In Positive Sign for New York's Troubled Office Market, Hudson Square Complex Snags Big Refinancing Loan

One SoHo Square Secures Loans Worth $905 Million



In another encouraging sign for New York’s beaten-down office market, One SoHo Square in the Hudson Square neighborhood is getting a $905 million refinancing loan.

The total loan amount from lenders Goldman Sachs, Deutsche Bank and Bank of Montreal includes a $785 million seven-year fixed-rate loan and a $120 million mezzanine loan, according to a report from rating agency DBRS Morningstar. One SoHo Square, comprising two mid-rise office buildings separated by an adjoined 19-story glass tower at the intersection of Sixth Avenue and Spring Street, will serve as collateral, according to the report.

CoStar data lists Stellar Management and Imperium Capital as the property's owners. Imperium declined to comment, while Stellar didn't immediately respond to a request seeking comment.

With New York’s office market still battling what CoStar data shows as a record-high vacancy rate of 11.8%, the new financing reinforces recent glimmers of hope for the beaten-down sector. Recent market reports from various real estate firms have pointed to improved leasing volumes and a slowdown in sublet activity from the first quarter despite continued challenges ahead.

“The overall outlook for the Manhattan office market is considered to be positive as companies begin moving back into offices,” DBRS reported, citing an appraisal.

The rating agency also has a “generally positive view of the credit characteristics of the collateral," adding the property is in a desirable location and has “investment-grade” tenants including health tech company Flatiron, MAC cosmetics, Warby Parker eyewear and beauty brand Glossier that use the location as their headquarters with long-term leases. Other tenants include health insurer Aetna.

More than 92% of the 786,891-square-foot property is geared for office use, with the rest for retail and storage use, DBRS said. Retail tenants include grocer Trader Joe’s, drugstore chain CVS and beauty brand Aveda.

“These factors are critical as the cash flow will be less susceptible to revenue swings, making it more resilient during economic downturns,” according to the rating agency. A case in point: DBRS said only one retail tenant, representing less than 1% of the complex’s total rent, had requested rent relief during the pandemic. None of its office tenants asked for assistance.

The complex’s $268 million in renovations and other capital spending over the last few years also “often play a significant role in retaining existing tenants and attracting new tenants,” DBRS said.

While the now pervasive remote-working trend creates uncertainty around the future demand for office space in gateway markets like New York, the property and the Hudson Square market it sits in should fare better because of their access to transit options, DBRS said. The property is also near “major demand drivers like the Hudson River Park and Google’s expansion project,” it said.

The Hudson Square market “is strong and has demonstrated strong demand, especially from the tech employers, in leasing momentum in the past five years,” DBRS said.

The area, like most of Midtown South clusters in Manhattan, has attracted tech and creative firms over the past decade, highlighted by Google’s $1 billion investment in Hudson Square to create a campus-like setting that would double its employees in New York to 14,000, according to a CoStar analysis. Disney also has bought property in the area and plans to use the space as a home base, DBRS said.

However, the property isn't risk-free. For instance, two of the tenants, Flatiron and e-cigarette maker JUUL, have 18% and 100% of their respective spaces marketed for sublease, according to the rating agency.

"As more firms spend time exploring remote work and revisiting their space needs during the pandemic, New York City office recovery will surely be among the markets to face this challenge," DBRS said.

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