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 Office delinquencies down, but…the overall US CMBS delinquency rate fell four basis points to 5.40% in September, higher than it was one year ago, when the US CMBS delinquency rate was 4.78%.


•U.S. posts its largest budget deficit since 2013.*

•Bellwether GE slashes its forecast.

•Is there hope for Scranton? Technology seems to be moving from place to place less easily."*

•Managers of bonds backed by leveraged loans rein in retail exposure.*

•US cities shower Amazon with offers of tax breaks.*

Times Square feels heat from Hudson Yards.

•Housing-supply shortage weighs on home sales. Also: A confluence of disasters is giving the U.S. construction industry a strong dose of inflation, led by higher costs of lumber and wood products for framing and sheathing. Also: where the rent is too high.





•Canadian inflation jumps to 1.6% on gasoline prices.


•Frankfurt has emerged as clear winner in battle for U.K. jobs.


•China’s warning of a ‘Minsky moment’* should not be ignored.

•Property weighs on China’s expansion: The property sector was a major drag on China’s economic expansion in Q3. Output from construction climbed 4 percent from a year earlier, versus 5.4 percent growth in the prior three months, the statistics bureau said. Growth of real estate services slowed to 3.9 percent from 6.2 percent, while the economy grew 6.8 percent.

1) Rising Unemployment?

Note that the BLS’s monthly state and local unemployment report was released today, and the initial look at the unemployment rate in major cities wasn’t pretty. Most of the major metros have seen an increase in the unemployment rate over the past two months. Also: while the 127k drop in employment in Florida state between August and September can be explained by the impact of the hurricane, the same can’t be said of the 34k drop in New York state employment, for example. Slowing in the (major) cities?

Metro Division July 2017 Unemployment Rate  Sept. 2017 Unemployment Rate 
Los Angeles-Long Beach-Glendale 4.5%  4.9% 
Miami-Miami Ceach-Kendall  4.7%  4.5% 
Chicago-Naperville-Arlington Heights  4.5%  5.1% 
Detroit-Warren-Dearborn  3.3%  3.6%
New York City  4.7%  5.1% 
 Seattle-Bellevue-Everett 3.5%  3.8% 


Also, do older workers always “cost” more? Median wages for 45-54 year olds were lower than median wages for 35-44 year olds in Q3.



2) Regus-Parent IWG Loses 1/3 of its Value on Profit Warning (FT)

IN SHORT: A blip? Shares in IWG slumped as the serviced office group blamed Brexit and global ‘disruption’ for its profit shortfall. IWG's profit warning may be the precursor to weaker demand for office space in London, though evidence suggests competition among serviced-office providers is more likely.

The chief executive officer of IWG, the world’s largest serviced office group, said he was unconcerned by competition from US rival WeWork as his company issued a profit warning on Thursday. Shares in IWG, formerly known as Regus, fell more than 34 per cent after the group said that operating profit for 2017 would be “materially below market expectations”. It blamed a “Brexit effect” in London and global “disruption” as a result of natural disasters in the US for the expected lower earnings. IWG runs offices in about 3,000 locations in 100 countries and is best known for its Regus brand but also operates Spaces. It has faced stiff competition from US upstart WeWork, which is valued at roughly $20bn and has been expanding aggressively into London during the past year.

Mark Dixon, IWG’s chief executive, said of the threat from the US group: “Yes, there are more competitors, but I’ve been in this business for 30 years and there’s never not been a competitor. We operate in many other cities where WeWork operate and there is no problem.”

He added that IWG had a presence in many more cities than WeWork. The company said revenue on its “mature” buildings, which it has owned for at least a year, did not pick up as much as expected in the third quarter, while the London office market had been weak. “The issue in London is quite clearly a Brexit effect,” said Mr Dixon. “We’re an international company and we get a lot of feed coming through from overseas, and that has slowed because London will no longer be the capital of Europe.” IWG said about 8 per cent of its revenues were generated by its London leases. The company said costs had increased as it invested in growth, opening new centres as global demand for flexible office space available on short-term leases rose. Mr Dixon said it took IWG roughly one year to gain enough tenants to profit from leasing a building. He denied that IWG had tried to expand too quickly and said the company had made “good investments”. “We’re not investing to waste money,” said Mr Dixon. “We’re very disappointed and it’s a setback, but the strategy is the right strategy. We are optimistic about the future.” Even accounting for a potential improvement over the remainder of the year, the company said operating profit for the full year was likely to be between £160m and £170m. Last year the figure stood at £185.2m Mr Dixon said the company would not be taking any particular action as a result of its profit warning. “[We will] just continue doing what we’re doing,” he said. “We believe it’s a blip.”

The serviced office sector suffered in the early 2000s after the collapse of the dotcom boom. The US arms of both Regus and HQ Global Workspaces, a rival company, both entered Chapter 11 bankruptcy protection. In August IWG reported pre-tax profits of £80.8m for the six months to June, a 4 per cent decline on the previous year. In late afternoon trading, shares in FTSE 250-listed company had fallen 33 per cent to 213p, leaving them down a fifth since the start of the year.

3) Take-Aways from SLG's Call

IN SHORT:Again, with the leasing volumes. Yes, they’re strong, but SLG is only calling for a 2% increase in same-store NOI this year—hardly a blowout.

The same old

“The level of uninterrupted job growth is record setting in New York City and is a major contributor to the take up in the third quarter leasing activity that is keeping overall vacancy between 9% and 10%. Leasing market conditions strengthened in the third quarter as Midtown experiences highest amount of quarterly leasing activity in the past two years...our same-store net operating income increase of 1.9% trended up from the prior two quarters of the year and we expect that trend to continue.”

The pipeline…hurt by Hudson?

“Our leasing pipeline remained strong at 840,000 square feet, of which leases out for signature and negotiation account for over 350,000 such square feet. And we have about a 0.5 million square feet of deals in term sheet -- credible term sheet beyond that, that would more or less be deals for Q1 of 2018. This pipeline at 840,000 square feet is larger than it was in early September, I think when we last spoke about our pipeline results and this is continuing to build. The mark-to-market on the deals we hope to close in the fourth quarter is approximately 11% which would be within the range of our guidance for the year and consistent volumetrically with a goal of 1.6 million square feet of total leases signed, and this notwithstanding that the 1.6 million square foot stretch goal that volume would double the amount of square footage that we had expiring in all of 2017. While mark-to-market compressed in the second half of the year, we hope to see this trend reverse itself as leasing volumes increased consistent with the demand that I spoke of that was evident in Q3 and availabilities in new construction on the West Side is reduced as that space leases up.

Lease termination income: a good news/bad news story

“From a cash NOI perspective, our same-store cash NOI performance improved as expected during the quarter, bringing us to a 1.3% increase for the first nine months or 1.9% excluding lease termination income. For 20 years, lease termination income has been a very reliable source of revenue, and as a result, we've always provided same-store cash NOI guidance, including the revenue stream. This year, unfortunately has been different, against the projection of $8 million of lease termination income for the year, that's our historical average, we recorded only $2.5 million so far, and we don't see much of any termination income coming in the fourth quarter.

This potential $5.5 million shortfall is a good news, bad news story. The good news is that the tenants are still in place and occupancy is maintained. The bad news is that the shortfall weighs on earnings and same-store results, such that we do not expect to hit our 2% to 3% same-store cash NOI guidance.”

• 1515 Broadway—continues to be in negotiation (“We're on track to try and complete 1515 by year-end”). Also: “Looking specifically at the third quarter, we saw a reduction in rental revenues of about $5 million relative to the second quarter, primarily from 1.9 million of percentage rent at 1515 Broadway, which is recognized only in the second quarter of the year when it is received as per the lease.”

• The 4% increase in cash rents on released space was “really skewed by just two buildings” where “a couple of high rent deals that had burned off.” They are sticking with their 11% -14% annual increase projection for mark-to-market rents.

• There was also $4 million less income recorded on investments in 2 Herald Square in the third quarter, as they were put on non-accrual status in early August.

1 Vanderbilt

Did the leasing achieved this quarter with the German banks fall into your underwriting range of $130 to $150/sf? “It exceeded…on a weighted average for the entire building and for the floor that was leased, that lease exceeded the underwriting.”

Worldwide Plaza: Shout-out to Nomura and Cravath (your rents will be going up...)

“I also want to mention that yesterday we closed on our acquisition of a joint venture interest in Worldwide Plaza, a trophy asset with attractive going in returns and an excellent tenant roster. The relatively low price per square foot and significant future upside, due to average in-place rents that are well below market made this opportunity highly appealing to us.”

“Cravath has seven years of term left, Nomura has more, as Marc said, it's a below market transaction. So, I think there is a lot of upside and we have a lot of time to kind of work with the tenants and optimize the deal. The average rent overall for the building is well-below market, but long dated. We think, Cravath is a terrific tenant, and they occupy some of the primaries of that building. And there will be opportunities down the road with those tenants and others too. We think we'd be able to tap into the embedded rent opportunity to create a value, which will be evidenced with some kind of value creation maybe re-capital event three to five years down the road.”

On investment sales

“I think the volumes obviously are down year-over-year. I think a lot of that is reflective of the attractiveness of financing markets, and I also think you've seen a lot of velocity in the very recent past with our trade of 16 Court, the trade of 685 Third on Third Avenue which was a very positive trade for the market with a Japanese buyer and the trades which were announced of the NYRT assets, the Twitter and Red Bull buildings and the 36th and 38th Street buildings, the West Side collection, all of which were done at very strong pricing. So I think the pricing has not been impacted, the velocity has been impacted because of the attractiveness of that financing market and obviously the volumes do reflect it, but there is a healthy amount of transaction activity in the market.”

“I think European and Japanese [investors have been] stepping up, China clearly pausing pending some of the outcomes of the meetings they are having now. And still a lot of interest on the debt side from Korean capital. They're fueling a lot of the -- a lot of the deals out there, and steady interest from Canadians.”

Are you listening, analysts? The market is BALANCED

“Yes, concessions are higher than originally budget, but [are] offset by higher rents. So -- and I think that's… what we keep trying to reemphasize… that the market is better than some people’s sentiment.”

“You shouldn't look at TIs much differently than other forms of expenses or even revenues. They will rise over time generally just due to the natural results of cost of construction, I mean that's ultimately what you're getting at is what is the cost to build-out space to a level that's acceptable for a level of rent over the years those construction costs are rising, hence the TIs rise, hence we budget for that.

We're probably right on budget in terms of our TIs. You guys see the numbers. They were pretty much in line with the prior quarter and really the entire year. So if the answer -- if the question is, are they higher? Yes. Materially? No. Are they -- is it in line with our budget? Yes or maybe we'll do a little better. And is it offset by higher rents, which we're also achieving? Yes, in net effectives, I guess, on portfolio-wide they're up for us. So it's -- in very hot markets, you can drive those concessions down. And in bad markets, you may have to see them spike. But in general, markets like we have now, which are relatively balanced, it's typically an amount required to deliver a certain level of finish that is acceptable and customary for the kinds of tenants that are renting at these levels.”

Less TAMI, more Finance

“A lot of our leasing that we've seen in the portfolio in the third quarter were dominated by financial services, legal and TAMI and the deals that we're negotiating now it's primarily financial and legal, less TAMI and that's not a function of less TAMI demand it's more function of the product that we have available right now.”

Where to buy

“But we are pretty much where we want to be on the acquisition front and on the disposition front, as it relates to other parts of the market. We're obviously very invested in and have a major presence in the East Midtown market in particular. And one of the areas, as an example that we think has great supply and demand metrics, low availability, almost non-existence of big blocks is Midtown South. So, I'd say that's one of our real preferred areas of acquisition. Our last big acquisition prior to Worldwide, was 11 Madison. In that area, we own 1 Madison, we own 304 Park Ave South, and two buildings on Sixth Ave, and yeah, we're constantly scouring for more in that area because we think the -- we think the demand profile there, the types of tenants and the types of opportunities, which are somewhat limited, given the inventory down there are particularly appealing. So, we'll try and do deals like that, even extrapolating that a little further Downtown to 110 Greene, which we did about a year and half ago. Those kinds of deals, which that has a significant office component at 110 Greene Street is our attempt to gain exposure in high-quality buildings in those submarkets, where we think there is relatively good demand.”

On retail

“I think we feel comfortable with our current position, because we are generally very well leased across our portfolio. There's definitely sub-markets where there is quite a bit of vacancy right now given sort of a lack of tenant demand, some combination of lack of tenant demand and slowness to adjust asking price on rents. So, there are definitely sub-markets with vacancy that are sort of shaking out. We've seen that type of shake out before in various sub-markets, Upper Madison specifically, other sub-markets come to mind. We're somewhat insulated from that again because we are generally pretty well leased on the retail side and we have good remaining term on our leases. And I think we're comfortable with our positioning and the sub-markets we're in. -- I think there is an asset on the market now in SoHo that has an LVMH lease, which is fairly long in term. We're curious to see where that trade trends. 522 Fifth was on the market. That asset hasn't cleared. But that would be another sort of indicative trade. So it's sort of tough to peg exactly where cap rates are right now in the retail side.”


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