Fortress Makes $1B Bet on NYC Offices

Good morning,

Fortress makes $1B bet on NYC offices, tensions rise in the sunshine state between Griffin and DeSantis, and cities target obstacles to redeveloping urban vacant lots. Let’s delve into today’s topics.

📈 Market Update

🏙️ Fortress Makes $1B Bet on NYC Offices

Fortress is making on the largest recent bets on the NYC office market, acquiring $1B in office debt from Capital One. The loan portfolio purchase was reported this week, though specifics were not disclosed. The move comes amid ongoing struggles in New York's office market, with record vacancies and growing distress. However, the discount Fortress likely received and potential for upside could make it a strategic play on an eventual office rebound.

Lenders Desperate to Offload Debt:
The office debt purchase comes as many lenders are urgently looking to offload their exposure. Concerns are mounting that revenues will be insufficient for landlords to service debt and asset values will fall below loan balances. Major lenders like JPMorgan and Barclays have considered office debt sales.

Capital One recently reclassified nearly $900 million of its New York office loans, likely spurring the sale to Fortress. The discount Fortress received and its appetite for distressed situations position it to take on the risk other lenders are shedding.

🔍️ Outlook:
While the near-term headwinds are formidable, Fortress is betting that NYC offices will eventually rebound. The firm has indicated it is targeting opportunities where loans can be repaid versus taking over properties.

With its expertise in distressed debt situations, Fortress may be making a calculated gamble on offices by acquiring loans at an advantageous point in the cycle. Still, the speed of the market's recovery remains highly uncertain. Active management of the portfolio will likely be needed.

⛱️ Griffin vs DeSantis: Tensions Rise in the Sunshine State

Citadel founder Ken Griffin has quickly amassed significant influence in Florida politics after moving from Chicago last year. This was demonstrated when Griffin helped reshape an anti-China property ownership law proposed by Governor Ron DeSantis through an extensive lobbying effort. The original legislation would have prohibited citizens of China and other nations from buying property in most of South Florida, impacting Griffin's plans to relocate hundreds of employees to Miami. Citadel lobbyists secured changes allowing lawful visa holders to purchase a single property, despite DeSantis hailing the crackdown as a stand against China.

Tensions Rise Between Griffin and DeSantis:
The property law episode highlights growing tensions between Griffin and DeSantis as the governor pursues his presidential bid. Although Griffin initially supported DeSantis financially, he has not donated to DeSantis' current campaign. Griffin continues to weigh his options as the presidential race unfolds, signaling dissatisfaction with DeSantis' attacks on companies like Disney and stances on issues like abortion rights.

Concerns Over State Direction:
While the property ownership law was watered down, it is still causing widespread concern among Florida's Chinese community. Many worry it will increase discrimination and some Chinese investors have decided to leave the state. The law could still impact private companies with Chinese investors, though further tweaks are possible. Overall, the episode shows Griffin's growing influence in Florida, but also his unease with DeSantis' ideological direction as governor.

🏘️ Cities Target Obstacles to Redeveloping Urban Vacant Lots

Thousands of vacant residential lots sit empty in cities like Chicago, Detroit, and Pittsburgh due to legal and bureaucratic hurdles that depress property values and tax revenues. These cities are now pursuing strategies to clear obstacles to redeveloping these lots. Initiatives aim to acquire vacant properties and simplify tax lien rules to transfer lots to developers and nonprofits. New laws cut interest rates on back taxes and allow easier transfer of city-owned land.

However, successfully redeveloped lots remain small in number so far. Officials hope updated policies will revive more neighborhoods hollowed out by population and job losses. Targeted efforts to eliminate barriers are designed to turn vacant land into assets again.

✍️ Further Reading

• Blackstone REIT Appoints New President as Redemption Requests Continue To Exceed Limits (CS)

• Global Yields Reach 15-Year Highs as Rate-Hike Worries Build (BBG)

• Aldi Adds To Grocery Consolidation With Deal to Buy Winn-Dixie, Harveys Supermarkets (CS)

• Mall Giant Signals Possibly Keeping US Presence, Including 'Crown Jewel' Los Angeles Location (CS)

• The City’s Coming Back as Occupancy is Beginning to Rise, says Rudin Management CEO (CNBC)

• Total CRE Loans From Banks Hit $3T Even as Originations Cool (GS)

• Net Absorption of Office Space Continues to Shrink in Q2 (GS)

• Nadji: Notion That Widespread Distress Will Lead to Fire Sales 'Is Overblown' (GS)

• TMG Partners’ $172M Bay Area Loan Sets a Record (CPE)

📊 Chart of The Day