Archives for July 2023

Back to the office has become a growing chorus from employers in different industries for a host of reasons: Higher productivity, greater innovative thinking—two heads—or 50—are better than one—and even an enhanced healthfulness, according to some.

But how well is this new trend working? Placer.ai’s Nationwide Office Building Index recently looked at 800 office buildings. The results in its June 2023 recap don’t reflect a roaring rush back, based on data from the first five months of the year. Numbers were more than the majority at 60% of pre-pandemic levels but that still means many aren’t returning.

Indeed, in a separate measure that uses different criteria, Kastle Systems is reporting that office attendance has once again dipped below the 50% mark across 10 major US cities in recent weeks, despite the mandates.

However, Placer.ai’s results represent a mixed bag. For instance, it found that even workers who go into the office stay less than they did four years ago. But foot traffic to offices have reached their highest level since before COVID-19.

Regional Differences 

Numbers vary widely with tech-centric San Francisco behind other cities like New York, Washington, D.C., and Miami, which are among the more populated office locales. But overall, all the cities studied reflected greater recovery this past June than on average during the first half of the year. Some cities are worth noting for their differences. Denver and Miami’s June 2023 numbers posted the smallest visit gap compared to four years ago. In SF, the visit gap shrunk 55% versus four years ago for the first time to 51.5%.

Source: “How Are Those Return to Office Mandates Working Out?“

There’s been a question of whether multifamily would see some significant distress. A couple of years ago, Blackrock thought it would be a long way off. By early in 2023, Yardi thought multifamily distress was going to increase as buyers and sellers waited for the other to blink over prices. But even then, others thought there would be little multifamily distress this year.

According to a new report from Trepp, the resolution between the two takes might be a matter of location.

“The multifamily market has been flying under the radar given the distress prevalent in other sectors, but in certain regions, there have been some notable developments,” Trepp wrote. “Several major metropolitan areas in the country have exhibited distress or hints of it looming, as evidenced by their performance across a few key statistical indicators.”

Overall, multifamily delinquencies have been low. Of the top 25 MSAs, San Francisco’s rate of 2.69% has been the highest, following by New York (1.01%), Pittsburgh (0.82%), Philadelphia (0.70%), and Houston (0.62%).

The source of distress in San Francisco here, says Trepp, is “almost completely attributable to the Veritas Multifamily Portfolio,” accounting for $447 million in securitized CMBS debt, or 81% of the region’s entire delinquent balance.

However, where the picture gets more interesting is not in actual defaults, but where multifamily debt service coverage rate is less than 1. Lenders more typically look for at least 1.2, giving a 20% cushion. A DSCR of 1 means enough cash to service debt. Under 1, a property is in a case of an inability to catch-up and a likely need for better financing terms or a significant addition of capital.

“For multifamily properties, San Francisco leads again, with a rate of 12.98%,” Trepp writes. “Interestingly, three big Texas cities all rank in the top five, with Dallas, Houston, and San Antonio posting rates of 9.15%, 9.03%, and 7.59%, respectively.”

Those are some astounding numbers, where MSAs show a significant percentage of multifamily properties that one could say aren’t financially going concerns.

“With Houston’s lack of zoning regulation, it is always a tough area for multifamily relative to the more regulated DFW, Austin, and San Antonio metroplexes,” said Lonnie Hendry, senior vice president and head of CRE and advisory services at Trepp. “The metro is feeling the stress in the multifamily market, and though delinquency hasn’t reached concerning levels yet, both DSCR and occupancy are not very strong. As seen with the lodging and office industries in Houston, both are lagging, and Houston typically goes as the oil and gas market goes. This does not come as a complete surprise given the macro conditions, and Houston is more boom or bust on a relative basis.”

Source: “Multifamily Distress Is Starting, Depending on Where You Look“

Leasing within the financial-services sector is shifting back toward major cities, although not at the same rate as pre-pandemic days.

A recent analysis by Jones Lang Lasalle Inc. (NYSE: JLL) found gateway markets — Boston, Chicago, Los Angeles, New York, San Francisco, Seattle and Washington, D.C — accounted for 43.6% of all financial-services office leasing activity in 2022 and the first quarter of 2023. That’s up from 33.9% in 2020-2021 and 42.1% in 2019.

Growth markets, meanwhile, which had been growing their share of leasing from financial-services tenants in recent years, accounted for 21.3% of office leases in the financial-services industry in 2022 through Q1 2023, down from 26% in 2020-2021 and 24% in 2019. Examples of growth markets include Atlanta; Austin, Texas; Charlotte, North Carolina; Dallas; Miami; Nashville, Tennessee; Phoenix; Raleigh, North Carolina; and San Diego.

All other markets accounted for 35.2% of financial-services leasing activity in 2022 through Q1 2023, down from 40.1% in 2020-2021 and 34% in 2019.

Although gateway markets are seeing a comeback in the share of leasing activity from tenants like banks and insurance companies, it’s still not at the pace or volume it was before the pandemic.

In the past year, financial-services organizations have leased 29.4 million square feet of office space, an 16.8% decline from 2019 levels, said Sarah Bouzarouata, senior manager of research and strategy at JLL, focused on the financial industry specifically.

“If you look at the industry as a whole, real estate strategy varies widely,” Bouzarouata said. “Generally, firms are maintaining expense discipline … (but) they’re also thinking about their real estate needs.”

Lease terms have been slowly increasing on the whole across the industry since the pandemic, according to JLL.

Right now, a lot of financial-services firms are trying to figure out how innovation and technology like artificial intelligence plug into their business strategies, including their real estate, Bouzarouata said. Meanwhile, cost cutting is top of mind as the economy slows and interest-rate hikes have created financial pressure across industries.

For a lot of companies in the finance world, there is a renewed focus on building magnetic gateway hubs for talent, Bouzarouata said, which may explain why the share of leasing within the sector has ticked up in gateway markets in recent months.

Still, growth markets account for one-fifth of financial-services leasing activity, she noted, and there’s still a desire among companies to locate in a lower-cost market.

“But the pandemic has really taught financial-services firms that scalable talent is very important,” she continued. “This year especially, and in 2022, there’s this renewed focus on how to create a magnetic hub where employees can feel super engaged, productive and achieve (a company’s) innovative goals.”

Closer look

Another commercial real estate firm that closely tracks leasing activity found a similar slowdown in leasing activity among FIRE — shorthand for finance, insurance and real estate — industries.

Savills PLC found FIRE leasing activity totaled about 3.1 million square feet nationally in Q2 2023, the second-lowest level of leasing activity within those industries since the pandemic. Leasing activity in 2022 topped 4 million square feet on a quarterly basis, with 7.5 million square feet leased in Q3 2022 alone.

An analysis of recent FIRE lease data provided by Savills indicates even some of the biggest, most notable office leases signed within financial services represent space reductions or subleased opportunities from tenants that’ve reduced their footprints since the pandemic.

British professional services and management consulting firm Aon PLC, for example, renewed its space at Aon Center in Chicago’s East Loop this year at 300,000 square feet, a notable deal in a post-pandemic office world but still a reduction in space, according to Crain’s Chicago.

In New York, Two Sigma Investments LP renewed its office space earlier this year at a SoHo office tower for 265,217 square feet.

One major FIRE tenant did expand in a 2023 lease deal — New York-based investment firm KKR & Co. Inc. signed on for 219,395 square feet at Hudson Yards in Manhattan in January, according to Savills. The space taken by KKR was originally leased by Meta Platforms Inc., Bisnow and other news outlets reported. The deal brought KKR’s space at Hudson Yards to about 560,000 square feet.

And, on the West Coast, Ares Management Corp. in January signed a 206,000-square-foot lease at an office campus underway in Los Angeles’ Century City district.

The most recent FIRE deal found in Savills’ data was Kaiser Permanente Insurance Co.’s 120,979-square-foot renewal at Two Greenwood Plaza in Englewood, Colorado, signed in late June.

Source: “Office leasing shifts back toward major cities in financial services, but it’s not all good news for those gateway markets”

 

A 4.1% increase in the nation’s overall industrial vacancy rate in Q2 2023 is partly due to the number of speculative new industrial space developments now coming to market, according to an analysis by Cushman & Wakefield.

A return to normal in companies’ space requirements after historically high demand in recent years also contributed to the 60 bps increase in vacancies, the report stated.

Overall, the report paints a picture of an industry adjusting to a less frenetic economic environment rather than one under severe pressure. “We are now seeing the impact of the robust pipeline of product coming to market and easing pressure on markets that were at historically low vacancy rates through the pandemic,” noted Jason Price, senior research director, U.S. Industrial and Logistics.

Even though the report foresees generally softening market conditions, it noted that new leasing activity remained healthy while renewal activity more than doubled.

Over 139.5 million SF of new industrial space was delivered in Q2 2023 – the third highest quarterly total on record – with the South accounting for 46% of the U.S. total. Since the start of the year, 273.2 million SF came on line nationally – of which 83% was built on a speculative basis. However, for the third consecutive quarter, the pipeline of projects under construction shrank, dipping 12.7% since its Q3 2022 high water mark.

Absorption fell in many markets in the second quarter, dropping nationwide to 45 million SF. But overall absorption of 116.4 million SF was only slightly below the three-year average of 133.9 million SF for 2018-2020. Indeed, 21 markets recorded more than 1 million SF of net growth during the quarter and six scored more than 3 million SF. They were the Pennsylvania Industrial Corridor, Savannah, Columbus, Dallas, Houston and Las Vegas.

Vacant sublet space rose 38% quarter-over-quarter to a total of 66.8 million SF. Price said this contributed to the lower absorption totals during the first half of the year.

New leasing activity remained healthy in the second quarter of 2023, with 141 million SF of deals signed, just 9% below first quarter levels. The total of 296 million SF leased in the first half matched the average for the same period in the years 2018-2020, with 600 million SF predicted by year-end. Renewals more than doubled from Q1 2023 to Q2.

Asking rents also rose 4.6% in this period to $9.59 per SF, with the Northeast and West seeing even stronger gains of 26.2% and 13.1% respectively. The report attributes much of the increase to higher-priced, premium vacant new construction. However, pre-leasing activity remained soft.

“Demand for space continues to come from across a wide variety of industrial and warehouse users giving us confidence that market conditions will stabilize at a more balanced lcvel,” Price said.

Source: “Inside Industrial’s Rising Vacancy Rate“