Archives for August 2022

But the CRE and the broader financial markets will avoid worst-case scenarios.

A whopping 70% of CRE professionals recently surveyed by Trepp say they think the office sector will see the biggest uptick in distress for the remainder of the year, and 83% said CRE/CMBS delinquencies will worsen over the next six months.

Overall, “the prevailing sentiment is that a variety of adverse conditions will impact business, but commercial real estate and the broader financial markets will avoid worst-case scenarios,” Trepp analysts write in an analysis of their 2022 CRE sentiment survey. “When asked about the current conditions of the markets, most respondents indicated headwinds were outpacing tailwinds. More than half said that economic conditions and higher interest rates would impact their businesses negatively…Not surprisingly, inflation, higher interest rates, and supply chain constraints were the biggest macro concerns in the survey.”

Participants in the survey were more optimistic about leasing activity versus sales activity, with more than half of the audience saying CRE fundamentals will be somewhat worse over the next six months but just 6% saying conditions would be significantly worse.  Three-quarters believe net effective rents will decline, with 25% of those saying the decline will be severe. And nearly 53% say CRE fundamentals will worsen somewhat.

Office is the sector respondents think will face the most distress in the coming months, coming in with 70%, followed by retail, lodging, and multifamily.  Respondents also believe industrial will begin to show cracks this year.

Responses to the survey also indicate more general challenges on the horizon for businesses, with 88% of respondents reporting they are either keeping their current headcount or simply hiring as needed. More than half of respondents say they think general economic conditions will negatively impact their business by the end of the year, with 62% saying interest rates are negatively impacting their operations currently. And nearly 60% say a recession is likely to happen by 2023.

The top five concerns among respondents were inflation (70.8%), interest rates (59.7%), supply chain challenges (36%), labor retention (28.8%) and regulations (22.3%).

Source: “Most CRE Pros Believe Office Sector Has More Distress Ahead“

Analysts call the aberration a “great divergence.”

Rent growth across the office and multifamily sectors is no longer in lockstep, disrupting a lengthy period in which the sectors typically followed the same trend, according to a new analysis from Moody’s Analytics.

Last year marked the only time that rents for office and multifamily actually went in opposite directions, analysts say, calling the aberration a “great divergence.”

“Companies haven’t fully reopened offices, but households come back to cities anyway,” they say. “Further, in a rebuff of the historic link – it wasn’t just suburban apartment markets feeling the positive demand shock, dense urban areas bounced back, with many having apartment rent levels that have now fully rebounded.”

Office market performance in cities like New York, Tampa, Orange County, Charleston, and Greenville also trended below the US average, with asking rents ticking up 0.8% from 2021 to 2022, but multifamily rents in the same markets “skyrocketed.”  And in Minneapolis, St. Louis, and Columbus, all of which experienced office markets that were above average last year, the apartment market is performing far below the national average.

“If people choose where to live based on their office locations, this divergence should not be as evident,” the analysts say. Lifestyle must play a very critical role in this divergence, though the single-family market, zoning regulation, industry types and other factors affect it as well.”

San Francisco, Jersey City, Manhattan, Philadelphia and Boston saw the sharpest spikes in lease applications from Gen Z renters in the past year, with increases of up to 101%, according to a recent RentCafe survey. Zoomers also account for more than one quarter of active renters in the past year in San Diego, Los Angeles, Manhattan and Philadelphia.

But Moody’s also said it would be “premature” to say that remote work has no negative impact on urban apartment markets.

“It is likely that as households age into child rearing, the typical pull of suburban/exurban life could become stronger in an era of hybrid and fully remote office work,” they say. “But it is also true that a particular lifestyle only exists in dense urban areas.”

Ultimately, whether this shift is temporary or permanent remains to be seen: If the prevailing trend of modern life had been households following work, we may now be entering an era where work is following households,” the analysis states.

“At a minimum, the link between office and multifamily performance has dramatically weakened over the past year,” they write. “The US economy is based heavily in the production of knowledge, and the main resource in the process is skilled labor.  If firms still believe there is value in the office, even in a hybrid capacity, they will look to locate within striking distance of those workers.  The link may not be permanently broken after all, but instead, economic strength may be diversifying and shifting towards where people want to be. Time will tell how this dynamic between office and apartment property types plays out.”

Source: “Rent Growth Diverging Across Office and Multifamily“

It could also lead to a prolonged period of elevated cap rates.

Analysts from Fitch Ratings say stagflation is likely to lead to lower CRE valuations and a “prolonged period” of elevated cap rates.

“Stagflation is the primary potential macroeconomic risk currently facing commercial real estate,” analysts note. “High inflation and weak economic growth could result in lower CRE valuations. This would be due to modestly growing or declining nominal net operating income (NOI) from soft tenant demand and elevated capitalization rates reflecting a higher risk premium.”

Fitch analysts say that historically, nominal CRE values increased in periods of sustained rising interest rates, and property-level NOI “tended to keep pace with, or grow faster than, any increases in cap rates.” But “long-term Treasury rates have increased since January 2022,” they say. “All-time low cap rates heading into 2022 and weaker cash flow growth may herald lower values in a rising interest rate environment.”

Fitch also notes that the positive correlation between cap rates and the 10-year Treasury yield has been weakening since the mid-1980s, “making the magnitude by which cap rates increase, should interest rates increase, uncertain.”

Separately, academic research points to another source of valuation erosion: Researchers from New York University and Columbia University recently examined the impact of pandemic drivers on office values, finding a 32% decline in office values in 2020 and $500 billion value destruction in the long run.

“Higher quality office buildings were somewhat buffered against these trends due to a flight to quality, while lower quality office buildings see much more dramatic swings,” the researchers noted. “These valuation changes have repercussions for local public finances and financial sector stability.”

Source: “Stagflation Could Drive Lower CRE Valuations“

Employers are responsible for the safety of employees, whether they work in the office or at home.

The COVID-19 pandemic accelerated the adoption of the hybrid workplace. However, with this acceptance comes more threats, liabilities and legal exposure for all employers regarding the life safety of their employees.

In his session at NFMT Remix, Bo Mitchell, president of 911 Consulting, will point out that employers have the sole duty of care for employee life safety, whether those employees work from home or at the office (or a mixture of the two).

When one looks at life safety that way, a hybrid workforce actually doubles the employer’s legal exposure regarding employee injury and death. OSHA, NFPA and all 50 State Fire Codes require all employers to plan for all emergencies and to train all their employees whether they work from home or in the office. Mitchell’s presentation titled “The Hybrid Workplace Threats, Liabilities, and Employer Exposure/Employee Life Safety Issues” will use workplace violence as an example of life safety issues in the new world of hybrid workplaces.

NFMT: What are the laws, regulations and standards regarding hybrid workplaces? 

Mitchell: Almost all employers are ignorant of workplace law covering offices in employees’ homes.

First, every employer — no matter what their business model — has a duty of care to keep all employees safe. Every employers’ duty of care is defined by law: “Each employer shall furnish to each of his employees a place of employment which are free from recognized hazards that are causing or are likely to cause death or serious physical harm to his employees.” {§5(a)(1) Occupational Safety and Health Act of 1970.}

Second, every employer shall have an Emergency Action Plan addressing “recognized hazards.” That means all hazards from active shooter to severe weather to bullying in your workplace. (OSHA 29CFR1910.38 and NFPA 1600).

Third, OSHA issued its “Instructions” for its Compliance Officers in 2000 — two decades ago —regarding the application of OSHA regulations to all home offices. For purposes of legal and operational safety, OSHA’s 54-page “Instructions” mean that the employer plans and trains for employee safety at home offices under all OSHA regs. (CPL 2-0.125).

Fourth, under law, the employee has no duty of care. Only the employer.

Fifth, your corporate counsel will therefore tell you that the definition of safety in the hybrid office is embodied in the employers’ duty of care covering the creation and training of an Emergency Action Plan in your traditional workplace as well as your employees’ home offices.

NFMT: Who polices employee safety in hybrid workplaces? 

Mitchell: Before an emergency, no one polices employer safety regulations in traditional or home offices. The hammer falls on the employer when an emergency occurs injuring or killing an employee. Then the OSHA Compliance officer inspects the workplace and demands to see the Emergency Action Plan and employee training records. The OSHA Compliance Officer’s inspection is often joined by the Fire Marshal, police and any other applicable agency depending on the emergency. All true at the traditional office and the home office.

Then, of course, there is the lawsuit. No matter what OSHA or any government agency rules, the employer will be sued. Workers Comp and your insurance company are no shield from a lawsuit where the employer has failed to plan and failed to train employees for emergencies no matter if that emergency is in the traditional or home office.

OSHA reports 5,000 employees will be killed and 2.1 million employees injured in the next 12 months in the American workplace.

I am a registered expert at court from Florida to California. I have read your deposition. Failure to plan and failure to train are negligence prima facia. You will be hung by a jury. The employer always is. You can run, but you cannot hide.

NFMT: Your presentation will use workplace violence as a life safety example. Can you describe how this is an issue for the hybrid workplace? 

Mitchell: Here are the stats. According to the U.S. Department of Justice (USDOJ) research: There are 2 million incidents of workplace violence (WPV) every year — assaults, threats, stalking, bullying, rape, murder, bomb threats, suspicious packages.

Much WPV is perpetrated by people known to the employer and the employee attacked. The most horrific kind of WPV is intimate partner violence (IPV). The USDOJ reports 1,300 deaths each year because of IPV. The great majority of victims are women. Thus, your sending employees to home offices actually increases the risk-potential of WPV given the workplace is now at home — nearer to and captured daily by intimate partners.

NFMT: What are other life safety issues facing employers and employees in hybrid workplaces? 

Mitchell: Most employers are unaware of the stats. The American Red Cross reports 10,000 heart attacks at work annually, but 1.5 million outside the workplace. That could be at a mall, sports event, car collision — and at home where the employee works.

The National Fire Protection Association (NFPA) reports 112,000 fires at workplaces annually. The number is three times higher in residences. At home, there are no sprinklers like you will find in most traditional offices. At home, employees do things not allowed in traditional offices like cook and smoke — all day long.

Traditional offices are built for high-use electrical and wired IT. Not so at home offices. Look under the desk of any employee’s desk at home. The maze of electrical and IT wires will horrify your Fire Marshal. Home electrical systems were built 10, 20, 50 years ago for a radio, a TV and a fan. They were not built for a PC, laptop, routers, modems, printer, internet, Wi-Fi, faxes, charging cell phones — all in addition to TVs, radios, streaming, washer, dryer, oven, microwave, hot water, air conditioning, heating. The electrical footprint in home offices is stunning — and risky for the employee and the employer.

In severe weather, employees will be more vulnerable at home than in their offices. It’s ironic that before COVID, most employers’ emergency policies regarding weather sent or kept the employee at home. How does that sound now given the stats on weather emergencies at home versus the office? The reality: medical, fire, weather and WPV threats are multiplied at home offices versus the traditional offices.

NFMT: Should facility managers be updating their safety and emergency plans to include hybrid and remote situations? 

Mitchell: They’d better. FM’s role and goal are to keep employees safe in their offices whether that office be in the traditional workplace or at home. The law is unambiguous and voluminous. Failure to plan and failure to train are the negligence issues at court.

Creating an Emergency Action Plan for the hybrid office strategy is the way the employer successfully addresses their duty of care. FM’s need to protect their people, property, productivity and their posteriors.

Source: “How Hybrid Workplaces Put Employers At Risk“