- CRE Daily
- Posts
- America's Office Real Estate: The Slow Burn of Distress
America's Office Real Estate: The Slow Burn of Distress
Last year, only 3.5% of office sales were from distressed sellers, a situation attributed to optimism in the market and leniency from lenders.
Jordan B. & Han-Gwon Lung
March 19, 2024
Together with
Good morning. Despite challenges for office-building owners since the pandemic, the expected rush of distressed sales hasn’t occurred. Meanwhile, in March, confidence among builders of new single-family homes soared to its highest level since July 2023.
Today’s issue is brought to you by AirGarage: Increase your property's NOI with full-service parking management technology.
Market Snapshot
|
| ||||
|
|
OFFICE MARKET
America's Office Real Estate: The Slow Burn of Distress
Covid-19 drained many occupants from office buildings, but that doesn’t mean owners are desperate to sell—yet. PHOTO: JIMIN KIM/ZUMA PRESS
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.
PRESENTED BY AIR GARAGE
Upgrade Your Parking Operator Before Peak Summer Season
Increase your property's net operating income with AirGarage’s full service parking management.
Legacy parking companies rely on manual labor and expensive third party hardware & software products to manage their facilities. This increases their operating expenses and hurts property owners' bottom line.
AirGarage is a vertically integrated parking management and technology solution that maximizes your income by increasing traffic, optimizing revenue per vehicle, and decreasing operating expenses.
The average property owner that switches to AirGarage from a legacy parking operator sees a 23% NOI increase in the first year.
Talk to AirGarage today and let them show you how we can increase your NOI with a custom proposal for your parking facility.
Please support our sponsors. It helps keep CRE Daily free.
✍️ Editor’s Picks
Tax exodus: New Yorkers moving to Florida and Texas for lower taxes are discovering diminished savings due to soaring housing costs.
Doubling down: Over three years, global investors poured $96B into SoCal property, making LA a top commercial market nationwide.
Market movers: Last month, a number of Manhattan's top CRE properties hit the market. The Big Apple saw $9.7B in transactions last year, down 55% from 2022.
From boom to bust: Austin, once America's hottest housing market, sees home prices fall by more than 11%, leading to a national property cool-down.
Signs of life: Bill Rudin, co-executive chairman at Rudin Management, joins CNBC’s ‘Money Movers’ to discuss how offices are faring relative to pre-pandemic levels.
Revitalizing the capitol: Washington, D.C.'s Union Station redevelopment project was approved by the FRA. It’s estimated to cost $8.8B over 13 years.
🏘️ MULTIFAMILY
Where Brooklyn at? EMP Capital Group secured $109M in construction financing from QuadReal Property Group for two 247-unit Brooklyn towers.
CEO shuffle: Freddie Mac (FMCC) appoints Michael T. Hutchins, a financial services veteran with 30+ years experience, as interim CEO effective March 16th.
Revamping lux living: Madison Realty Capital plans to add 65 luxury apartments to a former Neil Shekhter site on Wilshire Boulevard in LA.
Student housing debacle: Nelson Partners seeks to sell three student housing complexes to deal with $115M in debt and multiple lawsuits from investors.
🏭 Industrial
Industrial frenzy: During the pandemic, industrial property demand surged, resulting in 1.2BSF created in the U.S., but the numbers show growth is now slowing.
Phoenix splash: CapRock Partners purchased Chandler Airport Business Park for $45.5M at around $143PSF, with no leases signed.
Dallas dominates: Dallas-Fort Worth led the nation with 61.9MSF of new industrial space in 2023, attracting diverse companies to the growing metro area.
🏬 RETAIL
Revamping retail: After recent restructuring under Chapter 11, Party City is now focused on store optimization, entrusting Excess Space to manage real estate.
Revitalizing NY: The redevelopment of Great Northern Mall near Syracuse, NY, includes a $1B investment in mixed-use, retail, medical, and housing space.
Crashing crafts: Fabric and crafts retailer Joann (JOAN) files for Chapter 11 bankruptcy with $132M in new funds, aiming to reduce debt by $505M.
Credit crunch: Record credit card debt may surpass all-time levels, with $1.13T balances in 4Q23 as consumer spending shows mixed signals.
🏢 OFFICE
Third Avenue Saga: In NY's office market, Third Avenue struggles with a 29% availability rate, prompting landlords to renovate and explore new markets.
Domino effect: Last year, legal office leasing activity hit a post-pandemic high, which is expected to carry through 2024.
A MESSAGE FROM CRE DAILY
CRE Daily has partnered with Redwood Living Inc. for a FREE 30-minute webinar on the current state and future outlook of the Build-to-Rent (BTR) market. Register to watch this session for insights into the impact of jobs, wages, and broader economic factors on this booming sector.
Please support our sponsors. It helps keep CRE Daily free.
BUILDING MOMENTUM
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.
📈 CHART OF THE DAY
Target has disclosed a selection of the initial new outlets it plans to launch nationwide, marking the beginning of an ambitious expansion strategy that encompasses over 300 physical retail sites.
You currently have 0 referrals, only 1 away from receiving B.O.T.N Multifamily Deal Screener .
What did you think of today's newsletter? |
Join the conversation