PGRE - Paramount Group

[thepupil]

How do you or do you not factor in that some places in NYC may be de-gentrified (wo a crack down on criminal violence due to protests) & the lower appeal to older folks moving into these locations replacing young families moving out.  Part of the reason for the low cap rates is the assumption of safety.  TIA.

 

Packer

 

I would put this in the category of "general risks of cities becoming less appealing, causing vacancy to spike and rents to collapse"; crime is not something I factor in specifically/explicitly. 

 

I don't think that anyone can say with any degree of certainty what the world will look like 4,5,7, years from now when the leases start to roll off in a material fashion. We can only observe the small number of investment sales / leases occurring today and observe what is or what is not priced in, combine that with company (meaning what companies are saying about their office space needs) commentary / intuition, and decide whether good risk/reward.

 

I think of the company in terms of 3 components: (cash and unlevered buildings $4.3-$7.4, or 60-100% of the stock price), equity in 1633 ($1.6-$4.0), 20-55% of the stock price; we have a lot of visibility on cost structure tenancy and financing on 1633*, and the other levered buildings ($0-a lot more). If you want more detail on any component, feel free to ask, but I don't really explicitly value each building other than the unlevered ones (One Front, 900 Third, 1325 AoA) and the two trophy of trophies: 1633 and One Market.

 

I have a hard time getting below $6 in a pretty severe downside case, upside / vaccine / return to normal case is high teens and then there's this massive chasm of uncertainty in between $6 - $18 that I think will become more apparent over the next few years. If the stock went to $13, I'd have a hard time knowing how aggressively to trim, but at this time, I shouldn't be worried about that as that's 80% above the current price.

 

the way you'd push back to try to get below $6 is to argue they're going to incinerate the cash, that healthy corporates are going to successfully to break leases, or that operating costs are going to massively spike in a very short time while rents fall (like a huge increase in property taxes that causes an urban death spiral).

 

 

*if you want to make an argument why this building is worth less than $400mm equity to PGRE (60% less than implied by recent sale), there's plenty of info to do so, but considering its throwing off $80mm or so to the equity of which PGRE owns 90%) and has long lease length with good tenants and long term interest only financing, that'd be tough to do in my view.

[thepupil]

Nothing unexpected. net cash at expected levels since 1633 closed.

 

collected 98% of rents, leased 300K feet @ 20-25% increases (San Francisco office they bought below market leases, I assume).

 

 

largest position. 4 unlevered buildings w/ one contracted to sell, net cash balance sheet, 40% of Green Street NAV, buying back stock, and cashing rent checks from high quality tenants.

 

 

http://s23.q4cdn.com/903958510/files/doc_financials/2020/q2/PGRE-Q2-2020-Investor-Deck.pdf

 

http://ir.paramount-group.com/press-releases/news-details/2020/Paramount-Announces-Second-Quarter-2020-Results/default.aspx

 

Results of Operations:

 

Reported net loss attributable to common stockholders of $6.3 million, or $0.03 per diluted share, for the quarter ended June 30, 2020, compared to net income attributable to common stockholders of $2.5 million, or $0.01 per diluted share, for the quarter ended June 30, 2019.

Reported Core Funds from Operations (“Core FFO”) attributable to common stockholders of $50.1 million, or $0.23 per diluted share, for the quarter ended June 30, 2020, compared to $53.2 million, or $0.23 per diluted share, for the quarter ended June 30, 2019.

Net loss attributable to common stockholders and Core FFO attributable to common stockholders for the quarter ended June 30, 2020, include (i) $7.0 million of non-cash write-offs, primarily for straight-line rent receivables, and (ii) $1.8 million of reserves for uncollectible accounts receivable. These amounts reduced net income attributable to common stockholders and Core FFO attributable to common stockholders for the quarter ended June 30, 2020 by an aggregate of $8.8 million, or $0.04 per diluted share.

Reported a 4.1% decrease in Same Store Cash Net Operating Income (“NOI”) and a 0.9% increase in Same Store NOI in the quarter ended June 30, 2020, compared to the same period in the prior year.

Leased 300,570 square feet, of which the Company’s share was 169,898 square feet that was leased at a weighted average initial rent of $93.47 per square foot. Of the square footage leased, 159,548 square feet represented second generation space, for which the Company achieved a positive mark-to-market of 24.2% on a cash basis and 19.2% on a GAAP basis.

Reported portfolio-wide rent collections of 96.4% in the second quarter, including 97.8% from office tenants and 57.6% from all other tenants, including retail.

Transactions and Capital Markets Activity:

 

Realized net proceeds of $112.0 million from the completion of the previously announced sale of a 10.0% interest in 1633 Broadway, a 2.5 million square foot trophy office building located in New York City (based on a property valuation of $2.4 billion, or $960 per square foot).

Ended the quarter with over $1.35 billion in liquidity, comprised of over $550.0 million of cash and restricted cash and $800.0 million of borrowing capacity under its revolving credit facility.

Declared a second quarter cash dividend of $0.10 per common share on June 15, 2020, which was paid on July 15, 2020.

[thepupil]

some details from the call:

 

overall tone was cautious and there were several remarks along the lines of "we're glad to be leased up for term with good tenants". they weren't apocalyptic and did the obligatory pitch for working in an office versus home, but definitely cautious and measured.

 

What are tenants doing: mostly just wait and see, but they are keeping their space; but signing shorter (4-5 year leases) if up for renewal.

 

General leasing commentary

he Midtown Manhattan office markets on new leasing activity declined significantly during the second quarter. Amidst the ongoing pandemic. However, approximately 1.2 million square feet of renewals were executed during the quarter generally in line with the five-year quarterly average. As expected renewals, which represented 48% of Midtown total leasing velocity during the quarter. We're generally shorter term in length relative to historical norms, as tenants elected to buy time before reassessing their longer-term real estate requirements.

Moreover, through 2024, our New York and San Francisco portfolios lease roll is 7.7% per annum inclusive of the Barclays block expiring at the end of this year. While in (inaudible) touring and leasing activity is expectedly down in both of our markets. It has become increasingly apparent that limited lease roll in the near term and the portfolio comprised of best-in-class credit tenants will serve us well as we work through these difficult times.

 

ICBC (Industrical Commercial Bank of China, one of if not the world's largest bank), renewed their floor at 1633 Broadway at flat rent spread for 4-5 years. They aren't a top tenant, but this takes care of much of 2021 rent roll at 1633.

In the second quarter, we signed this extension with ICBC at 1633 Broadway for approximately five years at a starting rent of $82 per square foot, resulting in the further reduction of our 2021 lease roll.

 

the better news were 2 large renewals at One Market Plaza, PGRE's truly trophy office that overlooks San Francisco Bay (unfortunately co-owned in JV w/ BX, wish they owned it all). they renewed 150K SF (10% of the building) expiring in February 2021. this is the building's 2nd largest tenant after Google: law firm Morgan Lewis. Morgan Lewis was paying $57 / foot at the time of the 2017 CMBS document (and low $70s ish before renewal if my math is right). The renewal was around $100 / foot. A 2nd law firm renewed their 85K of space as well (I believe this is Wilson Sonsini who at the time of the 2017 CMBS document had ~57k of space some of which was expiring in 2020. they were paying an average of $71 then and now are paying $100/foot (I don't know who exactly is paying what but the renewals were at average of $99).

 

One Market Plaza's value is probably closer to the upper end of my value range of $975 (no equity value) and $1.8B ($1.6 / share to PGRE). It's doing run rate of $110mm NOI and still signing 37% GAAP / 20%+ positive rent spreads with high quality tenants. rent average $90 / foot and largest tenant (Google / 20%) is only paying $85. 15% of the building just repriced materially higher so NOI will continue to grow.

 

One could even get crazy and go higher. At a 5 cap on $110mm NOI the building is worth $2.2B less $0.975mm debt = $1200 equity =$588mm to PGRE / 242mm shares and OP units = $2.4 / share.

 

See 2017 CMBS document (page 8 )

https://www.spratings.com/documents/20184/769219/One+Market+Plaza+Trust+2017-1MKT/eb8beafe-a423-44e1-97a1-275f1796993a

During the second quarter, we leased approximately 250,000 Square feet at a weighted average term of almost four years with initial rents averaging just under $99 per square foot. The San Francisco portfolio also had limited near term role with just 7.3% of currently leased space expiring per annum through year-end 2024. At One Market Plaza, we completed two significant renewal transactions during the quarter, the largest of which was in approximately 150,000 square foot extension with a law firm we previewed on our last call. This deal was the largest transaction completed in San Francisco during the second quarter and will contribute to the further reduction of leased roll in our portfolio as this space was set to roll in 2021. In addition, we extended another law firm in the building for approximately 85,000 square feet. The two renewals resulted in a cash mark to market of 37.2% and both deals reinforce One Markets immense appeal to leading tenants. One Plaza's leased occupancy remains virtually full at 98.2%.

 

Paramount stopped the buyback. seem to be singing the tune of capital preservation now. they have $850mm due 4Q 2021 at 1301 AoA and are focused on leasing the 500K of Barclay's space that leaves soon there (their largest tenant). I don't expect more buybacks until the DC office sale (4Q supposedly) closes or they lease BarCap (allowing for a more favorable refinance).

 

As we have stated previously, 1301 Avenue of the Americas remains our primary focus as we market the Barclays block of space. The sixth Avenue submarket remains among Midtown's most well-positioned submarkets Our offering is even more compelling in today's environment given certain attributes such as walk-ability to major transit hubs and our ability to create a private welcome tenants that affords not only in a enormous branding opportunity, but also a way for a large tenant to control the experience for its employees and its guests.

 

It's still relatively early, we are talking about October next year and it's something that we would consider of course early in 2021, if we have some activity, it is better to get the better terms if we have some leasing activity on the Barclays space that we have documentation on and that's how we consider, it's that should not be problematic to refinance our team has been in the market for a couple of assets that we are managing and our asset management pool. So we are well aware, how the market works and we don't see any liquidity issues whatsoever.

 

 

 

[thepupil]

at the risk of spamming for what is ultimately a very small data point, I couldn't help but notice a "Spring Creek Capital" has purchased 2.6% of Paramount, buying about 5.7mm shares in the first two quarters of 2020.

 

This is Koch Industries public stock investment arm and is now their 6th biggest position. this is merely a stock pick from some ~$600mm AUM manager in kansas, so it shouldn't be significant. Arguably the fact that respected RE hedge fund Long Pond blew out of NYC office is a more meaningful datapoint.

 

But it brings up a question that's racking in my brain.Where are the bold billionaires and why aren't they more aggressively buying office REITs?

 

anyone can do the basic analysis/triangulation and conclude that PGRE implies a 50% decline in asset values at current prices and can look at the leases and do  dumb math on replacement cost or whatever.

 

There's very little analytical edge on these things and it's all relatively accessible. Most billionaire's are likely familiar with the private real estate market and have the resources to gauge the situation of a frozen market / huge bid/ask and i'm surprised there aren't a few vocal bulls out there taking one side of the trade.

 

billionaires are a diverse bunch and i'm surprised there isn't a "cities may indeed come back" guy, even if he ends up being wrong. And people like BX/BAM don't count because they are already pot committed to the asset class and manage OPM so they are extremely incentivized to make the bull case.

 

I'm talking about someone who is a principal w/ limited prior interest like the Koch’s buy of PGRE but actually material and not a lousy $50mm

 

Some scenarios:

1. it's coming now that the shell shock of the pandemic is wearing off / scenarios have arguably narrowed.

 

2. pupil is a complete patsy and missing something these guys are seeing. they are simply not compelling or more risky than pupil perceives.

 

3. Something like PGRE is too illiquid. At ~$15mm / day, you can only buy $1.5-$3.0mm / trading day without big impace and that takes time / makes it look difficult to build a material position for these types. of course there are block trades and more liquid BXP/VNO/KRC/SLG

 

morning COBF over, heading to work (closes out  and walks downstairs, because not in an office...yet).

 

[Spekulatius]

I think these billionaires will buy, but they will into something that they control ( complete buildings etc) rather than Reits.

Right now, there doesn’t seem to be much of a  market yet for these deals, so they are not buying yet.

 

It seem that replacement value is an overused metric. Even these retail crowdfunding RE platforms offer a lot deals To participate in for ~70% replacement value. How can this be?

[thepupil]

I think these billionaires will buy, but they will into something that they control ( complete buildings etc) rather than Reits.

Right now, there doesn’t seem to be much of a  market yet for these deals, so they are not buying yet.

 

It seem that replacement value is an overused metric. Even these retail crowdfunding RE platforms offer a lot deals To participate in for ~70% replacement value. How can this be?

 

Replacement cost is not a  good metric in my view because it says nothing of supply/demand or obsolescence or current earnings power. In theory if assets are worth less than replacement cost, then new development should not occur and if there’s a cyclical recovery you should benefit. Replacement cost doesn’t help at all if there’s long term secular decline or permanent  demand destruction.

 

I recall (I think it was Zell) talking about how replacement cost is a ceiling not a floor.

 

The replacement cost of a beautiful Victorian mansion in some nowheresville rural city in decline is many times its market value as an example. My own house is an example. It takes a lot of money to build a 2K sf house in the DC burbs, far more than my 1948 structure is worth. The value is the land of course.

[BG2008]

The value is in the land AND the structure.  But if you have some fancy Japanese wooden frames with some extinct wood species, then the replacement cost isn't relevant. 

 

But if you are buying a cookie cutter box with cement, I Beams, and today's average construction technique, you can bet that it cost a crap load of money to erect a building today.  Construction cost in NYC has compounded 4% a year in the last decade.  Wages for construction employees has grown quite a bit, espcially those with specialized skills.  We joke that the new white collar jobs in NYC is the blue collar jobs.  Psych majors, media grads eat ramen in NYC.  Plumbers and electricians eat crab legs and they can just wear a torn T Shirt to work. 

 

My investment property was purchased for $250/sqft in 2008.  Today, it would cost about $170-180/sqft just for the structure and the interior.  The land would probably be $100/sqft.  The whole process will take 4 years as my family is finding out in the private market at the moment.  Every developer thinks that they can build in 2-3 years, but it usually takes 4-5 years.  So you figure you need at least 30-40% profit, this means that bringing new supply on, you need market prices of $392/sqft which is within 10% of my recent bank appraisal. 

 

Obviously, if your product is functionally obsolete, then replacement cost is moot.  Hey, it cost a boat load of money to dig a hole in the desert.  Doesn't mean that it will retain its value. 

 

But if you own finished property in NYC that doesn't have regulatory risk and development risk, it's worth a lot of money.  Trust me the city will find every fricking reason to put a stop order in.  It's very hard to develop here. 

[BG2008]

Darn it Pupil, why do you get me into these conversations with you on a weekly basis?  I need to get work done. :)

[CorpRaider]

Chris Hohn of TCI Capital (I haven't studied him but he' reputedly a skilled investor...for sure has a big ass AUM) bot some VNO and BXP.

 

Burry bot some ROIC.

 

Third Point owns some REITs including VNO.

[Gregmal]

Ive always thought using replacement cost was misleading and just a sales tactic for some RE assets. There's a big difference between buying a big box type ATT and WFC campus(or for instance see Toy R Us headquarters as shining example) at a fraction of replacement, and say, buying a SF or a small retail shop well below replacement. The big office campus can sell for half of replacement, but if you dont pin down the area, and you lose the single tenant, well...you've got a lot of space no one wants and not a lot to do with it but pay taxes or eat substantial renovation/demo costs. Whereas a moderate sized retail space can be released with ease, converted to a different use, etc...theres value there. SF, if someone can live there it works, and if the building + land cost is greater than what you can acquire the existing for, its kind of a no brainer.

[realassetsvalue]

A Midtown Manhattan Office Comp - rare these days!

 

$600 PSF for ~3 year sale and leaseback to Morgan Stanley. Deal is being pitched as a single-building HQ option. If a tenant would take the whole building, would require a lot of capital so I wonder what RFR are underwriting as an all-in basis and what rents.

 

According to the article, RFR passed on 900 Third Ave @ $400m / $680 PSF. Feels like 900 Third Ave should be marked down to $350m or $600 PSF (or lower?). It's one of the weaker properties, at least in terms of rent roll, as I think Pupil has pointed out previously. 900 Third is 80% leased but probably has a longer in-place lease term than 3 years (although I'm not sure of that).

 

https://therealdeal.com/2020/09/01/aby-rosen-buys-midtown-office-building-for-350m/

 

PGRE trades at an implied value of ~$560 PSF by my math, 7% cap rate,  9% AFFO yield based on annualized Q2 numbers, which still feels very cheap.

[thepupil]

I think $600/ foot for 900 Third and 1325 AoA would be too generous, at least right now. 

 

They appear to me to be the worst things that PGRE owns. I am much more comfortable w/ One Front Street.

 

I have both at $450 / foot in base case and $225 in the "maybe I'm an idiot so I'll haircut another 50%" case. None of those are too scientific. Without property level NOI or more knowledge (what's the NOI margin of an 80% occupied building in midtown?), these are spitballs and guesstimates.

 

I think I may be too harsh on 900 Third, but there’s simply a lot of uncertainty. I actually think One Front Street could be worth what they paid $800/Foot or more but that’s crazy talk for now.

 

 

 

 

 

[whistlerbumps]

Interesting on current NY environment..

 

$39/sq ft for Midtown Manhattan is not consistent with the NYC office REITs current valuations. $ESRT $SLG $VNO

[thepupil]

Interesting on current NY environment..

 

$39/sq ft for Midtown Manhattan is not consistent with the NYC office REITs current valuations. $ESRT $SLG $VNO

 

I replied to this. I have been surprised at the weight being assigned to a rumored 20K 4 year sublease, versus (for example), the 300K sf of leases signed by PGRE (and more by others) last quarter.

 

I am trying to be objective and recognize that perhaps this scuttlebutt is more representative of what's to come, than say the decisions of people simply renewing their lease while they figure out their longer term plans.

 

Nevertheless, I weight the reported results more heavily than this tweet.

 

I asked Diogenes/Wall Street cynic what he thought PGRE was worth, will be interested if he replies.

 

I'd also note the other day, he was tweeting that VNO and SLG traded at 3 caps. I asked him how he was getting there. no response.

 

(sell side would say 6, green street would say 7-8, VNO would say 10+), it's a simple question that doesn't have a simple answer and is highly dependent on how one values certain non-office properties). i struggle to see how anyone could get to 3%.

 

the guy has 51K followers, so he doesn't have time to answer my dumb questions.

 

in another tweet, some guy said "a big NYC RE firm is going to fail soon" and everyone was guessing and like 1/5 responses were VNO, which is kind of wild. VNO has $4 billion of liquidity and every single CMBS's most junior note trades at $99 (see the VNDO shelf), the pref's are above par, the unsecured debt is above par.

 

the narrative against these is super powerful.

 

I'm not used to owning something so publicly hated and frankly find it annoying. it could make you dig in (not good) or otherwise impact your thinking.

[CorpRaider]

I thought that thread about the rumored failure was telling.  They went right to the big public names and started comparing the scenario to a Lehman (seems way more likely it would be a private co that you know has a secret b/s and can't just issue stonk).  (It also seems shorts are feeding the WSJ stories) 

 

If these are the people on the other side of the trade, I feel better.  Sorely tempted to get some PGRE today.  Got some more VNO and SLG the last couple days.

 

I've been able to work from home basically as much as I want, as stated by firm policy, for like a decade.  But I still go in more than I work from home, because there is a the social/proof aspect, opportunities come up to work on projects/build relationships and also there are people on premises there to do things to help me, maybe free food/coffee, the computer network is better, and I can put my work junk where I want in my office without my wife complaining, they clean up for me and take out my trash, etc...  Like didn't "we" all work out of the home/farm back in the (pre-industrial) day and employers were like, "hey come do your thing as part of my organization and with my scale I will give you the perks and handle the work space requirements for you."  No way would I commute daily to midtown, but if prices adjusted so that more people could bike from Chelsea, that might be very attractive.

[Gregmal]

Eh, my tax dollars I am told go to supporting failures, and so to do my investment dollars!

[CorpRaider]

I don't get how my Lamar can have ripped but yet no one is going to drive to offices or retail in the future.  So who TF is going to be looking at those billboards?

[realassetsvalue]

Interesting on current NY environment..

 

$39/sq ft for Midtown Manhattan is not consistent with the NYC office REITs current valuations. $ESRT $SLG $VNO

 

I replied to this. I have been surprised at the weight being assigned to a rumored 20K 4 year sublease, versus (for example), the 300K sf of leases signed by PGRE (and more by others) last quarter.

 

I am trying to be objective and recognize that perhaps this scuttlebutt is more representative of what's to come, than say the decisions of people simply renewing their lease while they figure out their longer term plans.

 

Nevertheless, I weight the reported results more heavily than this tweet.

 

I asked Diogenes/Wall Street cynic what he thought PGRE was worth, will be interested if he replies.

 

I'd also note the other day, he was tweeting that VNO and SLG traded at 3 caps. I asked him how he was getting there. no response.

 

(sell side would say 6, green street would say 7-8, VNO would say 10+), it's a simple question that doesn't have a simple answer and is highly dependent on how one values certain non-office properties). i struggle to see how anyone could get to 3%.

 

the guy has 51K followers, so he doesn't have time to answer my dumb questions.

 

in another tweet, some guy said "a big NYC RE firm is going to fail soon" and everyone was guessing and like 1/5 responses were VNO, which is kind of wild. VNO has $4 billion of liquidity and every single CMBS's most junior note trades at $99 (see the VNDO shelf), the pref's are above par, the unsecured debt is above par.

 

the narrative against these is super powerful.

 

I'm not used to owning something so publicly hated and frankly find it annoying. it could make you dig in (not good) or otherwise impact your thinking.

 

Wall Street Cynic is Jim Chanos, which makes taking the other side of the trade on NYC office right now even more of a white-knuckle experience.

 

Narrative among the RE folk in NYC that I know (not billionaires or moguls) is also that its still early innings of a bloodbath... But in 5 years? NYC probably OK. Not particularly novel opinions but just adding to the anecdotal impressions.

 

SL Green have 410 Tenth in the market with CBRE. Comprehensive refurbishment, 640,000 sq ft, on the edge of Hudson Yards down the street from the Farley Building.

 

NOI of $43.25m fully pre-leased through 2036 - 52% to Amazon, 33% to First Republic Bank and 12% to Related Company - with leases starting 2021 and 2022.

 

Acquisition debt guidance from CBRE is 265 - 275 bps all in at 60% LTV for a 10 year term.

 

This is as prime as it gets and should be a key data point along with VNO's deals in the market to see where the top end of the market is today...

[thepupil]

oh shit. i respect his work and have been a vocal defender/proponent of him. that is surprising and unnerving.

 

Funny what pseudonyms do, I’d never have at all expected a response and probably would not have written if I knew it was him.

 

[CorpRaider]

I thought your response was fair.  All he said was the big REITs aren't priced for $39 per S.F.  Yes, no one can really argue that the entire market is not priced to reflect that sublease reportedly offered (not executed) during the pandemic... 

 

His public comments indicate that he's short a NY regional, CRE-focused bank.  Seems like a totally reasonable bet to me even as someone who is buying (in odd lots...haha) the big, scaled-up, NYC REITs.  That sounded like a smart bet even just based on the supply coming from new developments (man related cos ooof) + wework.

[bonkers]

The main concern I still have with Manhattan office is the risk of oversupply. Sam Zell seems to be very supply oriented, and has brought this up over the last couple of years. So has Barry Sternlicht even very recently.

 

From historical perspective, NYC construction has been elevated, but does not look that bad (Source: https://www.buildingcongress.com/advocacy-and-reports/reports-and-analysis/construction-outlook-update/New-manhattan-office-construction-nears-30-year-high.html):

1970s +55 M sqft.

1980s +49 M sqft.

1990s +11 M sqft.

2000s +19 M sqft.

2010s +27 M sqft. (estimate from few years back)

 

However, I don't have up-to-date figures, nor do I have any visibility to what is still under construction e.g. in Hudson Yards, on top of One Vanderbilt and Vornado's projects. My worry is especially what is still underway, coming say 2020-2022, and hitting the market during a period of low demand. 

[realassetsvalue]

I've attached a CBRE source. Take the broker positivity with a grain of salt and the forecasts aren't useful but they're likely to have a good handle on the construction numbers (page 17).

 

Broadly - 13m sq ft under construction scheduled to complete through 2023, which I think is about 3% of Manhattan office supply (somewhere around ~420m sq ft I think if I am remembering correctly). You can see about half is pre-leased and theoretically, the 2020/2021 completions are already factored into CBRE's availability (vacancy) rate...

 

SL Green presentations are usually pretty good on construction pipeline. From Dec 2019 - slides 24 & 25 - a more granular view of the upcoming construction pipeline by building: https://slgreen.gcs-web.com/static-files/f187c1df-7350-408e-b73b-083d37850dea

 

I don't have a good source with a similar picture right before the GFC to see if this is a better or worse outlook on the supply side but will try to look around for something on this later in the week.

 

 

H1_2020_Manhattan_Report_Final.pdf

[thepupil]

The main concern I still have with Manhattan office is the risk of oversupply. Sam Zell seems to be very supply oriented, and has brought this up over the last couple of years. So has Barry Sternlicht even very recently.

 

From historical perspective, NYC construction has been elevated, but does not look that bad (Source: https://www.buildingcongress.com/advocacy-and-reports/reports-and-analysis/construction-outlook-update/New-manhattan-office-construction-nears-30-year-high.html):

1970s +55 M sqft.

1980s +49 M sqft.

1990s +11 M sqft.

2000s +19 M sqft.

2010s +27 M sqft. (estimate from few years back)

 

However, I don't have up-to-date figures, nor do I have any visibility to what is still under construction e.g. in Hudson Yards, on top of One Vanderbilt and Vornado's projects. My worry is especially what is still underway, coming say 2020-2022, and hitting the market during a period of low demand.

 

there's no way around it in my view. the upcoming supply / demand imbalance is scary.

 

i could try to make an argument how the implied value of the NYC office in PGRE is very low depending on how you mark their SF exposure at which point one might bring up that SF is on fire and that there is an exodus from SF too. 

 

So instead. I'll just say, ya, it's scary.

 

[Gregmal]

The outlook may be bad, but on any reasonable basis, these companies are priced for that, and much worse. Yet, at pretty much any valuation, there will always be the "state the obvious" folks. Cuz you know, "NYC is looking pretty bad". VNO could trade to a 15 cap and there'd still be folks talking about "I wouldn't want to be in NYC" and "brick and mortar retail is dying, and office aint far behind!". I guess thats what makes a market. Embrace the hate.

[realassetsvalue]

Some market data from Cushman and Wakefield on the San Fran office market - probably more blood in the streets faster than I was expecting: https://www.sfchronicle.com/business/article/S-F-hits-highest-office-vacancy-rate-in-nearly-a-15613639.php

 

I have attached the main chart for those who don't want to use the Google Cached version to get around the paywall.

 

Vacancy rate up to 14.1% from 9.9% last quarter and 5.4% a year ago. Of current vacancy 7.4% is sub-lease, so over half.

 

"Asking rents were down 5.9% from the second quarter to $78.45 per square foot annually. With the pandemic erupting only six months ago, rents are expected to fall further, Sammons [C&W guy] said. In the dot-com bust, they fell 63% and in the 2007-2009 recession, whose effects were felt in San Francisco even after the official end of the economic contraction, they fell 27%, said Sammons."

 

The next couple of quarters will be important to determine whether the market impact will be on the scale of the GFC or the Tech Bubble. I approximately feel like it is the former that is priced in and the latter is not fully. My forecast is for a GFC-like impact but on the look out for disconfirming evidence.