insulation system, giving them a new, patterned white-and-gray look and much-needed insulation from the elements.

Mario Faggiano.

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The buildings “weren’t insulated and they leaked,” said Jeffrey Moelis, the development director of preservation at L+M (and cousin to L+M co-Founder Ron Moelis). The new facade panels “solved those problems and allowed Michael to create this [architectural] vision. And [they] allowed us to do it in a way that helped us achieve our budget.” In Brownsville, Brooklyn, Kirchmann teamed up with L+M to reimagine the Marcus Garvey Apartments, a townhouse-style residential complex with 693 federally subsidized apartments. GDSNY created a new lighting scheme for the exterior, devised new landscaping for the courtyards in between the buildings and installed solar panels on the roofs of the sprawling development. As part of the facade renovation, they designed two-story, perforated metal panels that resembled patterned ivy and installed them on tall, light-up panels, which cover narrow stretches of the facades above the doorways on the Marcus Garvey buildings. “He really buys into that idea that there’s no reason why people who live in affordable housing can’t live in a beautiful place,” Moelis said. “It doesn’t cost a whole lot more. If they feel like they’re in a nice place, they’re going to respect it and take care of it. We’ve seen a big drop in vandalism [at Marcus Garvey]. It’s not all attributed to the architecture—there’s beefed up security—but I think people are proud of where they live, and they don’t want their neighbors and guests destroying the place.” Kirchmann estimated that he has completed 20 projects with L+M, including the redevelopment of six New York City Housing Authority complexes

with 875 apartments—Bronxchester Houses in the South Bronx, Saratoga Square in Bedford-Stuyvesant, Brooklyn, Millbank-Frawley Apartments in central Harlem, and Campos Plaza in Alphabet City. He also brought his artistic talents to L+M’s four-year-old residential buildings at 1351 Park Avenue in East Harlem, where he created what he calls an 80-foot-long metal “art wall,” with fins of differing depths that seem to undulate as one passes by on the elevated Metro North tracks. But in the past two years, he’s finally started to work on the kind of projects he set out to do more than a decade ago—ground-up buildings. Next to the High Line in West Chelsea, GDSNY is constructing a 10-story, eight-unit luxury condo building at 500 West 25th Street. Each upper story except for the penthouse holds a full-floor, three-bedroom, three-bath apartment with a private terrace. Asking prices range from $5.5 million for a 2,100-square-foot condo on the third floor to $16.9 million for a four-bedroom, four-bath duplex penthouse spread across 4,300 square feet. The boxy structure cantilevers over the High Line, which Kirchmann considers the most significant piece of architecture in New York City. Its facade, clad in pale gray Alabama limestone, will borrow design cues from the elevated-freight-line-turned-park. Kirchmann brought in the lighting designer that worked on the High Line, a French firm called L’Observatoire, to craft night-time lighting for the exterior of 500 West 25th. Wrought iron railings along the balconies and gold aluminum accent panels are also supposed to invoke the 1920s design and stainless steel railings of the High Line. The developer also hired Swedish-born


Michael Kirchmann.

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POWER PLAYER

local street artist Tony Sjöman, also known as Rubin, to create a geometric wooden art piece to adorn the lobby. “We wanted to do something interesting but not crazy” on West 25th Street, he said. “Our apartments are very high-end, but they get to the point. We try not to have any mirrorballs or anything hanging in the lobby. It’s just like clean Scanda-modern type stuff.” In fact, working with artists—and creating art of its own—is a big part of GDSNY’s business. Before he converted a Soho loft building at 25 Mercer Street into condos, he allowed British artist Shantell Martin to draw faces on the walls. (He left her drawings beneath the drywall for condo owners to find when they renovate their apartments in a decade or two.) He also hosted a laser art installation and dance performance in the building, with lasers by artist Matthew Schreiber and choreography from Kathryn Boren of the American Ballet Theatre. And in February of last year, he teamed up with an ad agency to spray-paint a sky-blue and fire-engine red mural featuring flying seagulls on his development site at 10th Avenue on West 25th Street, next to the High Line. The mural was part of a larger project called “Wall That Unites,” and was meant to protest President Donald Trump’s planned border wall with Mexico. And Kirchmann has finally gotten back to designing new office buildings. He and his business partner, Alan Rudikoff, inked a 99-year ground lease in April for one of the last undeveloped sites in NoMad, at 1241 Broadway at the corner of West 31st Street. They plan to build a 170,000-square-foot boutique office building, with Kirchmann’s former bosses from SOM handling the design. T.J. Gottesdiener, a managing partner at SOM’s New York City office, is working closely with Kirchmann on 1241 Broadway. When Gottesdiener met him 15 years ago, Kirchmann was his employee. Now he’s a client, which is “kind of awkward but fun,” Gottesdeiner said. At SOM, “he was tenacious. He’d have an idea and he would pursue it. It’s not a surprise to me that he went into development.” As a developer, Gottesdiener added, Kirchmann “talks about the art of architecture. You can see his wheels turning when we show him the ground-floor space or the lobby. He talks about what he can do to bring some kind of art into the program and how people will react to it, how it will be lit at night. [There are] great urban issues that he’s thinking about.” Douglas Mass, the president of engineering firm Cosentini Associates, has known Kirchmann since he started at SOM 21 years ago. The pair first met while working on an office tower in Paris for developer Howard Ronson, whose HRO International was a prolific builder of office space in Manhattan and western Europe in the 1980s and 1990s. They’ve worked on over 20 commercial projects together, mostly in Paris, London and Germany, Mass said. “I probably worked on every project with 68 | DECEMBER 4, 2018 | COMMERCIAL OBSERVER

MERCER ME: Michael Kirchmann and his firm, GDS Development have worked on residential conversions like 25 Mercer Street in Soho (top, right), and the firm is about to develop its first ground-up office building at 1241 Broadway (left).


POWER PLAYER

him at SOM,” the engineer explained. “Not too many people his age or any age have done 8 million square feet of space in 25 buildings.” Mass called Kirchmann’s aesthetic “classic appropriate architecture” while acknowledging that “he knows about budgets and he’s a great collaborator.” The South African architect also met his business partner, Rudikoff, while working on Ronson’s projects. Rudikoff was Ronson’s right-hand man, Kirchmann said, and he later went on to found his own development firm in Sweden in 2007. During his five years living in Stockholm, Rudikoff helped finance and develop a $350 million, 800,000-square-foot office, hotel and convention center complex called the Waterfront. Kirchmann has come a long way from his childhood in Johannesburg, where he was one of seven kids born to a real estate developer father and interior designer mother. He left to study architecture in Cape Town and moved to New York City in 1997, where he soon landed a job as a design architect at SOM under Roger Duffy. Once he decided to get back into the development game, he went back to school to learn the financial side of the business and completed a master’s degree in real estate at New York University in 2007. He ended up giving a few lectures on architecture as a master’s student. Then Columbia University’s Graduate School of Architecture, Planning and Preservation asked him to teach a real estate course with Jared Della Valle and A.J. Pires, two more architects-turned-developers who founded Alloy Development. Although GDSNY is still a small fish in the development world, Kirchmann argues that his experience as an architect—combined with his business partner’s work assembling a huge mixed-use project in Stockholm—makes them a particularly nimble firm. “We see all the pieces in front of us from the marketing to the design to the architecture to the engineering to the finance,” he explained. “We’re in a unique situation where we can synthesize those very effectively and very efficiently. [When] we look at projects, for example, we’re able to underwrite those projects very quickly because we can do zoning studies in-house. We can do planning in-house. It’s something that happens in a few hours as opposed to a few weeks. That definitely gives us a competitive edge when we are out there looking for properties.” BUILDING BLOCKS: Michael Kirchmann argues his 11 years of experience as an architect gives him an edge in the world of development. 70 | DECEMBER 4, 2018 | COMMERCIAL OBSERVER


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mapic 2018 OUT OF TOWN

By Lauren Elkies Schram

First Retailtainment, Then Edutainment, Now Eatertainment?!

It started long ago with the word entertainment. Then retailers and educators started jumping on the bandwagon with words like retailtainment and edutainment, respectively. The latest iteration: eatertainment. So said Reinhart Viane, the business development director at Belgium-based KCC Entertainment Design, while speaking on a panel about how to choose the best entertainment options for your shopping mall at this year’s  MAPIC  conference, the annual international retail real estate show held in Cannes, France. Later he told Commercial Observer that developers now need to “add another layer” to the eating experience and make dining “immersive.” He said concepts that have done this successfully include Dinner in the Sky, a Belgian-based novelty restaurant where a crane hoists everybody and everything they need to dine 150 feet into the air, and  Rollercoaster Restaurant, a chain of restaurants in Europe and the Middle East where food is delivered by way of rollercoaster tracks. Clifford Warner, the chairman of Mycotoo, an entertainment development company based in Pasadena, Calif., told CO that restaurants need to up their game, and become like “second living rooms.” A good example is the  Grounds of Alexandria  in Sydney, Australia, Warner said. It offers a little bit of a lot of things: a number of dining options, a full bakery, a

Dinner in the Sky. 72 | DECEMBER 4, 2018 | COMMERCIAL OBSERVER

Punch Bowl Social in San Diego.

specialty coffee bar, a full bar, markets, an animal farm, a florist and indoor and outdoor space. Plus it has space for kids and rooms for parties. In Europe, Thomas Rose, the head of leisure and restaurants at Cushman & Wakefield, said, “We’re seeing a huge growth of this sector, particularly in the more adult-focused concepts, which we call ‘competitive socializing,’ where brands mix a traditional activity like golf, darts or even bingo into a contemporary form alongside an amazing food and beverage, and critically—bar—offer.” Puttshack, a client of Rose’s,  recently launched its miniature golf concept with curated menu in London and is now looking at a U.K. and international rollout of the brand. But it’s not like this eatertainment concept is new. In the U.S., Irving, Texasbased  Chuck E. Cheese’s,  the  chain of family entertainment centers and restaurants, has been around since 1997, and Dave & Busters, with its restaurants, sports bar and games, has been around since 1982. As entertainment options increase, the quality of food is “being elevated at family entertainment centers,” Warner said. Millennial-oriented Punch Bowl Social, a Colorado-based venue with food, arcade games, karaoke, craft cocktails, etc., has 14 locations throughout the U.S. The 15th one is opening at 4238 Wilson Blvd. in Arlington, Va. on Dec. 8, the first in the mid-Atlantic region, according to a Punch Bowl Social spokeswoman.

Rollercoaster Restaurant. Food halls will also have to tweak their model and embrace more of the eatertainment idea in a crowded space. The new ones, Warner said, will have entertainment or space for bands. Time Out  magazine-branded food hall Time Out Market New York, which leased 21,000 square feet at 55 Water Street in March, as CO reported at the time, is including a stage in addition to the 20 food options and three bars. At KCC, which designs and builds theme parks, Viane said his company is working on designing several entertainment concepts for Al Rugaib Holding in Saudi Arabia that will incorporate eatertainment with cooking lessons followed by eating the food. “You have to make it Instagrammable,” Viane said.


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Nordstrom Local in The Boc in Los Angeles.

Everyone’s Talking About Omnichannel, but Who’s Doing It Right? A few weeks ago, Crown Retail Services’ Stephen Stephanou told the Real Estate Board of New York  commercial brokerage retail committee that he is helping Nordstrom find a few retail spaces in New York City—on a short-term basis— for its inventory-less service concept, Nordstrom Local. The Seattle-based company’s Nordstrom Local locations—there are  three in Los Angeles and they occupy up to a few thousand square feet, a fraction of the average 140,000-square-foot Nordstrom store—are just part of the fashion retailer’s omnichannel approach. “We’ve been investing pretty significantly against adding capabilities, certainly digital capabilities, but also capabilities in our stores to serve customers in the new ways they want to be served,” said  Erik Nordstrom, a co-president of Nordstrom, according to Diginomica. The integration of offline and online has become paramount, though not all brands, especially legacy ones, are able to strike the right balance. 74 | DECEMBER 4, 2018 | COMMERCIAL OBSERVER

Commercial Observer talked with U.S. and international brokers at MAPIC, the international retail real estate show in Cannes, France, last month about what brands are seamlessly marrying the online and offline worlds. Most people were only able to come up with a few names. Nordstrom and Whole Foods have successfully joined the online and offline experiences, said Patrick Smith, a retail broker at JLL. Since acquiring Whole Foods  last August for roughly $13.7 billion, Amazon has bolstered the crossover of offline and online shopping for both companies.  As for Nordstrom, it has achieved a “seamless” process “on the order [or] return to from either channel,”  retail consultant  Kate Newlin told CO today. “Nordstrom is doing a fascinating job of supporting the uber-brand, while exploring fresh takes on old ideas like personal shoppers with acquisitions such as Trunk Club.” (Nordstrom declined to comment for this story.) A brand that is doing well with the integration,  according to  Chase Welles, a partner  of  SCG Retail, who was clad in a Bonobos suit at MAPIC, is Bonobos. The brand allows you to shop online but touch and feel the clothes in the store. “You walk in the store, you›re measured, and it shows up at your house the next day,” Welles said.

Christophe Cuvillier, the group CEO and chairman of Unibail-Rodamco-Westfield, underscored the imperative of unifying online and offline initiatives in his MAPIC keynote, saying that the future is “interconnected retail.” Richard Scott, a director at London brokerage Nash Bond, told CO in Cannes that it is a lot easier for a business with a technology background to add a physical store than is the reverse. A case in point is the legacy, or long-standing, brands. “For reasons of legacy attempts and constraints of imagination, it still baffles the big guys who persist in claiming that not charging me to pick up my goods ordered online is a breakthrough for physical retail,” Newlin said. Scott said one company that is succeeding in fusing their online and offline channels is Made.com, a London-based online furniture and homeware company with a few experiential showrooms in Europe. Shoppers can visit the showroom, peruse the merchandise, and then need to buy the product online. E-commerce as a percentage of retail sales in the U.S. is less than 10 percent, according to the U.S. Census Bureau of the U.S. Department of Commerce, but it will continue to rise.


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DATA

ChartLease / Sale Lease charts reflect deals closed or announced from Nov. 26 to Nov. 30. Information on leases, sales and financing deals can be sent to Max Gross at mgross@commercialobserver.com

OFFICE

Sq. Feet Tenant

601 West 26th Street

350,000

Ralph Lauren

RXR Realty

200 Vesey Street

86,000

Syneos Health

American Express (sublandlord)

JLL’s Paul Glickman, Matt Astrachan, Erika Jean McNeil, Jonathan Fanuzzi and Kip Orban represented Syneos in the deal while JLL’s Lisa Kiell, Michael Shenot, Ed DiTolla and Andrew Coe worked on behalf of AmEx.

2 Herald Square

60,000

WeWork

SL Green Realty Corp.

N/A

67 Irving Place

51,050

WeWork

CIM Group

CIM brokered the deal with an in-house team, while WeWork’s executive vice president of real estate Arash Gohari handled it for the company.

1140 Avenue of the Americas

44,100

Waterfall Asset Management

Mitsui Fudosan America

JLL’s Chris Kraus and Daoud Awad represented Waterfall in the deal and David Falk, Peter Shimkin, Eric Cagner and Nick Berger of Newmark Knight Frank handled the transaction on behalf of the landlord.

111 West 33rd Street

42,000

FOJP Service Corporation

Empire State Realty Trust

Keith Cody represented ESRT in-house alongside a Newmark Knight Frank team of Scott Klau, Erik Harris and Neil Rubin, while Cushman & Wakefield’s Mark Weiss, Robert Baraf, Gary Ceder and Jared Thal represented the tenant.

250 Park Avenue

29,000

Insight Global

AEW Capital Management

Cushman & Wakefield’s David Hoffman, Robert Billingsley and Whitnee Williams represented the landlord; Eric Ferriello and Jodi Selvey of Colliers International handled the deal for the tenant.

160 Varick Street

29,000

WeWork

Hines

Michael Schoen and Harrison Katzman of Savitt Partners represented WeWork in the deal while landlord Hines had no brokers.

1156 Avenue of the Americas

28,600

WeWork

APF Properties

Brokers from Newmark Knight Frank handled the deal for APF, while WeWork’s executive vice president of real estate Arash Gohari, represented WeWork in the deal.

1400 Broadway

20,691

Signature Bank

Empire State Realty Trust

Colliers International’s Andrew Roos, Michael Cohen and Howard Kaplowitz handled the transaction for Signature Bank; Keith Cody and Leslie Nadel of ESRT represented the landlord in-house, along with Newmark Knight Frank’s Scott Klau, Erik Harris and Neil Rubin.

185 Marcy Avenue (Brooklyn)

20,000

Brooklyn Financial Group

Acuity Capital Partners

Tri State Commercial’s Shlomi Bagdadi and Avi Akiva brokered the deal for the landlord, while Bagdadi handled the deal for the tenant along with Tri State’s Moses Walter.

225 West 39th Street

16,000

WeWork

Walter & Samuels

Walter & Samuels handled the deal in-house while WeWork’s executive vice president of real estate Arash Gohari represented WeWork in the deal.

RETAIL

Sq. Feet Tenant

Landlord

Brokers

373 Park Avenue South

8,732

Lifetime Brands

ATCO Properties & Management

173 West 78th Street

4,206

Tacombi

Olshan Properties

SCG Retail’s Jacqueline Klinger and Taryn Brandes represented Tacombi in the deal; Olshan Properties was represented in-house by Eric Gray and Josh Birns.

67 First Avenue

1,980

Wara

Icon Realty

Wara was represented by Steve Rappaport of Sinvin Real Estate; Icon Realty was represented in-house by Zach Levine.

11 Howard Street

1,000

Cotton Citizen

RFR Realty

Jordan S. Claffey of RFR Realty represented the landlord in-house; Jeremy Aidan of Isaacs and Company acted on behalf of the tenant.

INDUSTRIAL

Sq. Feet Tenant

Landlord

Brokers

29 Clinton Avenue (Brooklyn)

11,000

29 Clinton Avenue, LLC

Patty Wagon

76 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

Landlord

Brokers David Goldstein, Matthew Barlow, Mitchell Steir and Gabe Marans of Savills Studley represented Ralph Lauren in the deal while RXR handled it with an in-house team of William Elder and Denise Rodriguez.

William Carr of ATCO Brokerage Services represented the landlord, while Scott Bennet and Todd J. Abrams of Prime Manhattan Realty represented the tenant.

Shlomi Bagdadi and Avi Akiva of Tri State Commercial represented the landlord; Tamako Okamura of Tri State Commercial represented the tenant.


ENDNOTES

PHOTOGRAPHS BY AARON ADLER

The Party Circuit

Left to right: Jonathan Mechanic of Fried Frank moderated the panel that included Howard Hughes Corporation CEO David Weinreb, Cushman & Wakefield’s Bruce Mosler, Jonathan Resnick of Resnick & Sons, Ric Clark of Brookfield Property Partners and Fred Berk of Friedman LLP.

CO DOWNTOWN FORUM 2018 Nov. 28, 225 Liberty Street Lower Manhattan’s residential and office markets may be thriving, but it could still use better flood protections against future storms panelists said at Commercial Observer’s Downtown Forum last week. “We’ve painted a rosy picture of Downtown…but there’s still more work to do,” said Ric Clark, the chairman of Brookfield Property Partners, during the event’s first panel at 225 Liberty Street. “[Superstorm] Sandy wreaked havoc on Lower Manhattan and we still haven’t come up with a resiliency plan.” Brookfield, like other major landlords in the Financial District, has elevated building utilities to upper floors and attempted to flood-proof the ground floors of its properties. But Clark pointed out that the neighborhood still wasn’t prepared for the next major storm, which could flood the streets and knock out the power just as quickly as Sandy did. The rebuilding of the World Trade Center has, of course, played a huge role in the revival of the Financial District as both an office and residential neighborhood. “Tenants that wouldn’t have come Downtown came Downtown because they could get large efficient floor plates [at WTC],” said Bruce Mosler, the chairman of global brokerage at Cushman & Wakefield, who noted that the Sept. 11 terrorist attacks destroyed 12 million square feet of office space.

Jonathan Resnick, the president of Resnick & Sons, noted that the construction of Fulton Transit Center and the Oculus (which anchors the World Trade Center PATH station) helped open up access to much of Downtown and the east side of Broadway. Howard Hughes Corporation CEO David Weinreb and Fred Berk, the co-managing partner of Friedman LLP, also participated in the panel, which was moderated by Jonathan Mechanic, a partner at Fried Frank. Speakers on the second panel of the day also raised the alarm about flood planning. “The reality is that this president won’t give us more funding for resiliency,” said Jessica Lappin, the head of the Downtown Alliance, speaking of President Donald Trump. “The money that is required is so large that you need the federal government to participate, and you need the Army Corps of Engineers.” Marty Burger, the CEO of Silverstein Properties, explained that his firm had built its Downtown properties with the next big hurricane in mind. “We’ve moved our building systems up at 120 Broadway, 120 Wall Street, 7 World Trade Center,” he said. “We’ve done a lot since then to weather that storm in the future.” He added that they had reconstructed 7 WTC quickly because it had a Consolidated Edison substation beneath it that powered much of the neighborhood. The other speakers on the panel, which was moderated by Michael Zetlin, partner at Zetlin & De Chiara, were Dan Gardner, the CEO of Code & Theory, and Douglas Durst, chairman of the Durst Organization. “In terms of preparing for the future with sea level rise, we got a taste of what could happen with Superstorm Sandy,” Durst said.—Rebecca Baird-Remba

Richard Anderson, the former president of the New York Building Congress, asks a question.

Left to right: Michael Zetlin, Marty Burger, Douglas Durst, Dan Gardner and Jessica Lappin.

Downtown Alliance head Jessica Lappin (center) exchanges a word with Downtown Alliance’s Andrew Breslau (right).

COMMERCIALOBSERVER.COM |  DECEMBER 4, 2018 | 77


THE RADIO TOWER & HOTEL

2420 AMSTERDAM AVENUE

The Plan WHO’S WHO FOR 2420 AMSTERDAM AVENUE

RENDERINGS COURTESY MVRDB

DEVELOPER: YOUNGWOO & ASSOCIATES DESIGN ARCHITECT: MVRDV EXECUTIVE ARCHITECT: STONEHILL & TAYLOR INTERIOR DESIGNER: WORKSHOP APD MEP ENGINEER: COSENTINI ASSOCIATES STRUCTURAL ENGINEER: GACE FACADE ENGINEER: CANY TECHNICAL SERVICES

BLOCK BY BLOCK: Youngwoo & Associates is putting up a 22-story office, hotel and retail project in Washington Heights that resembles a precariously stacked collection of colorful blocks.

By Rebecca Baird-Remba Youngwoo & Associates recently broke ground on a bold, multi-colored hotel and office building in Washington Heights that promises to be the first new commercial high-rise north of 125th Street in half a century. The 22-story, 285,000-square-foot Radio Tower & Hotel will bring 155,000 square feet of office space, 221 hotel rooms and 8,000 square feet of retail to a former gas station at 2420 Amsterdam Avenue, between West 180th and West 181st Streets. It will be one of the first large office buildings to be developed in Upper Manhattan. The Radio Tower will also be the first U.S. project for renowned Dutch architecture firm MVRDV, which is known for designing whimsical, colorful buildings across Europe. The 295-foot-tall structure will resemble a stacked collection of blue, green, yellow and red blocks, assembled around an 8,000-square-foot courtyard. 78 |  DECEMBER 4, 2018 | COMMERCIAL OBSERVER

The facade will be clad in glazed ceramic brick, to ensure the bright exterior remains vibrant for years to come. Winy Maas, a principal and co-founder at MVRDV, described the building as “a ‘vertical village’ with blocks that are the same size as the surrounding buildings, thus avoiding the common drawback of large developments in which new skyscrapers overwhelm the existing character of the city,” in a statement. The design is not just meant to be eye-catching. It’s also a way to divvy up the various uses that will live in the project— offices, hotel, event space and retail. The blue volume, for example, will house 11,000 square feet of event space for weddings and parties. Youngwoo expects that Yeshiva University, which has a campus nearby, will rent it out for gatherings. The developer is even designing a portion of the building to cater to Orthodox Jewish visitors and families. “We’re trying to program the whole building so it’s Shabbat-friendly,” said Brian Woo,

an executive vice president at Youngwoo. “A lot of the key access is electronic and manual, so they can shut off the power in that part of the building.” Orthodox guests will also be able to drop off their luggage on Fridays before sundown. Woo said he hoped to create places where the community can gather, like the courtyard, which will be open to the public and have a coffee bar and community garden. “It’s not only a gathering place for the hotel and office but for people in the community as well,” he explained. “The entire concept behind it is to be inclusive.” The developer secured a zoning variance from the city to build more office space than the site’s zoning would allow, because it felt that developing a 285,000-square-foot hotel is “maybe a little too ambitious. There’s demand for hospitality but not that much demand,” Woo said. Upper Manhattan is also desperate for new office and retail space.

“There’s no new office space in the neighborhood,” he added. “People are relegated to the first story of a brownstone for office space. We’re getting positive feedback from people locally that this is what they’ve always wanted.” Asking rent for the office portion will be in the mid-$50s per square foot, but tax incentives like the Industrial and Commercial Abatement Program and the Relocation and Employment Assistance Program could bring the net effective rent to somewhere in the $30s, said Mitchell Salmon of Lee & Associates, who is leasing the building’s office and retail. “We’ve gotten a lot of interest from medical users and education users, and we expect a lot of interest from municipal entities and TAMI [tech, advertising, media and information] tenants,” Salmon noted. “Bringing this kind of Class-A office space to the Northern Manhattan market is going to be very exciting.”


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NOTICE: For the safety of every Guest, all persons specifically consent to and are subject to metal detector and physical pat-down inspections prior to entry. Any item or property that could affect the safety of Yankee Stadium, its occupants or its property shall not be permitted into the Stadium. Any person that could affect the safety of the Stadium, its occupants or its property shall be denied entry. All seat locations are subject to availability. Game time, opponent, date and team rosters and lineups, including the Yankees’ roster and lineup, are subject to change. Game times listed as TBD are subject to determination by, among others, Major League Baseball and its television partners. Purchasing a ticket to any promotional date does not guarantee that a Guest will receive the designated giveaway item. All giveaway items and event dates are subject to cancellation or change without further notice. Distribution of promotional items will only be to eligible Guests in attendance and only while supplies last. Additional terms and conditions apply. Mastercard, Priceless, are registered trademarks and the circles design is a trademark of Mastercard International Incorporated. ©2018.


WHAT’S NEXT IN RETAIL Fueled by ideas, expertise and passion across borders and beyond service lines, Cushman & Wakefield professionals create solutions to prepare retail real estate investors and occupiers for what’s next.

Visit Us at ICSC New York Deal Making 2018 Booth #2235 cushwakeretail.com

@cushwakeRETAIL


U N IQ U E O PP O RT U N ITIES

NEW LOBBY COMMENCING SPRING 2019

200 L I BE RT Y ST R EET The modernization of 200 Liberty marks the continuation of the multi-million dollar, large scale redevelopment of Brookfield Place.

// NEW LOBBY, ELEVATORS & RETAIL // 418,662 RSF AVAILABLE Q3 2020 // EXCLUSIVE, BRANDED ENTRANCE // MULTIPLE OUTDOOR TERRACE OPPORTUNITIES EXCLUSIVE ROOF TERRACE 16,000 SQUARE FEET OF DEDICATED GREEN SPACE

TENTH FLOOR TERRACE


T I M E AT 2 0 0 L I B E RT Y S T R E E T

IS T I M E W EL L SPEN T

CONTACT LE ASING M I K AEL NAH M IA S //

2 12- 417-7032

mikael.nahmias @ brookfieldproperties.com

DAV I D M C B R I D E

//

212 - 41 7-7014

david.mcbride @ brookfieldproperties.com

The #1 Place to Ice Skate in NYC

PAUL N. G L ICKMAN //

212-418-2646

paul.glickman @ am. jl l.com

JOHN WHEELER

//

john.wheeler @ am.jll.com

212-812-5906

AN U RBAN OASIS

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