Archives for April 2024

Palisociety, a Los Angeles-based hotel management company, wants to capitalize on New Mexico’s booming film industry by revamping Hotel Blue on the corner of Central Avenue and Eighth Street.

Located at 717 Central Ave. NW, the 75,000-square-foot Hotel Blue will be renamed Arrive Albuquerque. The hotel, which has been in the works for years, will feature 137 rooms, a ground-level coffee shop, a pool, bar, restaurant and meeting spaces, Jorgan Von Stiening, president of Palisociety, said. The retail/restaurant tenants have yet to be finalized.

Bradbury Stamm Construction Inc. began work on the site in June 2023. Albuquerque’s City Council amended the hotel’s Industrial Revenue Bond (IRB) application in fall 2023 to allow for the project’s completion date to be pushed to Dec. 31, 2024. Covid-induced construction delays and inflation were cited for the slow down.

When asked this week for an update on the exact timeline, Von Stiening simply provided a “no comment.”

Once complete, the $30 million hotel will employ a mix of 75 full- and part-time employees, Von Stiening said.

“One of the things that we really love about Albuquerque is it’s ripe for a great new hotel product and it’s a growing market,” Von Stiening said. “There’s a lot of tie-ins, especially over the last couple of years between Los Angeles and Albuquerque, with film production and studios. There’s a huge opportunity there to capture a Los Angeles customer base that’s spending more and more time in Albuquerque”

The redevelopment project is Palisociety’s first investment in New Mexico. In addition to Albuquerque, the company “has eyes on” expanding its portfolio to Santa Fe and Taos, Von Stiening said.

As of today, Palisociety focuses its investments on hotels with 150 rooms or less. Although the company searches for opportunities across the U.S, the firm’s presence is predominantly on the West Coast, Von Stiening said.

“With this location, specifically, we see such an opportunity to help redefine the area and continue the positive growth along Central Avenue,” Von Stiening said.

Hotel Blue was built in 1965 and stands six stories tall. The redevelopment is aimed at filling a need for hotel rooms in the Downtown area, according to a news release by the City of Albuquerque.

Source: “Here’s why this L.A. company remains bullish on its $30M Downtown Albuquerque project“

Real estate debt is a big concern in today’s Fed environment, as the industry expects a 40% rise in debt maturities in 2024. Meanwhile, office properties – already facing record vacancies – represent the largest percentage increase in those properties.

That’s according to recent research from Colliers, which provides both a dose of reality and some optimism about CRE’s looming debt picture as offices adapt both financially and in their facilities to maintain viability.

Debt Maturities Rise, Fueled by Office Space

Colliers’ comparison of the Mortgage Bankers Association’s data from 2022 and 2023 revealed that the difference in 2024 loan maturities rose by $270 billion. Aaron Jodka, Colliers’ director of research for U.S. Capital Markets, said banks accounted for $114 billion, followed by CMBS, CDO, and other ABS at $97 billion. In addition, credit companies, warehouses and “other” increased by $53 billion.

“Though loans can be refinanced and renegotiated, our analysis points to the increase coming from loan extensions, as it is uncommon to issue one-year paper,” Jodka noted.

Office saw the most significant change in maturities in 2024, up $89 billion, followed by “other,” including self-storage, mixed-use, and manufactured housing, which increased $72 billion. Jodka said that recent growth in this category’s alternative, or specialized, asset classes has added a new dynamic to refinancing and liquidity. Industrial/warehouse and hotel/motel increased between $45 and $48 billion.

Colliers also found that CMBS spreads have come in, offering another bright spot in the lending market. Single-asset single-borrower loans have shown good movement, Jodka said, suggesting increased demand. This may allow for refinancing or new issuance, providing liquidity in the marketplace, Jodka said.

Employers Adapt Work Space to Bring Employees Back

As companies adjust their financing strategies, they are also addressing employee needs in an evolving workspace environment. Jodka noted that companies are encouraging a return-to-office movement by providing better experiences in the workplace versus a remote or home office.

“Businesses are supporting a sense of community through shared social spaces and task-focused work environments,” he said. Additionally, he said they’ve seen an expansion of “Zoom rooms” and conference spaces that feature best-in-class technology and acoustics.

These updates come at a cost. Jodka said that new collaborative spaces constitute a greater percentage of the overall office environment. Colliers’ research also found that today’s office build-outs are more expensive, and properties have been helping with creative offerings, like tenant improvement allowances and rent relief. Some tenants are using subleased space to help with the build-outs as well.

Jodka noted that these efforts to adapt and rightsize space have been a bit of a wash. “Although companies are reducing their footprints,” said Jodka, “today’s office build-outs are more expensive, and overall budgets aren’t going down the way one might expect.”

Source: “How Office Is Balancing Competing Financing and Workplace Realities“

CommercialEdge’s report on how the national office market fared in March 2024 contains little good news for landlords, but it does describe shifting trends that are influencing some locational decisions as well as the risks posed by AI.

The national office vacancy rate rose to 18.2% — up 120 basis points over the prior year. The average national listing rate dropped 1.3% to $37.74, construction plummeted, and properties changed hands at a national average of just $171 per SF.

The report notes that both coworking spaces and flexspace are becoming more suburban. The amount of flexspace – industrial space often used for both warehousing and office – grew in the year from113.5 million SF to 124.8 SF, almost all in suburban submarkets.

Similarly, suburban coworking space grew by nearly nine million SF compared to 400,000 SF in urban areas. “Suburban submarkets now account for nearly as much space as their urban counterparts,” the report noted. “With Manhattan excluded, the suburbs’ share of national coworking space is 52%. Many firms have eschewed traditional office leases and instead are choosing coworking to fulfill this need.” Suburban coworking spaces serve to encourage in-office collaboration, training and deep focus.

The report questions whether these flexspace moves will become permanent features of the office landscape. It noted that city centers enjoy amenities and transportation options suburbs often lack. “We expect that vibrant city centers with mixed real estate uses will attract more coworking tenants in the long run,” it noted.

Meanwhile, offices in tech markets are also suffering higher vacancies. In San Francisco, the vacancy rate grew 510 bps to 24.2%. In the Bay Area it rose 350 bps to 20.8%, in Seattle 390 bps to 22.6%, in Denver 330 bps to 22.7%, and even in Boston – a life sciences hub with strong demand — 290 bps to 12.8%. In a few fortunate metros, vacancy rates declined over 12 months though they remained high. In Austin, vacancy fell 20 bps to 22%, in Chicago 20 bps to 19%, in Tampa 350 bps to 12.7%, in Phoenix 20 bps to 18%, in Atlanta 280 bps to 17%, and in Nashville 190 bps to 15.5%.

There has also been a slowdown in the growth rate of office-using employment – “a blow to a sector striving to recover demand lost to remote and hybrid work.”

In the past two years, office construction shriveled by 40%. The report expects the drought to continue. In 2023, 44.1 million SF of office projects were begun – well below prior levels; in 1Q 2024 office starts nationally totaled just 2.8 million SF.

As for sales, the negative trend continued. The total value of transactions this year was $5.4 billion, of which the Washington, DC area accounted for almost $1 billion. The next closest market was the Bay Area with $404 million in sales. The national average sale price was $171 per SF. San Diego led the nation at $608 per SF, followed by San Francisco at $580.

There were also some interesting deviations: $92 per SF in Chicago and $201 per SF in Nashville—putting Nashville in the top 10 nationally. Oracle’s just announced plan to construct its $1.2 billion global headquarters in Music City to build on its role as a healthcare hub will certainly help.

The uncertain impact of AI hangs like a cloud over the whole picture. The report considers it a threat because some firms intend to supplement existing staff with AI instead of new employees. However, it is expected to increase demand in some areas, since AI firms of all sizes are ramping up to adopt the technology.

Source: “Shifting Office Trends Could Influence Site Selection Decisions“

Recovering risk appetite and tightening spreads in the commercial real estate market mean active managers have to work a little harder, according to DoubleLine Capital LP.

The most “draconian” scenarios have been priced out of commercial mortgage-backed securities following the sudden unraveling of Silicon Valley Bank last March, according to DoubleLine portfolio manager Morris Chen. Just over a year later, capital markets are open and even borrowers in still-unpopular industries — such as the office space — have access to credit.

That’s a dramatically rosier picture than the backdrop a year ago, when the DoubleLine Commercial Real Estate ETF (ticker DCRE) launched into the eye of the storm. Last spring, no matter the location or underlying leases, most office loans were priced as if a three-year extension and a blanket loss of 60% severity was guaranteed, Chen said. Now, as the markets dial back expectations for the “worst possible outcome,” that means that investors need to spend more time finding mispriced opportunities.

“There’s more of this ‘sharpen your pencil’ environment where investors are resetting their expectations,” Chen said in a phone interview. “The shift is the markets getting smarter or more efficient and people are more willing to roll up their sleeves and dig into this. That’s also a very healthy sign, it’s very akin to a stock pickers’ market.”

Spreads on CMBS have tightened more than almost any other type of popular credit, with BBB- rated bonds shaving off nearly 260 basis points over the last year, according to data from Citigroup.

Read More: LibreMax’s Lippmann Building Portfolios Resilient to High Rates

That tightening has occurred even as worries linger over commercial real estate amid a murky outlook for office properties and gnawing questions about the health of small and midsize lenders. Despite those concerns, there’s been “incredible” credit availability for CRE borrowers as of late, according to Chen. So far this year $23.5 billion of non-agency CMBS has been issued, or nearly 160% more than at the same time last year, according to data compiled by Bloomberg News as of Tuesday.

Tightening spreads are good news for the actively managed DCRE, which commands about $130 million. Since the ETF began trading last April, it’s climbed more than 7% on a total return basis, compared to roughly 3% for the fund’s benchmark.

As the market has moved away from the most-bearish scenarios, DCRE has broadly kept to its founding portfolio setup: short-duration securities with “high probability” outcomes in terms of payoffs, Chen said.

“Inside of the two-year part of the curve is very interesting. It’s an area where if you want to play offense, you can play offense,” Chen said. “You need to find the right bonds, understand the structure, understand the dynamic in terms of the CMBS market, and that’s what we’re here to do.”

Source: “Fears of Ravaged Commercial Real Estate Market Have Eased, DoubleLine Says“