Archives for August 2023

Rent growth declined to below 1% last month, only the second time since the 2010 Great Recession. And it could head down further in the next few months, according to a post by RealPage Chief Economist Jay Parsons. But he expects the rent growth slowdown to level off relatively soon. He explains:

On a month-over-month basis, asking rents have actually risen in every month this year so far, Parsons writes, noting that the year-over-year rent change is cooling quickly because 2023′s increases are so far below 2022′s. “So we’re replacing big numbers with smaller numbers in the more closely watched year-over-year calculation.” For example, year-over-year rent growth hit 0.78%, the lowest figure since July 2010. A year ago in July 2022, the rent growth had been a much higher 12.25%.

“That math starts to change going forward, as rents dropped much more than seasonal norms between September 2022 to December 2022, Parsons writes. “That suggests, in turn, the year-over-year change numbers should drop off again in August and maybe September before leveling off (to some degree).”

Meanwhile, occupancy rates have held stable in 2023 so far, after plunging from record highs to more normal rates in 2022, Parsons writes. Demand keeps improving this year as consumer confidence rebounds from 2022 lows. As of July, national market rate apartment occupancy averaged 94.6%.

Also, the pace of occupancy loss has slowed. Occupancy rates remain above long-term norms across much of the Midwest and Northeast. Across much of the West and South, occupancy has dropped below long-term norms. As one example, it has fallen about 1.5 percentage points or more below local long-term averages in Salt Lake City, Portland, Oakland and Austin and in Minneapolis/St. Paul.

None of this is to say that rental markets are posting the type of growth that has kept the apartment market buoyant for the past few years – growth that many multifamily developers factored into their pro forma calculations.

YoY rent growth moved above 2% in only 15 of the country’s 50 largest markets, Parsons reports. All but three were in the Midwest and Northeast with those three exceptions in Virginia Beach, Va., San Diego and Miami. But they, too, are cooling, especially Miami.

In fact, the West Coast is cooling faster than the Sun Belt, and almost two-thirds of its markets or 63% saw YoY cuts last month, versus 32% of markets experiencing that in the South, 3% in the Midwest and 0% in the Northeast. Where Western markets are now negative as of July include Los Angeles, Seattle and San Jose. Sun Belt markets that also turned negative and had the highest supply included Austin, Charlotte and Nashville. And several markets cut rents a significant number such as Phoenix at -5%, Las Vegas at -4.5%, Austin at -3.9%  and Jacksonville at -3.3%. These all showed demand, but it was short of supply.

Source: “Multifamily’s Rent Growth Slowdown Shows Signs of Leveling Off“

The Biden administration wants to “aggressively” get federal workers back in the office by September or October, according to an email to the Cabinet on Friday, as Axios initially reported.

White House Chief of Staff Jeff Zients wrote: “We are returning to in-person work because it is critical to the well-being of our teams and will enable us to deliver better results for the American people.” He did say the move wouldn’t totally eliminate remote work totally.

Last month came the news that most federal agencies have been using less than 25% of their office space. The General Accounting Office said agencies had “long struggled to determine how much office space they needed to fulfill their missions efficiently.”

The move is the latest in the government’s attempt to get federal employees in office. In April, the Office of Management and Budget circulated a memo to executive departments and agencies to “substantially increase meaningful in-person work at Federal offices, particularly at headquarters and equivalents, while still using flexible operational policies as an important tool in talent recruitment and retention.”

The issue of remote work at the federal level has increasingly become complex. As of September 2022, a General Services Administration report said that most agencies were planning significant cutbacks in the amount of space they use. The GAO surveyed 24 federal agencies on plans to reduce leased space. Of those, 16 said they would reduce the number of leases and 19 planned to reduce square footage over the next three years.

In December 2022, the Real Estate Roundtable — backing firms including Brookfield Properties, Blackstone, Empire State Realty Trust, Starwood Capital, as well as multiple major banks and CRE professional organizations — emphasized just how concerned many in the industry have become over worry that the federal government might give up leased space.

“We therefore respectfully urge you to direct federal agencies to enhance their consideration of the impact of agency employee remote working on communities, surrounding small employers, transit systems, local tax bases and other important considerations, along with the direct effect on governmental service delivery and labor productivity. In addition, we ask for your support of legislation to facilitate the increased conversion of underutilized office and other commercial real estate to much-needed housing,” the letter from the group to the administration read.

House Republicans in January 2023 introduced a bill aimed at forcing agencies to have workers return to the office. The bill, if it became law, would have required within 30 days of enactment that every federal agency would have to return to the “telework policies, practices, and levels of the agency as in effect on December 31, 2019, and may not expand any such policy, practices, or levels until the date that an agency plan is submitted to Congress with a certification by the Director of the Office of Personnel Management.” The chance of the bill passing through Congress and getting a signature from the president were next to non-existent.

Further complicating the picture has been the prospect of conflict with union contracts that would have made it difficult to force people back to offices. Biden has long emphasized his support for unions, and unions have strongly supported his campaign hopes.

Source: “White House Tells Federal Agencies to ‘Aggressively’ Get Workers Back to the Office“

Challenged by rising interest rates, a sometimes staggered economy and empty office space buildings, commercial real estate (CRE) investment has become a game for the haves and the have-nots.

If you have cash, there are opportunities across the country, and if you’re looking for funding, there are still some deals out there if you’re counting on rates dropping later.

But the question for investors remains — are there still good CRE deals to be had in this economy? Benzinga posed that question to Obermayer attorney Michael Thom, who specializes in public and private financing of commercial real estate properties and is based in the Philadelphia area.

Benzinga: Let’s start with some of the hotter investment strategies right now — what are you seeing come into your office?

Thom: The value-added stuff is always popular, whether it’s office space, commercial or a warehouse. The real value comes when interest rates go down and first-time developers get in. Unfortunately, because the rates are higher, a lot of people are trying to get out, so that’s where someone with cash who understands the market steps in and gives them that out. We are also seeing people come in with single-use properties, which are less risky. If they find a tenant, they proceed and if not, they can easily back out. If you find a single stand-alone like a warehouse or industrial site and get a single tenant, you can potentially double your investment.

Benzinga:  What about those who have cash on hand right now?

Thom: There are CRE developers who have been around forever and understand the market fluctuates, and even though rates right now are higher, if they find a good property, they don’t care what they pay because when the market corrects, they can get a steal.

Benzinga:  What about all the empty office space? Are there actually deals out there?

Thom:  Yes, because if you can get a good deal and have a good team in place, you can still find companies to come in. If you want to transition to residential or mixed use, that depends on what kind of zoning relief you can get. If you turn it into apartments, there’s some good money there but only if the municipality allows it to happen. There are some places you can get the land and the building for nothing. In other places, potential rents would make it worthwhile.

Benzinga: Benzinga has found that the warehouse and industrial sectors outperform all others in the CRE market. Have you seen the same?

Thom: Yes, 100%. Warehouses are going up everywhere right now. Unfortunately, some people thought that if they built one, they’d get Amazon and FedEx to use it. That hasn’t happened.

Benzinga: What’s hot in Philadelphia right now?

Thom: A little bit of everything. Warehouse and industrial, as well as single-tenant buildings, are flying. Some of my clients are buying office space, but most of them are only buying for a specific use and they already have companies ready to move in. We aren’t seeing investors buying a property because they just want to get into the market.

Source: “Commercial Real Estate Investors With Cash Continue To Bet On Interest Rates Coming Down“

The national office market has been on a bumpy ride since the Covid-19 pandemic, and additional challenges are lurking on the horizon.

A recent analysis by CoStar Group Inc. (Nasdaq: CSGP) found 55% of office leases signed before the pandemic that were active in January 2020 have yet to expire, meaning there’s still a lot of potential vacancy or space reductions that could hit the market.

“All of the pain we’ve been seeing in the office market, we’re realistically only halfway through and are still seeing that aftershock,” said Joseph Biasi, head of capital markets research at CoStar Risk Analytics.

Although some companies inked short-term renewals on their leases at the height of the pandemic, uncertain about what the future would bring, renewal volume today is about half of what it was between 2016 and 2019, CoStar found. The firm also found new leasing activity has decreased 12.5% since the pandemic.

Other groups that track office-space demand are also finding weaker space demand, with VTS Inc.’s Office Demand Index, or VODI, finding office space demand in major U.S. markets in the second quarter at 53% of its average level in 2018-19.

All of this adds up to mounting concern in the office world, especially as trillions in loans backing commercial real estate properties — including beleaguered office buildings — will come due in the coming quarters and years.

Federal regulators issued guidance in late June that encouraged lenders to be flexible and work “constructively” with commercial real estate borrowers facing financial challenges. The guidance is modeled on a statement issued by regulators in 2009, during the global financial crisis, when commercial real estate also faced significant losses.

But, Biasi said, loan workouts make the most sense if a building can realistically perform down the line. With office values declining, occupancy declining and much higher interest rates — not to mention return-to-office metrics flattening across most major markets in 2023 — a lot of landlords are facing a difficult situation at refinancing.

Nationally, CoStar is tracking 261.6 million square feet of available sublease space, compared to 144 million square feet in the second quarter of 2009, the peak during the global financial crisis. Sublease space is an indicator of future vacancy and potential risk, something CoStar has been encouraging lenders to track as they work to understand risks around the corner in their portfolios, Biasi said.

“We expect, at least through 2023, the vast majority of (commercial mortgage-backed securities) loans that have office exposure are going to have some trouble at refinancing,” he said. “Extend and pretend is difficult when you have values declining, (net operating income) struggling as well, vacancy increasing … we expect it to be a long-term issue.”

Refinance rates for CMBS loans were 78.1% and 71.8% in the first and second quarter of this year, respectively, compared to 85.5% in 2019, Moody’s Investors Services recently found.

Potential solutions

For landlords and companies dealing with a glut of office space, some are coming up with new solutions in an effort to boost occupancy and potentially attract tenants to their buildings.

New York-based Convene, which describes itself as a hospitality company and provides meeting, events and coworking space, found through an analysis of its clients a majority are using Convene-branded spaces to supplement or partially replace traditional office space.

Right now, because they’re trying to woo a more shallow tenant pool, landlords are willing to invest significantly into amenities and common spaces, said Brian Holland, head of real estate at Convene.

“We’re getting more calls than we ever have, and landlords are desperate to differentiate themselves,” he continued. “The dynamics of the conversation (have) completely changed.”

He said the company is also hearing more frequently from tenants themselves, many of whom have excess space on their hands. Earlier this year, Convene opened Quorum by Convene, a 40,000-square-foot venue that’s part of law firm White & Case LLP’s headquarters in Midtown Manhattan but managed by Convene. While White & Case has preferential rights to use it for meetings and events, the space is rented out to other groups when not used by the firm.

Conversions of vacant office buildings into new uses, especially residential, are also a hot topic right now but aren’t expected by most experts to be the silver-bullet solution to fixing the glut of office space hitting the market.

Landlords are having to give extra concessions at renewal time or are employing other tactics at the negotiating table to retain and attract tenants, many of whom are scrutinizing landlords more heavily because of mounting risks facing office-building owners.

Source: “Most pre-pandemic office leases haven’t rolled over, threatening to prolong pain in CRE“