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PG Funds' Gregory Kraut had a contrarian solution for New York's struggling office market: transform small buildings in trendy neighborhoods into high-end Class A space. The idea was that while the sector faced challenges, some tenants would still prefer Soho or Tribeca over Midtown South and Hudson Yards. KPG's strategy paid off initially, with 86% of its portfolio leased by summer 2023.

    However, like many others, KPG couldn't escape the pain of rising interest rates. The firm sold one of its prized assets, a five-story building at 446 Broadway, to San Francisco-based Spear Street Capital for $52 million. This was likely a loss, as KPG had bought the property in 2018 for $45 million and spent over $10 million on renovations.

    KPG's total financing package for the property was reportedly $64 million, including mezzanine debt not recorded in city records. The sale to Spear Street was only about $1 million more than the loan KPG got from Ladder Capital to refinance the property in 2022. This is a sign of the current market conditions, where even attractive properties are suffering drops in value due to rising interest rates.

    KPG's decision to sell the property highlights the challenges facing office landlords in New York City. Despite strong demand for office space, the rise in interest rates has driven down property values across the country. Even Brookfield's 1 Liberty Plaza saw its valuation fall from $1.5 billion to $1 billion since March 2022.

    KPG had bet on the NYC office market by converting aging Class B and C buildings into high-end boutique offices, focusing on areas like Soho, Tribeca, and Greenwich Village where office supply is limited. The firm's ambitious projects included plans to convert a seven-story building at 32 West 14th Street into a Class A office and retail space.