America's Office Real Estate: The Slow Burn of Distress

America's Office Real Estate: The Slow Burn of Distress

Despite the impact of work-from-home on office occupancy, a flood of distressed sales in the US office real estate market is yet to materialize.

What happened: Despite the significant impact of Covid-19 on office occupancy, a fire sale of distressed office properties in the U.S. is yet to materialize. Data from Colliers reveals a rise in the vacancy rate from 11% pre-pandemic to 17%, surpassing levels seen during the 2008 financial crisis. However, forced sales remain a rarity with only 3.5% of office deals in 2023 involving distressed sellers, a figure that dipped to 2.7% in January 2024.

Economic resilience: A robust economy has kept most tenants paying rent, delaying the reckoning for office building owners. The market sees a slow buildup of pressure as companies shrink their office space by 30% to 40% at lease renewals. Lenders, too, are playing a waiting game, opting to extend loans rather than enforce sales in a tepid market, with only a quarter of the $35.8 billion in office loans due in the commercial mortgage-backed securities (CMBS) market last year being paid off in full according to CRED iQ.

Opportunistic investors: Despite the lack of distressed sales, opportunistic investors like Reven Capital, Blackstone (BX), Brookfield (BN), and others are gearing up for the anticipated fire sale. Reven Capital aims to raise $1B in an IPO for office-focused distressed lending. Blackstone and Brookfield are also preparing for distressed opportunities.

➥ THE TAKEAWAY

Holding on: With a forecasted $72.7 billion refinancing gap looming by the end of 2025, the current slowdown in distressed sales might simply be the calm before the storm. Hopes for a market rebound are clashing with the reality of a sector under strain, highlighted by plummeting office values and the costly upkeep of increasingly obsolete spaces. Despite the gloom, the expected flood of distressed sales is unfolding more as a slow leak than a burst dam, and some see a golden opportunity to buy at rock-bottom prices.

Homebuilder Confidence at Highest Level Since July 2023

March saw builder confidence in newly built single-family homes hit a peak not seen since July 2023.

Why it matters: The NAHB Housing Market Index (HMI) reflects homebuilders' outlook on single-family home sales based on a monthly survey of ~900 builders. They evaluate present sales, forecasts for the next six months, and buyer traffic. Scores above 50 indicate optimism; below 50 indicate pessimism.

By the numbers: HMI surged three points to 51 in March, marking the fourth consecutive month of sentiment gains, which are at the highest level since July 2023. Most economists expected a score of 48. The index hitting 51 highlights growing confidence in new home construction and a positive outlook for the housing market's trajectory, particularly amid potential rate cuts later this year and limited housing supply.

Mortgage demand: According to Freddie Mac, the average rate on the 30-year fixed mortgage declined to 6.74% from 6.88% the previous week. This downshift signifies a potential opportunity for prospective buyers to enter the market, as lower financing costs could incentivize home purchases and new construction projects in the coming months.

Zoom in: The HMI revealed growth in all major U.S. regions, with the Northeast, Midwest, South, and West all seeing improvements in their three-month moving averages. Builders are also easing off on price reductions; only 24% reported cuts in March, a notable decrease from December 2023. Meanwhile, the use of sales incentives remains stable, with around 60% employing them to attract buyers.

Impact of shortages: The scarcity of inventory has propelled potential buyers into considering new builds as a viable housing option. Homebuilders have reaped the rewards, with increased interest in new construction projects due to limited availability in the established housing sector.

➥ THE TAKEAWAY 

Big picture: Contrasting the recent upswing in single-family homebuilder confidence, multifamily developer sentiment dipped into negative territory in Q4 2023, signaling divergent paths within the housing market. While single-family homebuilders ride a wave of optimism driven by strong demand and easing mortgage rates, multifamily developers face headwinds from tight lending, high development costs, and an oversupply concern.

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