We are living in the office space reimaging projects every single day. Where is the office going? There are a lot of articles coming out about the demise of office now. I just picked two so you can see what people on the street are saying.
As experts in the office world, what do we think? Well, there’s no denying that office is in a serious transition. We think this transition will take 3-5 years.. maybe longer. As brokers, we will need to work harder and be better than we have been over the past 10 years.
Here are some thoughts:
–Absorption may be flat or small increases for the next 5 years. Why? Companies are changing how they use office space. Absorption from expanding tenants is being negated by contracting tenants.
–A fair amount of Class B and C buildings will become or already are obsolete.
–We see rents dropping in most if not all office classes. Class A is still holding but supply may be an issue.
–We see some buildings going back to lenders but I predict that lenders will not want them, so they will work with the borrowers to extend the loan. How many of these get extended is the big question.
Almost all users will be redesigning and shrinking their spaces and will need experienced help.
Finally, I think owners and tenants will now need seasoned brokers and not just some acquaintance with a real estate license There is opportunity but experienced and skilled teams will help clients come out on top. Call or email me to discuss any needs you may have.
Distress is coming for Class A offices
Flight to quality can’t protect landlords from interest rates
By: TRD Staff | March 28, 2023
The top-tier asset class that was supposedly immune to hardship is now at risk, too.
Distress is coming for Class A offices, according to the Wall Street Journal. Much of the sector was already struggling with softening demand for space and depreciating property values. Rising interest rates, however, have looped in some who have remained above the fray.
In the fourth quarter, Class A space leased in central business districts across the country dropped for the only time last year, according to Moody’s Analytics. That same quarter, nearly 19 percent of high-end office space was available in Manhattan, according to Savills, higher than the availability rate for Class B and Class C buildings.
“Any property owner that says ‘Oh we’re fine’ is a little bit fooling themselves,” Moody’s Analytics Senior Economist Thomas LaSalvia, told the Journal.
As vacancies and interest rates creep up, so do defaults at the top of the office sector. Brookfield Asset Management recently defaulted on more than $750 million in debt backing two Los Angeles buildings, including the 52-story 777 South Figueroa Street property downtown. Columbia Property Trust also recently defaulted on $1.7 billion in office loans.
Since the start of the pandemic, office tenants have largely put a premium on high-end buildings, ones that feature all the bells and whistles an employee would expect from a modern space. In the first years of the pandemic, 76 percent of Manhattan office occupants who moved either switched Class A buildings or moved from Class B to Class A, according to an analysis by CompStak.
The ability of Class A office space to withstand the pressures facing the rest of office stock already appeared to be weakening, though. In Manhattan, the gap is narrowing on the demand generated between Class A and Class B space. In the last quarter of 2021, Class A office rents cost an average of 27.3 percent more than older offices — for the most recent fourth quarter, the difference was down to 24.7 percent.
Morgan Stanley analysts are forecasting something ‘worse than in the Great Financial Crisis’ for commercial real estate
By: Alena Botros | April 4, 2023
The commercial real estate market could see some pain ahead.
After the banking crisis, could the next domino be all those empty office buildings in your downtown? Investors and economists are sounding the alarm about the commercial real estate market, seeing trouble ahead with refinancing. This sector has been hit hard for years now with the shift to remote work bringing about rising vacancy rates and falling property values. For her part, Lisa Shalett, the chief investment officer for Morgan Stanley Wealth Management, and strategists, sees a “huge hurdle” ahead.
“We fear stresses in other asset classes will become another headwind for megacap tech stocks alongside those posed by a profits recession and/or economic recession,” Shalett wrote in the weekly Global Investment Committee note. And she had some frightening figures.
“More than 50% of the $2.9 trillion in commercial mortgages will need to be renegotiated in the next 24 months when new lending rates are likely to be up by 350 to 450 basis points,” Shalett writes. Alarmingly, Shalett notes that regional banks accounted for 70% to 80% of all new loan originations in the past cycle, with all eyes on the sector after the historic implosions of Silicon Valley Bank and Signature Bank last month. She said office properties were already facing “secular headwinds” from remote work, and she now sees a wipeout with vacancy rates close to a 20-year high: “MS & Co. analysts forecast a peak-to-trough CRE price decline of as much as 40%, worse than in the Great Financial Crisis.”
As Fortune has previously reported, tighter lending standards for the commercial real estate market are now likely. In fact, stricter lending standards were already in place with the Federal Reserve raising interest rates in its attempt to lower inflation, and the banking crisis will only exacerbate the existing lack of liquidity. That in turn will increase the risk of defaults, distress, and delinquencies, as the industry is largely built on debt, experts previously told Fortune.
Distress on this scale, Shalett says, will hurt landlords and the bankers who lend to them, trickling down to business communities, private capital funders, and owners of underlying securities. Nor will the tech and consumer discretionary sectors be “immune,” she says.
And what of the wider impact on the economy? While Shalett sees a soft landing still possible, she says the odds of that happening are decreasing in light of the likelihood of tighter lending standards. None other than Twitter and Tesla CEO Elon Musk seems to share this view, having recently tweeted that the state of the commercial real estate debt market is “by far the most serious looming issue.” But of course, he’s got his own troubles with office buildings that could be fueling his concern.