Office Closures Due to Remote Work Cost NYC $12B Annually

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Good morning. Manhattan remote work saves $4,661/yr for workers but costs NYC $12.4B/yr. Morgan Stanley's Mesa West Capital raised $1.37bn for real estate credit fund, surpassing $1bn target. Meanwhile, Citi's Matt King attributes the recent market rally to ended $1T liquidity injections.

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ECONOMIC CONSEQUENCES

Remote Work Costs NYC $12B a Year By Killing Big Offices

 According to a Bloomberg analysis of Stanford University data, Manhattan office workers are spending significantly less while working remotely, which is resulting in a potential annual loss of up to $12.4 billion for brick-and-mortar businesses in NYC. 

Commuting is for the rich: Last year, the average Manhattan office worker went into work just 30% of the time compared to pre-pandemic norms. All that working from home translates to 70% less money spent near their cubicles—or $4,661 less per year on food and entertainment. And only 48% of NYC office workers are in the office on weekdays, according to Kastle Systems. 

Saving thousands costs billions: When you take that figure and multiply it by the 2.7 million office workers in Manhattan, that adds up to a lot of lost business for NYC retail. But Gotham isn’t the only major US city to see a significant decline in retail profits. LA workers are spending $4,200 less annually, DC residents are stashing away $4,051 more each year, and even Miami migrants are saving $3,323.

➥ THE TAKEAWAY 

The slow leasing snowball: Nearly 30% of employers have scaled back their office footprints since 2020, which may have contributed to Manhattan’s lowest quarterly leasing volume on record since Q2 2021 (4.9 MSF in Q4 2022). Unsurprisingly, NYC real estate sales are also expected to fall by $101B this year thanks to the weaker office market. 

Consequently, Manhattan businesses such as restaurants and retailers, which are vital to the city's economic growth, are missing out on sales of up to $12.4 billion annually. The question arises: what happens to the value of a city when the presence of workers is no longer required? Only time will tell... 

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DELICIOUS DEBT

Morgan Stanley Credit Arm Raises $1.37B For Value-Add Debt Fund

Despite sky-high rates turning the current lending environment into a blasted hellscape, wealthy real estate investors are still borrowing a lot of money. In fact, Mesa West Capital just raised $1.37B for their latest fund.

Quick facts: Acquired by Morgan Stanley Investment Management in 2018, LA-based Mesa West Capital has been rolling out closed-end, value-add funds since 2005. The $1.37B Mesa West Real Estate Income Fund V, which counts insurance companies and pension funds as investors, is their biggest fund to date.

Following the money: Although this is the first fund Mesa has rolled out since they were acquired in 2018, they’ve been busing putting capital to good use. Back in August, they lent $139.9M to Sares Regis Group to reposition a 386-unit multifamily complex in Broomfield, CO, and $49.24M for ESG Kullen and Angelo Gordon to recapitalize a 219-unit multifamily property in Palm Beach County, FL. They’ve also originated $310M in West Palm Beach, Delray Beach, Boyton Beach, and Jupiter in the past few years. 

➥ THE TAKEAWAY 

‘Tested through market cycles’: According to Mesa West principal Jeff Friedman, sophisticated investors have been more than happy to give Mesa West money they want to go with real estate credit managers ‘who have been tested through market cycles.’ And Mesa West has certainly seen a lot in the past two decades, with loans ranging from $20M to $400M across 400 transactions that have added up to $26B since 2004.

RISK OFF

Global Liquidity Drain Coming as Central Bank Shenanigans End

According to Citi strategist Matt King, the market’s recent run-up and risk rally may be coming to an abrupt end as coordinated central bank liquidity injections taper off.

An extra $1 trillion: ‘The origins of this year’s risk rally lie in obscure technicals driving central bank liquidity,’ King wrote in a report. Specifically, he believes markets have been propped up since October by a $1T increase in central bank reserves that have led to a 10% boost for stocks, 50 basis points of tightening in investment-grade credit spreads, and 200 basis points for high-yield spreads.

Working in concert: According to King, four major factors have led to all this increased liquidity, namely 1) the Fed’s overnight reverse repurchase agreement facility and Treasury’s general account injecting cash back into the banking system, 2) European nations withdrawing hundreds of billions in Euros from the ECB since August, 3) Japanese reserves going up $200B due to their yield-curve control program, and 4) China’s central bank’s liquidity operations adding $400B in December alone.

➥ THE TAKEAWAY 

Running out of fuel: King’s analysis certainly helps explain why many finance leaders have expressed little faith in 2023’s market rally, which seems to fly in the face of the Fed’s commitment to keep raising rates for the foreseeable future. “At this point, we think most of the boost to reserves is done…the story for the rest of the year should return to being one of liquidity drainage and risk weakness,” King concluded.

• Not another Tuesday: After closing 200 stores, Dallas-based discount retailer Tuesday Morning has once again filed for bankruptcy, with $100M–$500M in liabilities.

• Scratch her back: Real estate moguls who contributed six figures or more to NY Gov. Kathy Hochul’s reelection campaign may win big if her proposed budget gets the green light.

• Easier said than done: To compete with Amazon (AMZN), Walmart (WMT) has staffed 16 technology hubs to build out its e-commerce platform. But now it’s closing 3 of them. 

• Still Rome: Despite a slow H2 2022, Manhattan investment sales shot up 40% last year, reaching $21B. Multifamily took the lion’s share of sales, while CRE investments were up 63%.

• Polishing the Rust Belt: Detroit is weighing a new land-value tax code that would replace current taxes with a single tax on land value only, which should drive up home values.

• New Exclusion Act: A dozen US states are considering a ban on real estate sales to Chinese nationals and companies. China is crying foul.

• The ‘Singles Tax’: Being single in NYC is expensive. New Yorkers renting alone pay $19,500–$24,000 more for one-bedrooms than couples living together. 

• Don’t tread on our elders: The Biden administration wants private equity-owned nursing homes that get Medicare and Medicaid to disclose more details on management practices. 

• Office renaissance: Across the pond, 12.6 MSF of office space was leased in 2022, up 15% from the previous year. European office demand has rebounded strongly since the pandemic.

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📰 Deals & Dealmakers

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• Motor City dreams: Detroit-based construction software startup Rivet Work just closed a $5.6M seed round and has raised $8.2M to date.

• Electric diplomacy: Ford (F) has partnered with a Chinese supplier on a new $3.5B EV battery plant in Michigan, despite ongoing US-China tensions.

• Building up Dallas: KDC will commence construction on the $200M, 500 KSF Parkside Uptown tower in Dallas by spring. The tower is expected to be completed by 2026.

• Healthy capital: PREIT sold a Plymouth Meeting Mall Whole Foods spot for $27M to raise capital, reduce debt, and improve its balance sheet.

• Oceanfront views: Blue Suede Hospitality Group snatched the historic 79-room, 32.33 KSF South Beach Plaza Hotel in Miami for $26.5M.

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