The Manhattan office market took a big hit during the pandemic. Many companies pivoted to remote work, which has weighed on the demand for office space. Put simply, the city's office occupancy level and rental rates have been under pressure.
However, the New York's largest office landlord, SL Green Realty (SLG 5.03%), remains as optimistic as ever that the city will more than recover from the pandemic. That's leading the real estate investment trust (REIT) to make a big bet on Manhattan's future.
SL Green Realty recently reported its first-quarter results. On one hand, the office REIT posted lower funds from operations (FFO) than the year-ago period. Meanwhile, rental rates on recently signed leases were below the fully escalated rents on the same spaces. Those metrics suggest it's still facing some headwinds.
However, CEO Marc Holliday struck a decidedly bullish tone on the accompanying conference call. He opened by proclaiming:
After a year defined by lockdown, closures, and restrictions, New York City is now undergoing a vast reawakening. Businesses, restaurants, and hotels are reopening, and restrictions are being eased. The leisure and hospitality industry is starting to bounce back as domestic tourism is increasing in Manhattan. 100,000 jobs have been regained over just the last three consecutive months, during the first quarter of this year. Leasing volumes for the period January through March were higher than any quarter since the outset of the pandemic. These are just some of the signs indicating a robust and perhaps, unprecedented recovery is underway.
He also pointed out that several of New York City's largest employers, including Google, Bloomberg, Amazon, and JPMorgan Chase, have firmed up their plans to have workers return to the office this summer or sooner. On top of that, the city will benefit from $100 billion in fiscal stimulus flowing its way over the next 12 to 18 months. When combined with a surging financial sector, a significant upswing in business activity, and hiring trends, "that's the recipe for what could be a truly explosive recovery in New York City," according to Holliday. He noted that "SL Green is well positioned to meet the growing tenant demand and develop the future of New York City."
Switching from defense to offense
The company's optimism surrounding the future of Manhattan's office market has it switching gears. The REIT had spent much of the past two years shorting up its financial position by selling assets. For example, it sold 707 Eleventh Avenue for $91.3 million in net proceeds during the first quarter and its leasehold interest in 1080 Amsterdam Avenue for $6.9 million.
However, the company recently turned the page by making its first large-scale acquisition in years. It's buying 450 Park Avenue for $445 million. The 337,000 square foot 33-story tower features luxury office and prime retail space.
Chief Investment Officer Harrison Sitomer commented on the deal:
Our investment in 450 Park Avenue represents the ideal asset for our first office acquisition since 2018 and further demonstrates our conviction in the vibrant East Midtown office corridor. As the most recognizable thoroughfare in East Midtown, Park Avenue continues to attract top-tier tenants and triple-digit rents. Given the domestic and international appeal for blue-chip assets like this one, we expect significant interest from joint venture partners who will capitalize this deal with us as we grow our investment management platform.
Its first office purchase in four years enhances SL Green's leading Manhattan office portfolio as demand for high-quality space is just beginning to improve. The REIT believes it can leverage this investment by bringing on additional joint venture partners. That would free up capital to pursue other investment opportunities.
Holliday noted on the call that the three biggest opportunities it sees for creating value for investors amid the market recovery are distressed assets, repurchasing its stock, and new development. It recently took over ownership of the Lipstick Building that came through its debt and preferred equity investment portfolio. Meanwhile, it intends to repurchase $400 million in stock this year. Finally, it's working on the One Madison development that it will deliver next year while pursuing other opportunities.
Taking a shine to the Big Apple
SL Green believes New York City is in the early days of an unprecedented recovery. Because of that, it's going on the offensive by making its largest acquisition in years while hunting for new investment opportunities, especially on the development side. Given what it sees ahead for the New York City office market, it also plans to continue repurchasing its stock, which it views as significantly undervalued. These factors suggest there's lots of upside ahead for this office REIT.