Vornado Loses Big in the Big Apple with a $600M Write-Down

Good morning. One of NYC's largest commercial real estate players has taken a tumble, with property values dropping by a whopping $600M. Demand for coworking space in Miami has surpassed pre-pandemic levels, with further growth on the horizon.

Meanwhile, J.P. Morgan's timber-investing arm plans to double down on woodland and is set to acquire 250k acres in Southern US for $500M. Talk about a bet on Mother Nature!

📖 Read about the 50 priciest office building sales of 2022, over 25,000 sqft, based on CommercialEdge data, and their respective markets.

🖥️ Watch this video from the NAIOP Research Foundation to understand how CRE ripples out into the broader economy and see how it's all connected.

🎧 Listen to why CBRE’s global chief economist says a recovery in the real estate capital markets is likely to begin around the middle of the year,

MIDTOWN MELTDOWN

Vornado writes down value of its portfolio by $600M

It appears that Vornado Realty Trust (VNO) may be the newest victim of NYC’s real estate woes. The REIT has written down its portfolio by $600M, with 80% of the write-down ($480M) impacted by Midtown properties.

Times have changed: Four years ago, the seven buildings included in the write-down were valued at $5.6B with $250M in net operating incomes. Assets included 489 KSF of retail space, 327 KSF of office space, signage, a Broadway theater, and a parking garage. Today, they’re valued 30% less at $4B with NOI of $200–$225M.

Not a good look: It hasn’t been a great run for NYC’s second-largest landlord. In July 2020, Vornado recorded a $306M impairment loss on 5th Avenue and Times Square properties. And last month, they cut their dividend by 30%, surprising analysts. On top of all that, they’ve also been booted from the S&P 500.

➥ THE TAKEAWAY 

Sticking the landing: While the situation appears dire, Vornado isn’t throwing in the towel just yet. COO Michael Franco believes that “retail has bottomed” and they’ve inked a deal with NY State to build several office towers as part of their Penn Station-area redevelopment. It appears Vornado has some wiggle room, but all eyes will be on their Q4 earning report, set to be released on February 13th.

COWORKING CAPITAL

Miami crowned as the global hub of coworking

As the nature of workspaces continues to evolve, Miami has emerged as the undisputed US capital of coworking. The city boasts 1.6 MSF of coworking space over 59 locations. And that number is only growing as owners attempt to meet the ever-increasing demand.

Fun in the sun: Last year, Miami saw a 143% increase in flexible office space compared to pre-pandemic levels. The year ended with coworking firms occupying 325K of the city’s available office space, a figure larger than 2021 and 2020 combined. This trend isn’t confined to coworking, either, as Miami enjoyed 48% more leasing activity last year than it did in pre-Covid years. Atlanta is the only other major US metro market to see office leasing activity return to pre-pandemic levels.

Landing and expanding: The forecast for Miami’s office market looks so good that the country’s biggest coworking firms are scrambling to expand. For instance, even though WeWork (WE) closed 40 hubs in 2022, 97% of their Miami spaces are occupied—and they’re hungry for more. Meanwhile, competitor Industrious has 154 KSF of space currently available, but isn’t too worried about it—they have plans to launch another 115 KSF in 2023 alone.

➥ THE TAKEAWAY 

A bright and flexible future: On the whole, only 3.5% of Miami’s office space is taken up by coworking locations, so it’s by no means taking over the office market—yet. In a JLL survey of 1,100 corporate decision-makers, 43% of respondents admitted they plan to increase their use of flex office space within 3 years. And CBRE seems to believe that this trend will spread nationwide, projecting that 13–18% of US office space will be flexible by 2030.

CARBON CAPTURERS

JP Morgan just bought a massive forest to make money—and not just from the timber

The timber-investing segment of J.P. Morgan Asset Management (JPM) has recently acquired around 250,000 acres of forest across the South’s ‘Pine Belt’ for $500M. Timber production is on the menu, of course, but carbon capture is the ultimate goal.

Forest for the trees: Carbon capture is a brilliant way to make money without having to touch any of the trees you own. In essence, companies wishing to offset their emissions will compensate owners of timberland to prevent logging so their trees can absorb carbon instead. The increase in corporate pledges to offset carbon has prompted investors to rethink forests as long-term assets, ones that produce value without the associated costs of logging.

Easy being green: This reimagining of the true value of timberland has caught on in recent years. In December, Manulife Investment Management (MFC) announced a $500M raise to buy properties where sequestering carbon would be the priority. And back in November, Oak Hill Advisors made a $1.8B purchase for forests in 17 states to reduce logging in favor of offsetting carbon emissions.

➥ THE TAKEAWAY 

Planting seeds: The practice of holding onto forests for their carbon offset credits isn’t yet profitable enough to truly affect the flow of timber to mills. But the number of buyers looking to make these investments is starting to influence the markets. The CEO of PotLatchDeltic (PCH), Eric Cremers, expects timber deals to decline in 2023 as sellers hold out for higher prices for their trees.

• REIT this way: Analysis of the REIT market suggests that trusts have gradually raised less capital since 2021.

• Back to the drawing board: NYC property magnate Scott Rechler prepares to surrender some office properties to lenders in the age of remote work and high interest rates.

• Population losses: DC, NYC, Houston, and LA all saw their populations decline during the pandemic. But where did everyone go? 

• On the buzzer: The San Francisco Board of Supervisors has passed an 8-year plan to build 82K housing units, narrowly avoiding the builder’s remedy.

• Loosening up: The Fed’s rate hikes have finally caused rents to go down, although they are still higher than they were just one year ago.

• Half-baked: Marijuana businesses are bumping up against limited options for properties and high asking prices.

• Let the good times roll: NY governor Kathy Hochul has proposed a 4-year extension of an affordable housing tax break in her current budget for the state.

• Score one for Indiana: Lafayette, Fort Wayne, and Elkhart, Indiana led the WSJ emerging housing market in Q4.

• Not dead, just resting: After a multi-year lull, January went down as the strongest month for Manhattan office leases since December 2019. 

• Loving life sciences: Alexandria, VA, experienced near-record demand last year driven by incoming pharma tenants, even as the industry experienced a drop in venture funding.

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🤝 Deals & Dealmakers

• Snapped up: Carmel Partners has purchased thousands of apartments in the Bay Area through six affiliates to the tune of $1B.

• My mall now: JBL Asset Management has purchased two retail properties totaling 384 KSF in Savannah, GA, for $63M.

• Glow up: Samson Stages is converting a warehouse in Red Hook into a 330 KSF production studio that will cost $400M.

• Norway is the way: Norway’s $1.3T wealth fund has upped its most significant stakes in 4 RE companies: Vonovia SE (VONOY), Alexandria (ARE), Equity Residential (EQR), and Invitation Homes (INVH).

• An offer they couldn’t refuse: Hilco Real Estate has announced plans to sell a 49 KSF data center in Forth Worth, TX.

• New town in town: North America Sekisui House LLC has revealed plans for a 60-acre mix-use project near Charleston, SC.

• High-caliber: Caliber Companies has secured a $55M bridge loan from Maxim Capital Group and Beach Point Capital Management to sponsor three of its airport hotels in Phoenix.

• Ben Franklin would be proud: SkyREM will be moving ahead with its plans to convert Philadelphia’s Quartermaster site into the $250M mixed-use Quartermaster Science + Technology park.

📈 Chart of the Day

😎 Offering-MEME-Orandum

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