As New York City progressed through the different reopening phases over the summer, office landlords pointed to Labor Day as a likely turning point to herald the return of its workers. That didn’t pan out out.
On SL Green’s third quarter earnings call Thursday, company executives acknowledged that their predictions had proven overly optimistic. At the properties of New York’s largest commercial landlord, occupancy is still only in the 15 to 20 percent range, in line with the citywide average.
“It’s hard to put a finger on it, it’s always sort of right around the corner. It feels imminent and yet the numbers don’t bear that out,” CEO Marc Holliday said during the call. “Eighty to 85 percent of the people who work in office buildings are still at home. And that’s frustrating.”
At the same time, Holliday emphasized that the numbers were trending in the right direction, and that he hoped to see occupancy in the 20 to 30 percent range come December.
In contrast, 100 percent of SL Green employees are now back in the office — “safely, smartly, and with enthusiasm for doing something positive for our families, our company and our economy,” as Holliday described it.
He added that whether the company’s tenants are back “next month, December, January, February, March, in our estimation doesn’t affect any of the long-term fundamentals of the things we look at.”
In Q3, SL Green recorded $135.5 million in funds from operations, or $1.75 per share, down from $151.4 million year-over-year. The real estate investment trust collected 97 percent of office rents due in the quarter and 70 percent of retail rents, roughly on par with collections in Q2.
The REIT’s income in the past quarter included $24.3 million from a legal settlement, which appears to correspond to its September settlement with Jacob Chetrit regarding a $35 million deposit for the scrapped sale of the Daily News Building.
Bump in new leases
Executive vice president and director of leasing Steven Durels said on the leasing front, more tenants have expressed interest in signing new leases, not just renewals. While renewals accounted for 77 percent of leasing activity in the second quarter and 56 in the third, 51 percent of deals currently in SL Green’s pipeline — totalling 825,000 square feet — are for new leases.
“They’re looking past the immediate disruption of Covid, and saying, ‘okay, we recognize there’s now light at the end of the tunnel’ — whether that’s six or 12 months out — and they’re starting to begin to plan for their offices and how they’re going to run their space,” Durels said.
“But I don’t think they have a firm point of view as to how much of that is work from home, how much of that is hoteling… It’s all over the board right now.”
For New York’s offices to fill up, Holliday said “business has to step up and give their employees some incentives,” including subsidized commuting, meals and childcare. SL Green has converted some of its unused office space at 420 Lexington Avenue into pods of classrooms, and hired tutors to keep employees’ children engaged in the remote learning process.
Holliday also maintained that concerns around public transport are somewhat overblown, noting that he and SL Green president Andrew Mathias commute using mass transit themselves.
“I’ve been doing it since March 1, along with many people I know, and we’ve made it through, fortunately,” he said. “And safely — we adhere to the protocols.”
Another way the company has sought to boost the office recovery has been insisting that vendors it works with come to the office as well.
“Broadly speaking, I know lawyers that will say they’re just as productive at home, but that’s false and wrong from the client perspective,” Holliday said. “I can tell you that, as a client that’s closed something like 30 transactions in the past seven months.”
“If we’re here, they’ve got to be here,” he continued. “We’re not going to do Zoom calls with a vendor that’s sitting on the beach”
SL Green’s major milestone of the third quarter was the opening of One Vanderbilt. Much of the company’s upcoming leasing pipeline is now centered around Grand Central, including One Vanderbilt and the company’s other properties in the vicinity, Durels said.
While the supply of sublease space in Manhattan’s office market has surged in recent months, SL Green has not seen much of an impact in its portfolio.“It’s alway damaged goods,” Durels said, noting various constraints on lease terms and expansion options that subtenants face.
In Lower Manhattan, the firm topped out its 34-story mixed-use development at 185 Broadway, the first project to be built in the area under the Affordable Housing New York Program. A few blocks away, SL Green commenced demolition for 126 Nassau Street, a 215,000-square-foot facility it is building for Pace University.
In September, SL Green sold a 80 percent stake in 126 Nassau Street to a real estate fund managed by South Korea’s Meritz Alternative Investment Management, and secured a $125 million construction loan from Bank of China.
Company executives also addressed media reports about their efforts to sell properties such as 410 Tenth Avenue, the landlord’s main foothold on the Far West Side.
“We’ve been selling, fairly robustly, our mature and non-core assets since 2015, and 2020 is no different,” Holliday said. “This is all part of a long-term plan.”
Mathis provided more detail on 410 Tenth in particular. “It’s an asset that’s drawn a lot of interest, given where interest rates sit today,” he said. “We don’t have to sell it… but we did get some interesting offers and we decided to test the market.”
Investor interest in SL Green’s properties may also serve to validate the company’s expressed optimism about the New York market after the pandemic.
“These investors who are bidding for these buildings, they’re smart, they have a point of view,” Holliday said. “I don’t think they’re buying it based on whether people come back six, 12, 18 months from now, but their view is that the city will be back. And if you don’t think that, you’re not going to invest in this city.”