Workers will likely spend 20% to 25% less time in the office than before the pandemic, according to the head of real estate brokerage CBRE Group.

Chief Executive Officer Bob Sulentic said companies such as CBRE are seeking to balance in-person work with the recognition that people don’t want to spend hours in traffic.

The rise in remote work since the pandemic has had far-reaching implications for the real estate industry, including property owners that Sulentic’s company counts as clients. Office landlords have been confronting declining tenant demand as more companies adopted remote-work policies. That’s pushed the office vacancy rate in the US up to 18.4% in the third quarter, according to CBRE.

Landlords have also been pressured by the rise in borrowing costs, which has contributed to a nearly 21% decline in office prices in the 12 months through October, according to real estate analytics firm Green Street. Investors including Brookfield Asset Management Ltd. have defaulted on debt and walked away from buildings.

Sulentic said higher borrowing costs have dented commercial real estate valuations more than his firm originally forecast.

“We thought values may come down 15%, 20%. We now think that may be another 10%,” Sulentic said.

He noted price declines were “most acute” for office buildings.


Source:  Fortune


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It’s no secret that the commercial real estate industry is struggling.

The Federal Reserve has hiked interest rates to their highest levels since 2007. The collapse of First Republic Bank last week represented the second-largest commercial bank failure in American history.

But, through all the tumult, there may be opportunities for investors looking to take advantage of the distress, panelists said at Commercial Observer’s State of Commercial Real Estate forum, hosted in partnership with L&L Holding Company.

JPMorgan Chase’s decision to buy First Republic, at the behest of federal regulators, certainly weighed on the minds of the public and private sector experts gathered at 222 Broadwaythe morning of May 2. But not so for Andrew Farkas, CEO of Island Capital Group.

“Now that you’re all distressed investors, this is good,” Farkas said during a fireside chat. “Don’t be afraid of defaulting loans. Don’t be afraid of down markets.”

While “a recession is never really good for anything,” Farkas said that tough markets like today’s are when “fortunes are made,” because investors can buy on the cheap. A slowdown in the debt markets also could encourage sellers to provide financing for acquisitions themselves, he added.

Still, the turbulence in the banking sector is another concern in a long list of problems facing New York City’s office market. A “wave of defaults” looms for office property debt, Richard Barkham, CBRE’s global chief economist, said in the opening panel, titled “2023 Economic Outlook: Analyzing Key Stats & Data.

Office property values have dropped roughly 30 percent since the pre-pandemic peak of the market, and those buildings are unlikely to recover all of their value in the next five years, Barkham added.

But not every office building is in trouble. High-end, trophy properties are still seeing strong attendance, Jamil Lacourt, director of construction at L&L Holding, said in the “Office 2023: Where Occupier Innovations & Workplace Demand Meet” panel. Buildings that offer tenants data on their carbon footprint are more attractive to firms that are required to track their sustainability commitments, said Linda FoggieCitiGroup’s global head of real estate operations.

Landlords can also use data to measure how tenants use amenities and what types of benefits keep renters coming back to their buildings, said Chase Garbarino, founder of workplace experience software company HqO. Panelists were joined by Colliers’ Michael Cohen and the Rockefeller Group’s Bill Edwards.

“The market environment today is creating a really good opportunity for the larger commercial real estate market to be more data-driven,” Garbarino said. “Commercial real estate does a better job than any industry in assessing the financial viability of their customers. And they probably have the least understanding of how people use their product.”

Buildings that can’t survive as offices could be converted into housing, if the property is the right size, zoned properly and empty of tenants, said Michael Pestronk, co-founder of real estate development firm Post Brothers.

“You need a lot of stars to be aligned in order to convert an office building,” said Shimon Shkury, president and founder of Ariel Property Advisors, in the “Investment Sales, Conversions & The Rise of the Rental Market” panel. “The city and state, if possible, have to think about subsidies and help people that want to come here and convert office buildings.”

Gov. Kathy Hochul proposed a tax incentive to turn office space into housing in her initial budget in February, though most of the governor’s housing agenda was cut during budget negotiations. But Melissa Román Burch, CEO of the New York City Economic Development Corporation, said legislation to support conversions could be passed before the legislative session ends in June.

Not all commercial real estate properties need a complete redesign. Multifamily properties remain a strong asset class as rising rents outpace the impact of higher interest rates on owners’ bottom lines. (Farkas said he was “all-in” on single-family rentals. “Single-family home rental has been unbelievable,” Farkas said. “And 10 years ago, I told everybody they were going to lose their ask. Wrong!”)

Life sciences space and data centers are also still in demand, particularly thanks to the exponential growth in the amount of data collected by companies that utilize artificial intelligence technology, Rob Harper, head of real estate asset management in the Americas at Blackstone (BX), said in the panel “A Deep Dive Into the State of CRE Market: Paving the Road to Stabilization.”

Last, it was on to retail.

Retail leasing activity has started to trend up slightly, said Fred Posniak, senior vice president of leasing at Empire State Realty Trust. That could be because the retailers that survived the pandemic represent a stronger crop of businesses, Andrew Mandell, vice chairman at Ripco Real Estate, said in the “What’s Next for Retail: The Innovative Strategies Driving the Retail Revival” panel.

Still, retail is far from immune to inflation and the higher cost of debt, which can make it more difficult for retailers to raise funds to expand to new locations, Posniak said.


Source:  Commercial Observer


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Retailers and wholesalers accounted for the most industrial deals at 200,000 square feet or larger last year, or 35.8% of all leasing activity, a considerable increase from 24.7% in 2020, according to CBRE Group Inc. E-commerce fell from the No. 1 spot in 2020 to third last year, accounting for 10.7% of all deals, while 3PLs grew from 25.8% to 32.2%, ranking No. 2 among large industrial leases in both 2020 and 2021.

Propelled by a surge in online ordering, and changes to consumer preferences in part because of the pandemic, retailers and 3PLs have ramped up their distribution networks considerably in recent years. That demand is expected to be sustained this year, and could become even more frenzied with the recent surge in gas prices.

James Breeze, senior director and global head of industrial and logistics research at CBRE, said transportation accounts for at least 50% of a typical industrial occupier’s costs, even before the recent hike in inflation and oil prices. But, largely because of sanctions imposed on Russia from the war in Ukraine, oil prices have risen dramatically, although Brent crude futures — a key benchmark for oil prices — began to decline this week. National gas prices were down 0.2% between Monday and Tuesday, according to AAA.

Any run-up in transportation costs will likely outpace warehouse rent growth, even while that’s growing at a rapid clip, which could result in even more demand for warehouse space, Breeze said.

Carolyn Salzer, senior research manager of industrial logistics at Cushman & Wakefield PLC, said higher gas prices could have a ripple effect on the industrial market, depending on the user and their supply-chain model. Both Salzer and Breeze said real estate costs for warehouse users have typically been about 5% of a company’s costs but, more recently, that’s gotten closer to 10%, Salzer said.


Source:  SFBJ