Similarities Shared by the Hardest-Hit Office Buildings
May 3, 2023 • Maximizing the value of your real estate portfolios demands constant vigilance and adaptability, given the once-in-a-generation transformation of the places where we live, work, shop and play, coupled with the headwinds of inflation, increasing interest rates, and tighter underwriting standards. Here’s a snapshot of what we’re seeing across office, retail, and industrial markets nationally.
Similarities Shared by Hardest-Hit Office Buildings
The increasingly beleaguered national office market, fueled in large part by a toxic combination of diminishing tenant demand and increasing interest rates, has left in its wake what CBRE refers to as HHBs: the hardest-hit buildings. HHBs share some unfortunate characteristics. They are older and don’t provide state-of-the-art amenities, and they are more often in urban vs suburban locations in regions that are losing population, such as the West Coast and Northeast. In addition, buildings ranging in size from 100,000 to 300,000 SF accounted for 84% of all HHBs. Learn more.
Retail Is Buoyant, But Not Everywhere
According to Cushman & Wakefield (C&W), strong retailer demand and constrained supply kept national retail vacancy rates in Q1 2023 at their lowest level since 2007, when C&W began to collect this data. Q1 2023 also marked the eighth consecutive quarter of positive net absorption, meaning the square footage of new stores — approximately 2.5M SF in Q1 2023 — exceeded the square footage of stores that closed. With Houston, NYC, Charlotte, Phoenix, and Chicago leading on store openings, LA, Las Vegas, San Diego, Seattle, Detroit, and Kansas City were among the markets where negative net absorption was the highest. Learn More
Emerging Markets for Industrial Development
According to Colliers, there are 10 emerging markets for warehouse, shipping, and distribution centers, both in areas experiencing rampant population growth and in places with other compelling characteristics, such as high-speed access to dense populations, competitive tax structures, business-friendly climates, and record-breaking low vacancy rates. These markets include Austin: fueled by population growth and Tesla and Samsung’s new manufacturing plants; Charleston: fueled by automotive investment, the Port of Charleston, and historically low vacancy rates; Las Vegas: fueled by highway access to high-population areas and tourism; Memphis: fueled by Memphis International Airport, the busiest cargo airport in North America; and Raleigh-Durham: fueled by low vacancy rates and population growth. Learn more.
The Impending Crisis of Refinancing CRE Debt
Almost $1.5 trillion of U.S. commercial real estate debt will need to be refinanced before the end of 2025 and “refinancing risks are front and center” for owners of office, retail, and industrial properties according to Morgan Stanley analyst James Egan. Adding to the uncertainty is a cautious lending environment evidenced by the 50% year-over-year Q4 drop in loan production from 2021 to 2022, which pre-dates the failures of SVB, Signature, and First Republic. Although distressed office buildings have become the focal point, several forecasts are projecting peak-to-trough drops of up to 40% in valuations, and as much as 70% in markets such as NYC and San Francisco. It is likely that all property types will be facing a challenging “refi” environment in the coming 24 months. Learn more.
Future of Urban Retail: What’s the New Normal?
Ellen Sinreich and ICSC + Legal Forum recently convened a panel of retail real estate professionals to discuss the future of urban retail. The panel was moderated by Ellen and consisted of Kenneth Bernstein, CEO & President of Acadia Realty Trust; Wayland Benbow, Director of New Business, Nao Medical; Larisa Ortiz, Managing Director, Streetsense; and Jonathan Schwartz, VP, Real Estate, IT’SUGAR. Topics discussed included the impact of hybrid work, changing patterns of consumer behavior, and the need for collaboration among public policymakers, elected officials, and the retail and real estate communities.March