NYC Largest Office Landlord SL Green Outperforms in Q2

SL Green's strong performance offers a beacon of hope in Manhattan's tough office market, but widespread recovery remains distant amidst high vacancy rates.

Jordan B. & Han-Gwon Lung
July 19, 2024

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Good morning. SL Green surpasses analyst expectations in Q2 despite ongoing challenges in Manhattan’s office market. Plus, Blackstone is betting on CMBS demand after closings its biggest multifamily deal yet.

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OFFICE MARKET

NYC’s SL Green Enjoys Strong Q2 Despite Office Market Struggles

Manhattan's largest office landlord, SL Green, reported massive second-quarter results, exceeding analyst expectations, with funds from operations reaching $2.05 per share against a forecast of $1.65.

On track: SL Green’s success is partly attributed to the popularity of its Summit observation deck at One Vanderbilt, which has drawn significant foot traffic and revenue. The firm is also well on its way to leasing 2M SF this year, having already secured tenants for 1.4M SF and expecting 91.5% occupancy by EOY.

Zoom in: Despite SL Green's success, the broader Manhattan office market remains challenging. Since March 2020, an additional 42.8 million square feet of office space has entered the market, an increase roughly equivalent to the entire financial district in Lower Manhattan. This surge has pushed the office availability rate to 17.9% by the end of June, slightly down from the 18.1% high in Q1.

High demand: Tenants are favoring Class A buildings to encourage a return to the office, leading to increased leasing activity in top-notch properties. Class A buildings are capturing more than their fair share of leasing activity. However, with almost two-thirds of Manhattan's total office stock being Class A, there is ample supply. To attract tenants, landlords are offering incentives such as one to 1.5 months of free rent per year and generous tenant improvement allowances.

Holding up: Class A buildings built since 2000 have a lower-than-average availability rate of 13%. Midtown, especially the Plaza District, is seeing reduced empty space. Rents in Hudson Yards, Greenwich Village, and Chelsea are above prepandemic levels, with Hudson Yards up 5% since 2019. Meanwhile, Downtown struggles with vacancy rates over 20% and falling rents.

➥ THE TAKEAWAY

Looking ahead: SL Green has a bullish outlook for the year's second half. The firm raised its 2024 earnings guidance to $7.45-$7.75 per share due to strong portfolio performance and additional fee generation while keeping net income guidance steady at $2.73-$3.03 per share. SL Green's Q2 success highlights the resiliency of well-managed office portfolios in a rebounding market.

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✍️ Editor’s Picks

Boosted bonds: Blackstone (BX) increased its CMBS bond offering to $2.95B to fund its $10B acquisition of AIR Communities (AIRC), its largest-ever multifamily deal.
Storage incident: Dubbed 'the largest IT outage in history,' a global IT failure is impacting airlines, banks, retailers, broadcasters, and even the Olympic Games.
Diving in headfirst: Homeowner pool demand surged during the height of the pandemic, with 96K new pools ordered in 2020 and 117K in 2021. But 2023 demand is disappointing.
Playing it close: Seven US banks with over $100B in assets have uninsured deposit ratios over 50%, posing liquidity risks.
Ahoy, Philly: Philadelphia will welcome back cruises in 2026 after 15 years, boosting its tourism economy with Norwegian Cruise Line (NCLH) voyages to Bermuda, Canada, and New England.
Mapping success: Here’s how NYC's top real estate broker, Bob Knakal, is moving toward AI in search of further success.

🏘️ MULTIFAMILY

En Avant: Minneapolis ranks as the top city for renters in 2024, with a surge in online searches and a 21% decrease in available apartments.
Urban oasis: San Francisco's Board of Supervisors unanimously approved a plan to transform 30 acres of parking lots into 3.5K residential units.
Workforce wonder: Apple (AAPL), along with partners, established a $50M Bay Area Housing Innovation Fund to provide affordable housing quickly and affordably to workers.
Golden deal: GID Real Estate Investments purchased a 331-unit property for $167M in Rancho Penasquitos, CA, the second-largest single-asset deal in the state.

🏭 Industrial

Pumping up: Prologis (PLD) plans to spend $1B to $1.5B on acquisitions this year, up 66.7% from prior projections, amid increased market activity.
Rethinking cigs: Philip Morris International Inc. (PM) invested $600M in a new Aurora, CO facility to produce ZYN pouches, creating 500 jobs and $550M in annual economic impact.
Industrial sunset: LA’s industrial market faces new challenges with below-average retail sales and nearly 4% of industrial space vacant, marking a 14-year high.

🏬 RETAIL

Tex-Mex merger: Darden Restaurants (DRI) is set to acquire Chuy’s Holdings (CHUY) for $605M in an all-cash deal.
Lots of confidence: Asana Partners from North Carolina will renovate 44 Oak Lawn Design Plaza in Dallas, costing the firm around $164 PSF.
Mall makeovers: Pacific Retail paid $425M for LA’s The Shops at Palm Desert and Bridgewater Commons, renovating the two malls for new development.

🏢 OFFICE

Cutting the fat: M&T Bank Corp. (MTB) reduced its risky CRE loans by $987M in Q2, particularly for office properties, which continue to pose challenges.
Atlanta-bound: StubHub will open a new office hub in Atlanta, laying off hundreds in Utah, but relocating a "select few” employees, ahead of its anticipated summertime IPO.
Beantown blues: Boston’s office market struggles with historically high vacancies as employment growth remains muted despite low unemployment rates.
Fire sale bet: Namdar and Empire Capital bet on Manhattan offices at 345 7th Ave, which faces a foreclosure auction on September 12.

🏨 HOSPITALITY

Boutique buyout: Hyatt (H) is in late-stage talks to acquire boutique hotel brand Standard International, following a string of similar acquisitions aimed at expanding the hotelier’s leisure portfolio.
Hallandale revamp: BH Group and Prime Group are planning to build a South Florida hotel at a beach site with 246 rooms, 281 parking spaces, and a public plaza.

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