The legal industry leased more office space last year than it has since the Covid-19 pandemic.
In 2023, U.S. law firms leased a collective 16.9 million square feet, according to Cushman & Wakefield. That’s not only more office space leased by the sector since the Covid-19 pandemic, but exceeds the amount leased nationally by law firms in 2017, 2018 and 2019, as tracked by Cushman.
The legal industry has bucked the broader trend of office-market leasing since the pandemic upended norms around office-space usage. While law firms, like other industries, have taken a hard look at their office real estate, they on the whole are using the office more regularly than other industries. Therefore, they’ve occupied a more robust segment of the leasing market while other industries have slowed their deal activity, put spaces on the sublease market or exited big chunks of space.
For those in commercial real estate who work with law firms on their office-space needs or otherwise track the industry, the legal sector’s recent leasing activity is indicative of its new normal.
Many law firms that saw their leases expire in 2020 or 2021 inked a short-term extension because of the uncertainty during the height of the pandemic. But in the past two years, law firms have gone back to the office more frequently and overall feel more confident making longer-term decisions about their space, said John McWilliams, senior research analyst at Cushman.
The biggest relocation signed by a law firm since the pandemic, according to Savills, was Paul, Weiss, Rifkind, Wharton & Garrison LLP’s deal inked late last year. The international law firm agreed to take 765,931 square feet at 1345 Avenue of the Americas in Manhattan. Not only was it the largest law office relocation since the pandemic, it was also the largest office lease signed across all industries and the U.S. last year.
What Law Firm Leasing Activity Says About The U.S. Office Market
Although it’s only one sector — and legal tenants only made up 8.8% of the national leasing market in 2023, according to Savills — how this industry is making office-space decisions is somewhat indicative of broader trends affecting the U.S. office market.
For example, like many professional-services tenants, law firms are largely seeking to be in the top 10% of office buildings in the markets they’re in, McWilliams said. Many law firms that have made leasing decisions in the past couple of years have departed office buildings that, while not necessarily Class B or C space, are no longer considered the top-tier towers in town.
Notably, a growing share of legal-industry tenants have decided to renew their leases in their current buildings rather than relocate, which may be indicative of the shrinking amount of top-tier office space available in a given market. That’s especially true of office tenants that require 100,000 square feet or more.
Data from Savills found, in 2023, 56% of leases signed within the legal sector were stay in place, compared to 33.9% in 2022.
And as office space at the high end of the office market is leased, and buildout construction costs are growing, a greater number of legal tenants are considering higher-quality sublease space on the market, experts say.
“Law firms are continuing to put value in office space as part of their recipe for being successful,” said Tom Fulcher, chair of the legal practice group at Savills. “It feels like we’re establishing the new normal in terms of (which industries) want to work in the office or remote … those things are calcifying into what it’s going to be moving forward.”
Source: SFBJ
Loan Modifications More Than Doubled Last Year
The move for lenders to find ways to avoid action on troubled CRE loans has been called “extend and pretend,” though “delay and pray” might be even more apt.
While an institution can avoid significant and final decisions, it can put off the day when it takes a hit to its balance sheet, hoping that find another solution in the meantime. Who wants to take possession of a property along with the responsibility of disposing of it?
But how much of this activity has been going on and how long could it be sustained? CRED iQ has analyzed loan modifications during this period of significantly elevated interest rates.
In office, 26% of $35.8 billion in CMBS loans that matured last year were paid in full. Borrowers either couldn’t get refinancing (which likely would have meant a heft injection of equity into projects) or couldn’t sell for a price that allowed them to gracefully exit the stage.
Since February 2022, so two years, 593 office loans transferred to special servicing. Out of them, 13.7% were modified, 14.0% returned to the master servicer as corrected, 8.4% were paid off, and the remaining 63.9% are still with the special servicer.
CRED iQ gave two examples of the largest loan modifications to date — 1.6 million square feet One Market Place in San Francisco and 249,063 square foot mixed use in the Chelsea submarket of New York City. Well enough, but how long can this go on without investors, regulators, or others demanding a permanent ending?
Source: GlobeSt.
Spread Between Corporate Debt and CRE Mortgages Hits 24-Year High
In its recent look at U.S. capital trends, using the most recent data through 2023, MSCI look at what it called debt snapshots — a handful of considerations that help explain how troublesome CRE debt markets are at the moment.
The first was the spread between corporate debt and CRE debt and how it has risen to a high at least when looking at figures from the last 24 years. It was more relatively costly to finance a commercial property through a direct mortgage.
After the Great Financial Crisis, the gap between corporate and CRE mortgage debt averaged only about 9 basis points between Moody’s Baa corporate bond yield and 7-year and 10-year commercial mortgage rates.
Connected to the cost is the perception of risk. According to Moody’s, the definition of Baa credit is, “Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.” The added spread for CRE mortgage rates suggests that commercial mortgages are even riskier. Given market jitters and concerns about default, that shouldn’t be surprising.
And when interest rates are higher than returns on investments, debt becomes dilutive. MSCI estimates that interest rates on outstanding debt went from 3.4% in June 2022 to 4.5% by December 2023. Property returns for the year were -8.3%.
So far, bank loan delinquency rates have been “rising, not surging.” However, as GlobeSt.com has separately reported, there have been questions of whether lenders have been indulging in “extend and pretend.” Stretching renewal dates means not having to take immediate hits on balance sheets. That can work for a while, but only so long.
Source: GlobeSt.
How Sale-Leasebacks Help PE Raise Capital In A Tight Market
Funding for growth, refinancing corporate debt, and merger and acquisition activities are top priorities for many private equity firms. A recent PwC report noted that 60% of CEOs plan to make at least one acquisition in the next three years. The report further explains that lower levels of M&A activity during 2023 created “pent-up buyer demand” moving into the current year. However, tapping into capital isn’t always easy when it is locked in assets.
Understanding sale-leasebacks and their advantages can help private equity firms strategically manage growth funding, debt maturities and other capital needs.
The Advantages of Sale-Leasebacks
With traditional financing strategies such as mortgages, terms are often shorter and exposed to higher market volatility. Accessing capital can also be time-consuming, a challenge for firms that need to move quickly for acquisition deals. That’s not the case with sale-leasebacks, notes Swann.
He explains that capital uses also have very few restrictions, with the most common purposes being acquisition financing, dividend payments, and refinancing maturing debt.
Misconceptions About Sale-Leasebacks
As private equity firms consider sale-leasebacks, questions often linger regarding who qualifies for this type of financing. Many believe that because their real estate is in a secondary or tertiary market, or their asset doesn’t have a huge value, they won’t qualify. But according to Swann, that’s not necessarily true.
As the market progresses through 2024, Swann expects sale-leaseback activity to continue upward, partly due to M&A activity and its flexibility to tap into capital quickly.
Source: GlobeSt.
How One Net Lease Giant Plans to Deal With Debt Maturities
Debt maturities are a big consideration in all areas of commercial real estate, including net lease. The topic came up in most recent earnings call for Global Net Lease (GNL), one of the largest public REITs focused on net lease.
The reason for a focus on debt maturities and the connected topic of interest rates is because they put pressure on all CRE businesses. The stock price reflects concerns about macroeconomics and finance. There was a sharp plummet starting late February 2020, which makes sense given pandemic-related shutdowns of retail businesses. With the advent of successful vaccines, the price regained ground to within a couple of dollars by June 2022, and then came the Federal Reserve’s reaction to inflation — a series of sharp and quick rate hikes. And the stock started falling again, from $19.90 to $7.56 as of March 18, 2024.
The expected wave of CRE loan debt maturities is a problem across CRE. That includes net lease properties.
He further said that assets targeted for disposition include both non-core and those that have near-term debt maturities or implied-term lease expirations. The latter is important because the company focuses on investment-grade or near-investment-grade tenants, with 58% of their tenants in that category. Single-tenant retail represents two-thirds of the investment-grade or implied investment-grade tenants. If a significant portion of the lease expirations are among these tenants, turnover would put more financial pressure on the company.
The largest segment of their portfolio is industrial and distribution, and that segment has been seeing pressures of late that had once seemed to pass the category by.
Source: GlobeSt.
Law Firm Office-Leasing Activity Hit Milestone In 2023
The legal industry leased more office space last year than it has since the Covid-19 pandemic.
In 2023, U.S. law firms leased a collective 16.9 million square feet, according to Cushman & Wakefield. That’s not only more office space leased by the sector since the Covid-19 pandemic, but exceeds the amount leased nationally by law firms in 2017, 2018 and 2019, as tracked by Cushman.
The legal industry has bucked the broader trend of office-market leasing since the pandemic upended norms around office-space usage. While law firms, like other industries, have taken a hard look at their office real estate, they on the whole are using the office more regularly than other industries. Therefore, they’ve occupied a more robust segment of the leasing market while other industries have slowed their deal activity, put spaces on the sublease market or exited big chunks of space.
For those in commercial real estate who work with law firms on their office-space needs or otherwise track the industry, the legal sector’s recent leasing activity is indicative of its new normal.
Many law firms that saw their leases expire in 2020 or 2021 inked a short-term extension because of the uncertainty during the height of the pandemic. But in the past two years, law firms have gone back to the office more frequently and overall feel more confident making longer-term decisions about their space, said John McWilliams, senior research analyst at Cushman.
The biggest relocation signed by a law firm since the pandemic, according to Savills, was Paul, Weiss, Rifkind, Wharton & Garrison LLP’s deal inked late last year. The international law firm agreed to take 765,931 square feet at 1345 Avenue of the Americas in Manhattan. Not only was it the largest law office relocation since the pandemic, it was also the largest office lease signed across all industries and the U.S. last year.
What Law Firm Leasing Activity Says About The U.S. Office Market
Although it’s only one sector — and legal tenants only made up 8.8% of the national leasing market in 2023, according to Savills — how this industry is making office-space decisions is somewhat indicative of broader trends affecting the U.S. office market.
For example, like many professional-services tenants, law firms are largely seeking to be in the top 10% of office buildings in the markets they’re in, McWilliams said. Many law firms that have made leasing decisions in the past couple of years have departed office buildings that, while not necessarily Class B or C space, are no longer considered the top-tier towers in town.
Notably, a growing share of legal-industry tenants have decided to renew their leases in their current buildings rather than relocate, which may be indicative of the shrinking amount of top-tier office space available in a given market. That’s especially true of office tenants that require 100,000 square feet or more.
Data from Savills found, in 2023, 56% of leases signed within the legal sector were stay in place, compared to 33.9% in 2022.
And as office space at the high end of the office market is leased, and buildout construction costs are growing, a greater number of legal tenants are considering higher-quality sublease space on the market, experts say.
Source: SFBJ
A New Financing Risk Emerges
Goldman Sachs Group put together a mortgage-backed bond deal in 2021. Nothing unusual about that. The money went to a group purchasing 61 multifamily properties with a total of 1,719 rent-controlled units in San Francisco. The floating-rate, interest-only, first lien mortgage loan had an initial balance of $674.8 million.
By the end of 2022, the borrowers defaulted, as Mortgage Professional America noted. The loan was sold off at a deep discount, according to Bloomberg. Then came the rest of the bad news. Special servicer Midland Loan Services told the investors of a holdback of $164 million.
Holdbacks happen on occasion in CMBS financing, but this was big. As Bloomberg noted, it exposed multiple classes that had been rated as investment grade by Kroll Bond Rating Agency to potential loss and has raised fears among some investors that servicers will make surprise decisions that affect their returns in deals.
In February 2023, Fitch Ratings gave the overall package, GSMS 2021-RENT, a AAA investment-grade rating, with an explanation of key rating drivers.
The collapse of a highly-rated mortgage-backed bond might bring up memories of the Global Financial Crisis in which many bonds backed by residential mortgages with strong ratings were found to be less than what they appeared.
This has reportedly spooked Wall Street and investors. They already see a big downturn in markets, as GlobeSt.com has extensively reported. The prospect of special servicers holding back payments adds to the risk. Some of the investors in the deal reportedly were Angelo Gordon, LibreMax, and Lord Abbett.
He also said that there may have been a good explanation of the action, and that it was likely the biggest such action in that type of security.
Source: GlobeSt.
Stagflation Is a Real Possibility to These Analysts
A drumbeat for stagflation as a possible scenario for the US economy is growing louder.
Last week, strategists from the Bank of America wrote that the macroeconomic picture is “flipping from goldilocks to stagflation,” which they defined as growth below 2% and inflation of between 3% and 4%. Inflation is higher in developed and emerging markets, while the US labor market is “finally cracking,” wrote Michael Hartnett.
JPMorgan Chase’s Marko Kolanovic raised similar concerns in February. A halt in inflation’s downward trend, or price pressures broadly resurfacing “wouldn’t be a surprise” given outsized gains in equities, tight labor markets and high immigration and government spending, he said, according to Bloomberg.
Between 1967 to 1980, stock returns were nearly flat in nominal terms as inflation came in waves, with fixed-income investments significantly outperforming while stock returns were nearly flat in nominal terms. Kolanovic sees “many similarities to the current times.”
“We already had one wave of inflation, and questions started to appear whether a second wave can be avoided if policies and geopolitical developments stay on this course,” he said in his note, adding that inflation is likely to be harder to control as stock and cryptocurrency markets add trillions of dollars in paper wealth and quantitative tightening is offset by Treasury issuance.
Recent economic reports back up these analysts: The February Consumer Price Index came in at a higher-than-expected 3.2% year over year. Retail sales reported on Friday rose 0.6% from January to February, falling short of projections expecting 0.8% growth.
The Wall Street Journal highlighted these developments but ultimately dismissed the idea of stagflation taking hold in the US economy. So have the equity markets,
Barclays Plc strategist Emmanuel Cau wrote in a note that was reported in Bloomberg.
This week the Federal Open Market Committee will meet and the minutes it releases will show how Fed officials’ thinking changed from recent bad data on inflation.
One sign doesn’t bode well for Fed watchers hoping for rate cuts to happen sooner than later.
More than two-thirds of academic economists polled by the Financial Times believe that the Federal Reserve will be forced to hold interest rates at a high level for longer than markets and central bankers anticipate. Respondents to the FT-Chicago Booth poll think the Fed will make two or fewer cuts this year with the most popular response for the timing of the first cut split between July and September.
However, there is one viable theory for rates in June. Vincent Reinhart, a former Fed official who is now chief economist at Dreyfus and Mellon, told the FT that politics will play a role in the timing this year.
Source: GlobeSt.
Janet Yellen Says Rates Will Be Higher For Longer
It’s “unlikely” that market interest rates will return to levels before the pandemic, US Treasury Secretary Janet Yellen said to reporters yesterday in comments that were published by Bloomberg.
A reporter asked Yellen why the White House projections that were part of President Joe Biden’s $7.3 trillion fiscal 2025 budget proposal showed higher expectations for interest rates in coming years compared with projections a year ago. Yellen said the new numbers were in line with private sector forecasts.
The budget proposal now assumes that the rates on three-month US Treasury bills will average 5.1% this year, up from the 3.8% projected last March. The projection for the 10-year yield is now 4.4%, up from 3.6%.
Meanwhile, some economists are beginning to think that it will be a long time for the Fed to reach its goal of 2% inflation and that 3% will be the new normal.
Last week, the Labor Department reported that the Consumer Price Index grew 3.2%year over year.
Lara Rhame, chief U.S. economist at FS Investments, also believes that inflation will hover at 3% for the foreseeable future.
The Fed is “going to err on the side of caution in terms of cutting too quickly,” Rhame said to Axios.
Source: GlobeSt.
Powell: ‘There Will Be Bank Failures’ Caused By Commercial Real Estate Losses
Federal Reserve Chair Jerome Powell said Thursday he expects to see some banks fail due to their exposure to the commercial real estate sector, which has declined significantly in value following the shift to remote work.
Powell said the banks that are in trouble with falling office space and retail assets are not the big banks, which were designated as “systemically important” in the aftermath of the 2008 financial crisis. That episode, which resulted in a taxpayer bailout of the financial sector, was also triggered by unsound real estate assets.
Rather, the banks at risk of failure now Powell identified as smaller and medium-sized.
Powell didn’t go into detail about the specific regulatory actions regarding commercial real estate exposure that are now being undertaken by the Fed, which is both the federal currency issuer and one of the primary bank supervising agencies, though he did say he had identified the banks most at risk.
Commercial real estate investment trusts, known as REITs, have taken a hit over the past few months. Alexandria Real Estate Equities, Boston Properties, Kilroy Realty Corp., and Vornado Realty trust are all in negative territory since the beginning of the year.
Powell described the decline in value of commercial real estate as a result of remote work following the economic shutdowns of the pandemic as a “secular change” in the economy.
While the decline of commercial real estate values could put some banks out of business, Powell expressed confidence that the Fed and financial regulators would be able to contain the fallout and prevent a broader crisis. Thirty-four U.S. banks have failed since 2015, according to the Federal Deposit Insurance Corp. (FDIC), which insures deposits at regulated banks.
Source: The Hill
Ron Osborne Recognized As Sperry Commercial Global Affiliates Top Producer For 3rd Consecutive Year And Top Producing Office For The First Time
Ron Osborne, Managing Director/Broker of SperryCGA | RJ Realty, has been recognized as a Top Producer at Sperry Commercial Global Affiliates for the third consecutive year.
Each year, the firm bestows this esteemed accolade upon the top 10 brokers who achieve the highest grossing volume.
The firm, RJ Realty, was also recognized as a Top Producing Office in the Sperry network of 60+ offices. Mr. Osborne the Managing Director/Broker, attributes the honor to the hard work of his team.
The team is laser focused on clients’ needs and helping them achieve their goals. Most of RJ Realty’s clients have worked with Mr. Osborne for years and consider him and his team part of their advisory team. The RJ Realty team always puts the client’s needs first, from assisting them in financing a new acquisition, to helping them determine the right time to exit a property. Ron always advises his clients not to just buy for a return on the investment, but to also place location as just as important – sometimes even more than the current cap rate.