In February 2019, Amazon, Inc. (Amazon) officially broke it off with Long Island City (LIC), cancelling previously announced plans to construct a 4.0 million-square foot (sf ) campus in the city’s Anable Basin as part of the company’s famed HQ2 expansion. The news broke almost three months to the day after Amazon announced that its HQ2 development and an expected 50,000 jobs would be split between locations in LIC and Northern Virginia alongside a planned development with 5,000 jobs in Nashville. Following the announcement, concerns arose from local residents and government officials about the “secretive” nature of negotiations among Amazon and New York City (NYC) mayor, Bill de Blasio, and New York governor, Andrew Cuomo. Fears regarding the potential for exponential increases in housing costs and infrastructure strains also rose to the surface. These rumblings came to a head with a large public protest in early February, shortly after which Amazon officially announced its plan to scrap the project. In its statement, Amazon cited opposition from “a number of state and local politicians” as contributors to the decision.
As part of the plans for the campus construction in LIC, Amazon reportedly committed to moving into approximately 1.0 million sf of space at One Court Square, a 1.4 million-sf office property in LIC that backs a $315.0 million loan, $265.0 million of which was split into pari passu pieces across four commercial mortgagebacked security (CMBS) transactions, including the DBRS-rated WFCM 2015-NXS3 deal.
The exact terms of the proposed lease are unknown, but news reports initially suggested that Amazon would house employees at One Court Square while the larger campus was under construction. Now that Amazon has backed out of the LIC deal, DBRS expects that the property’s leased rate will fall significantly in May 2020 when the existing single tenant, Citigroup Inc. (Citi; rated A (high)/R-1(low) with Stable trends by DBRS), downsizes to approximately 400,000 sf, which is scheduled for approximately four months before loan maturity.
One Court Square is the tallest building in NYC outside Manhattan, representing just over 20.0% of LIC’s existing office supply. The property was constructed between 1987 and 1990 and was improved in 2011 when a NYC Subway transfer station was constructed inside the building, expanding the Court Square Subway Station Complex. Prior to Amazon’s announcement, the property was being marketed for lease (at asking rates between $55 and $65 per sf (psf ) with incentives that could potentially reduce the rate by $25 psf, according to The Real Deal) as Citi had disclosed that it would be vacating the bulk of its space in the near term. Even with the incentives, the low end of the reported askingrent range would represent a decent premium to the existing rental rate for Citi. The near-term lease expiry was contemplated at issuance for the WFCM 2015-NXS3 transaction and DBRS noted that the financially feasible option to convert some or all of the vacated space into residential use was a mitigating factor. That route had also been considered by one of the loan sponsors, Savanna Real Estate Fund, when an interest in the building was initially acquired in 2014.
Although the Amazon expansion into LIC and the expected ripple effects for the local economy were celebrated wins, Amazon’s retraction is far from a devastating blow. LIC had already been characterized by exponential growth in multifamily and other commercial development as well as a historically low unemployment rate reported at 3.3% as of October 2018 by the New York State Department of Labor. A 2017 study conducted by RENTCafé found that, between 2010 and 2016, LIC saw more new apartments delivered — 41 projects and 12,533 units — than any other city in the United States. According to a May 2018 licpost.com article, approximately 2,800 units were also delivered in 2017 with permits in place for an additional 5,900 units to be completed within the near term.
The multifamily development boom in LIC and some other outer boroughs has been fueled by LIC’s proximity to the East River and transportation avenues into Manhattan and other boroughs coupled with rising costs for apartments in Manhattan. But costs have also been rising in LIC as demand has driven higher-end development. As apartment dwellers have embraced these new developments, LIC has also seen a spike in office development. CoStar reported that, as of the end of 2018, approximately 1.3 million sf of office space was under construction, which was expected to add 17.4% of new inventory. This is a reflection of the increased draw to the area for employers who can benefit from a growing talent pool, many of whom want to live closer to work.
Although the latest developments with Amazon mean it’s back to the drawing board for One Court Square, DBRS believes that the property remains well positioned to benefit from the recent development boom in LIC that has brought significant investment and population to the area. Though massive tax incentives played a part in attracting Amazon in the first place, LIC and the larger NYC area certainly held a strong appeal on their own with a highly educated workforce, dense population base, sophisticated infrastructure and well-diversified economy. According to estimates by the American Community Survey, LIC’s population grew by 11.0% between 2010 and 2016, double the growth rate for NYC overall.
These factors will serve the property and its ownership well in determining the next steps, which will need to be addressed in plans for the upcoming 2020 maturity date for the CMBS loan on the property. While the proximity to maturity is not ideal, DBRS believes that the healthy exposure of $225 psf for the senior debt, the cash sweep that will net approximately $35.0 million in leasing reserves and the $20.0 million equity infusion contributed at closing by the loan sponsors support a high likelihood of successful repayment.
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