Sunday Summary: Cloudy With a Chance of GFC


Another week, another dire forecast about the state of the commercial real estate industry.

This one comes from Morgan Stanley (MS), whose analysts predict that commercial real estate prices could drop by at least 40 percent, worse than during the Global Financial Crisis, as office vacancies hit a 20-year high and more than half of the $1.9 trillion in outstanding CRE mortgage debt comes due over the next 24 months.

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And Morgan Stanley Chief Investment Officer Lisa Shalett warned in the report that the fallout from that price crash wouldn’t be just limited to the CRE industry — this could hurt the country’s entire financial system.

“Distress of this type has historically not only hurt the landlords and the bankers who lend to them, but also the interconnected business communities, private capital funders and owners of any underlying securitized debt,” Shalett wrote in the report.

And, if you needed some more doom and gloom with your Sunday breakfast, a new Colliers (CIGI) report found that the amount of sublet space on the market in Manhattan hit new highs, even though more companies are asking employees to return to the office.

The volume of office space available for sublease reached 22.1 million square feet in the first quarter of 2023, topping the pandemic high of 21.16 million square feet in July 2021. Meanwhile, a JLL (JLL) report found that the total availability rate for Manhattan hit a record high of 16.1 percent while leasing volume fell in February and March.

And another tech giant has announced it would shrink its office footprint, with streaming company Roku saying it would spend $30 million to $34 million this year to terminate leases or to sublease offices, including putting a significant portion of its 240,000 square feet at RXR’s 5 Times Square on the sublet market.

Finally, everybody has been looking at multifamily as a safe port in the storm, which could be changing as a new report from CoStar Group found apartment building sales in the first quarter of 2023 fell to their lowest levels since 2009.

It’s not all stormy weather in the forecast
While plenty of analysts are predicting gloom and misery everywhere, private lenders projected some much-needed optimism to Commercial Observer.

They pushed back against Morgan Stanley’s assessment and are confident CRE won’t face the same fate it did during the GFC.

“There’s just so much more money now in real estate than there was during the Global Financial Crisis,” David Perlman, managing director of Thorofare Capital, a CRE debt fund, told CO. “I do think prices will come down and commercial real estate will be hit hard, but I also think there are ways to make money in this cycle. People are still making investments and bidding on loans for good deals.” 

Plus, there are some sunny spots in the industry. The life sciences industry keeps chugging along, with demand for lab and research & development space in the country still well above pre-pandemic levels.

A new CBRE (CBRE) report found that life sciences will still be resilient in the current economic slowdown, but 2023’s growth is returning to a more normal pace compared to the gangbuster years of 2020 and 2021.

Life sciences isn’t the only market having a good run. The single-family rental business is expected to do better in 2023 than 2022, with data firm Attom projecting gross rental yields on three-bedroom homes to be 7.5 percent this year, up from 6.7 percent in 2022.

Plus, SFR rents keep growing faster than home prices — ranging between 5 percent and 20 percent growth across markets — and the overheated housing market and higher mortgage rates continue to force would-be homeowners to rent.

Some actually good office news (and we promise no more weather clichès)
Last week showed two welcome bits of positive news in the office market: Companies still want large spaces, and some people can still turn a profit on an office building.

First, Paramount Group was able to fill a giant chunk of space left vacant at 31 West 52nd Street with law firm Wilson Sonsini Goodrich & Rosati signing a 16.5-year lease for 119,000 square feet.

Paramount is switching out one law firm for another as that’s some of the 190,000 square feet Clifford Chance vacated with its move to 2 Manhattan West, and Paramount said it was working with its new tenant on filling the remaining empty space.

Across the Hudson River, Veris Residential (formerly Mack-Cali Realty) sold its Harborside office complex in Jersey City, N.J., to 601W Companies for $420 million. That netted Veris a profit compared to the nearly $300 million it bought the site for, something even its brokers thought wouldn’t happen.

When you control the office market, you control … information
That information being that the office market was in trouble before the pandemic even hit. 

A flight to quality and away from Class B and C office properties was already starting to hurt the market, but not many people noticed thanks to the insatiable appetite for leasing that coworking companies had at the time. And none expanded greater than Adam Neumann’s WeWork (WE), which became the largest private tenant in New York City in 2018 after it sealed seven deals that year alone.

“There would have been higher vacancy. A lot of the spaces, especially on the lower end of the quality spectrum, would have been vacant for longer, and so [coworking] kind of saved a lot of buildings and landlords who had more exposure to this asset type,” JLL’s Andrew Lim said. “But what that means in terms of the health of the market is that you kind of kick the can down the road.”

Dig in for some long reads
First up, CO looked at the battle playing out between Related Group and some preservationists and residents in Miami. The condo developer wants to build a three-tower development at 77 SE Fifth Street and 444 Brickell Avenue, one of the city’s most sought-after spots — and one that also happened to be popular 7,000 years ago.

Archeologists have uncovered human remains and thousands of artifacts there, which they say give the clearest indication of what life was like in what became the Magic City before the construction of the Giza Pyramids in ancient Egypt or the first cities that appeared in Mesopotamia. 

“It’s a phenomenal site. It would completely change everything we know about archaeology in Miami and South Florida,” said Sara Ayers-Rigsby, a professor at Florida Atlantic University and the director of the Florida Public Archaeology Network. 

Related isn’t the only developer on Miami’s waterfront having these troubles, as other builders often confront similar issues when working on projects there.

And it’s not just the past impacting CRE, but the future as well. The consequences of climate change have led to extended droughts that have vastly reduced the water supply in some spots around the country, causing some CRE companies to prepare pre-emptive water management in their buildings in case of various worst-case scenarios.

However, that doesn’t mean enough companies are putting resources and efforts toward water conservation.

“[Water is] not getting the attention that it deserves because it is essential to our survival,” said Hyon Rah, director of ESG consultancy at Savills. “I think that alone should give people pause and make them think about it. I mean, it’s more important than energy.”

Finally, learn about Consigli Construction Company’s Laura Bush, one of the rare women in a top position at a major contractor. She’s spent more than 20 years living the changes of the New York-area industry since decamping from the U.K.

Have a good week!