The Stoler Report with Michael Stoler: Michael Cohen

0:00 Speaker 1 Good morning. This is Mike Stoller for the Stoller Real Estate Report. What’s happening in the office market? It’s reaching numbers that have not been seen in many years. So today, to bring out what’s happening in the office market, I have a principal of Williams Equities and also the president of the tri-state region for Collier’s, Michael Cohn. Thanks for

0:21 being here.

0:22 Speaker 2 Thanks for having me, Michael.

0:23 Speaker 1 So I was looking, it’s been like nine months since you were on the show recently. So Tell me what’s happening today.

0:32 Speaker 2 So the last nine months, the market has been tremendously active. While the trajectory was certainly that of a recovery at the end of 25, I think most of us were surprised with how robust 2026 turned out to be. And we’re well on our way to a year with over 40 million square feet of leasing and a return of

0:58 in many respects, to the pre-pandemic environment of 2019. And I don’t think any of us would have predicted that kind of outcome at the beginning of the year.

1:09 Speaker 1 At the beginning of the year, would you have predicted this?

1:12 Speaker 2 No. I think this is taking everybody by surprise. We were certainly on our way, but this has been robust.

1:20 Speaker 1 I mean, I think this week they announced the $ 375 a square foot rent increase.

1:27 Speaker 2 Yes, right, on top of 625 Madison Avenue for a penthouse suite. Very affordable.

1:35 Speaker 1 Right, okay, and I think at one van they’ve exceeded $ 300 a foot.

1:41 Speaker 2 Sure, and I remember the days not so long ago when the idea of triple-digit rents was a fantasy. You could count on one or two hands the number of leases being signed at over $ 100 a foot, and that was big news. And now $ 100 a foot for Class A space in Midtown or in Hudson Yards is table stakes.

2:04 Speaker 1 So, I mean, you owned a building on Madison over here on 3rd Avenue for many years. What rents did you achieve over there before you sold it?

2:16 Speaker 2 So I think you were right the first time. It’s Madison Avenue. And we were a stubby building owner. facing the wrong direction, meaning no views of Central Park on Madison and 60th Streets. And we were lucky on a good day to get $ 65 or $ 70 a foot for that building. And the $ 375 rent you cited earlier is

2:40 being achieved a block or two away, but of course with Central Park views and for a brand new building.

2:46 Speaker 1 So what do you see for the next, the future? Do you think these type of rents going to be achieved at $ 400 a foot?

2:54 Speaker 2 I mean, the sky’s the limit at this point. Part of this is being driven by construction costs and carrying costs. If you’re building a new building, you’re borrowing money at a much higher rate than you used to be. And of course, we’ve seen inflation throughout the supply chain. So some of this is just dictated by the cost of

3:18 producing our product. But there’s also a virtuous cycle if you’re a landlord, in the supply and demand curves. And the supply of Class A office space at the top of buildings or new buildings is shrinking rapidly, and tenants are voting with their feet. For some tenants, the new building, new product, high in the stack with views is what

3:48 they want, and they’re willing to pay for it.

3:51 Speaker 1 Can they afford to pay for it?

3:52 Speaker 2 Well, my assumption is yes. We’re not seeing these rents coming from service companies, accounting firms, or architects. We’re seeing them paid by financial firms and hedge funds for whom real estate is a smaller portion of their revenue.

4:12 Speaker 1 Let’s talk a little bit about the accounting firms who used to be a large number of properties on 3rd Avenue. Where are they going today?

4:21 Speaker 2 Well, I think the middle market accounting firms are still on 3rd Avenue and in more moderate cost environments. We’re not seeing, and also over at the Hudson Yards, the accounting firms are pretty well scattered throughout the city today.

4:38 The industry, you know, it depends on the size and scope. Actually, there’s a lot of consolidation happening in the industry and accounting firms we’ve done business with have actually been acquired during the course of our site search on more than one occasion. But by and large, the accounting firms are more frugal with their overhead than they’re not paying $ 400

5:01 a foot or anything close to it.

5:03 Speaker 1 What about nonprofits? Where are they paying rent today?

5:07 Speaker 2 Well, nonprofits are, you know, they are by their nature frugal and they’re certainly double-digit rent payers and clustered in, you know, on the fringes of the CBD along the 3rd Avenue, and on the west side, closer to 6th and 7th. Sorry, not 6th so much, but 7th and Broadway.

5:31 And of course, many are still in Midtown South where rents are more affordable.

5:36 Speaker 1 Do you see any more of these Midtown buildings being converted to residential?

5:42 Speaker 2 Well, it feels like every day you open up the papers and you read a new announcement And I think that while much of that is taking place down in the financial district south of Canal Street where there’s still an oversupply, we’re also seeing it happen midtown and in midtown south. And, of course, the change in zoning in

6:05 midtown south that increased certain pockets to an 18 FAR of residential zoning.

6:10 Speaker 1 Explain to my audience what that means.

6:13 Speaker 2 So FAR stands for floor area ratio. Okay. If you had a 10,000-square-foot piece of land, at one point the FAR might have been 10, and so you could build 100,000 square feet. Today that FAR has increased to 18, so you can build 180,000 square feet, which makes the 10-story building on that site possibly a commercial, probably a commercial building,

6:37 a bit of an endangered species because the ability for someone to knock it down and build something almost twice as large and residential is very tempting. There are buildings in the Williams portfolio that we look at and we say to ourselves, this building may be worth as much or more empty than it is fully occupied by commercial

7:00 tenants because it’s such a good candidate for residential conversion or for a teardown and building a super tall. So we’re going to see this trend continue. So far, we’re 25 million square feet of office space converted into residential and counting. And that number will rise.

7:20 Speaker 1 So what do you expect with regard to certain trends like the WeWorks of the world and the shared office?

7:27 Speaker 2 So the shared office space, the co-working, is here to stay. And what we’ve done is we swapped the providers who signed fixed-rate leases at the top of the market in the late teens and could not afford to– to be profitable through the downturn of the pandemic, we’ve swapped those for partnerships with a new generation, including WeWork, of co-working

7:58 providers who are in partnership with their landlords, signed those leases in the trough of the post-pandemic era. and should do very nicely through the next couple of cycles. I do think that there is a persistent demand for what they provide. They’re an irreplaceable part of the city infrastructure.

8:20 Their problem was mainly their timing and the structure of their relationship with their landlord.

8:29 Speaker 1 What about AI?

8:31 Speaker 2 Well, AI is growing apace. It’s gobbling up space. And there’s a lot of speculation. Are we going through what we went through with the dot-com boom in the year 2000? And will we be followed by the AI bust as we did with the dot-coms? And I think there’s some important distinctions while there may be some kind of a

8:53 pruning ahead of us from the AI sector. These AI companies are making money. They’re not basing their business plan on catchy URLs like pets.com. And they have real viable business models. And many of them, as we’ve seen already, are getting gobbled up by even larger tech companies, which makes them overnight into credit tenants. So AI is here

9:19 to stay. It’s taking up a lot of space. And Manhattan has been one of the markets to benefit from its growth.

9:27 Speaker 1 Let’s talk about financing for the office buildings.

9:31 Speaker 2 Do we really have to?

9:33 Speaker 1 Yes. With the minute left, yes.

9:36 Speaker 2 Okay. Well, so lucky for landlords that rents are rising because interest rates are also rising. And that presents a real challenge. The cost of debt has doubled since the pandemic. And every day there’s another loan expiring, some of which can be refinanced just recently. reduce the profits you’re making as a landlord, and some of which cast a question

10:08 mark over the future of an asset. Can it be refinanced? How much additional capital will be required? What’s the opposite of a silver lining? The mud-colored lining of the office recovery, I don’t know that there’s an expression, but maybe we can coin one today.

10:27 Speaker 1 Okay, we’ll coin one and we’ll definitely come back in a couple of months to see what’s really happening in the market. I’d like to thank Michael Cook.

10:35 Speaker 2 Thank you for having me. Thank you.