Is this the end of expensive office space in New York??

David Goldsmith

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18 Percent of Employees Would Quit Instead of Heading to the Office Full Time: Survey​

Nearly 1 in 5 employees said they would quit their jobs if they were forced to go back into the office full time, according to a new survey from human resources provider Traliant.

Roughly 18 percent of the 2,000 workers surveyed said they would “look for a new job if their employer required them to return to on-site work,” and another 36 percent said they would try to negotiate flexible work arrangements, according to Traliant. The vast majority, 82 percent, said that hybrid and remote work options had improved their work-life balance.

The data, which was collected by analytics firm Propeller, includes responses from employees across the U.S. working on-site or away from the office. It comes after plenty of firms have cut down on their office space. Facebook and Instagram owner Meta said it planned to spend $3 billion to shrink its office footprint worldwide, and Manhattan office leasing dropped 40 percent month-over-month from September to October. Despite workers’ preference for home offices, the amount of fully remote jobs has shrunk in recent months.
But returning to the office isn’t the only corporate policy that employees have strong feelings about. More than half — 54 percent — of those surveyed said they wanted to leave their current company for one more aligned with their views on environmental, social and governance (ESG) issues, Traliant found. And 48 percent said they’d like to be more involved in opportunities to make real change, particularly when it came to their employer’s ESG commitments.

One-third of employees said they wanted their companies to be more vocal about social, political or environmental issues.
Forty-six percent of workers ages 25 to 34 said a company’s commitment to ESG issues was very important to them, and 57 percent of employees ages 35 to 44 agreed.
In terms of social issues, 40 percent of employees said their companies had “actively addressed” diversity, equity and inclusion issues in the past year, while about a third of respondents said their companies had made ESG commitments to address human rights issues. Roughly a quarter of people surveyed said their bosses had made commitments related to sustainability, labor standards and energy efficiency.
“One of the takeaways of the survey is now that HR leaders have a seat at the senior leadership table, they should lead the charge by asking employees what they need to be successful, and then craft an action plan that works for employees and the business,” said Maggie Smith, vice president of human resources at Traliant, in a statement. “If you’re not listening to employees and willing to adapt, good talent will go somewhere else. Employees want to be involved and it’s critical to keep them informed.”

David Goldsmith

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Developers punt on new office projects​

“There’s increasing uncertainty in the world, and tenants are acting accordingly”​

Top developers are punting on new office projects as workplaces face uncertain futures.
High vacancy rates and dwindling leasing demand have pushed developers to delay significant office projects either in the planning stages or already underway, the Wall Street Journal reported. People familiar with the matter told the outlet firms including Vornado Realty Trust, Brookfield Asset Management, Hines and Kilroy Realty are backing off of the sector.

Low demand and economic uncertainty occasionally leads developers to go full-throttle on office development, anticipating the ebbs and flows of the market; major projects could take years to complete. But interest rates are high and the future of office work has never been less clear.
In the country’s 54 largest markets, there is 156 million square feet of office space construction underway, according to CoStar, down from 186 million square feet in the first quarter of 2020. Meanwhile, the national office vacancy rate is 12.5 percent, the highest since 2011.

“There’s increasing uncertainty in the world, and tenants are acting accordingly,” Vornado Realty Trust president Michael Franco said last week in the real estate investment trust’s third-quarter earnings call.
CEO Steven Roth in the call cast doubt on the Hotel Pennsylvania site, where demolition is on track to be completed by the end of next year.

“I must say, the headwinds and the current environment are not at all conducive to ground-up development,” Roth said, demurring when asked if Vornado is considering non-office uses for Penn 15.

Nearly a record amount of space under construction is not pre-leased, another worrying sign for developers. Approximately 37 percent of space under development is available, according to CoStar, more than doubling the rate from 2019 and approaching the 39 percent record set in 2008.

Flailing demand for office space is exemplified by subletting trends as companies declare they no longer need the amount of space they did prior to the pandemic. CoStar data show 212 million square feet are available to sublease in the country, the highest amount since the firm started tracking the metric in 2005.

David Goldsmith

All Powerful Moderator
Staff member

Office lenders looking for an off-ramp​

JPMorgan Chase, Deutsche Bank, Barclays exploring debt sales​

Is the other shoe about to drop on commercial real estate?
Just in case it is, prominent lenders for commercial properties, especially offices, are exploring sales of their loans in cities with low demand, including New York, Bloomberg reported. JPMorgan Chase, Deutsche Bank and Barclays are among them.

In a sign of how motivated lenders are to offload debt, some are offering discounts ranging from 3 percent to 25 percent. Many of the talks around selling debt have been held behind closed doors, and debt deals are largely being kept out of the public eye.
The risks lenders face include that the properties secured by their loans will not generate enough revenue for their owners to pay the debt service, and the assets’ value will fall below the loan balance.
“Office in particular is a dirty word for lenders,” Jeff Kaplan of Meadow Partners told the publication.

Selling loans is a normal course of business for banks. What’s not, however, is the struggle they are having finding buyers. Hence the discounts.
Lenders issued $316 billion in commercial loans across the country in the first half the year, according to the Federal Reserve. But rising interest rates and distress for certain commercial property types has lenders reversing course.
Many have become hesitant to originate debt, fearing rising rates and inflation will reduce the value of those loans in the future. Some commercial real estate players are taking out variable-rate loans rather than lock in fixed-rate loans at high interest rates.
Commercial lenders are responding to declining property prices across the sector. Commercial prices are down 13 percent from a May peak, according to the Green Street Commercial Property Price Index. Shopping malls have taken the biggest hit with a 23 percent drop, but even industrial prices are down 17 percent since May.
In the long term, office landlords may have it the worst. A study by NYU’s Arpit Gupta and Columbia University’s Vrinda Mittal and Stijn Van Nieuwerburgh estimated that by 2029, New York City’s office stock will fall in value by 28 percent, or $49 billion.

David Goldsmith

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Companies still have way too much office space, and they can't sell it
The amount of commercial real estate available for sub-lease is roughly equal to eight Amazon HQ2 towers.
Other than high-use leases such as medical offices and laboratories, few lease holders can find buyers or tenants for unused office space.
Companies that own their own campuses will likely wait out the current market, even knowing prices may further deteriorate.
Collin Madden, founding partner of GEM Real Estate Partners, walks through empty office space in a building they own that is up for sale in the South Lake Union neighborhood in Seattle, Washington, May 14, 2021.
Collin Madden, founding partner of GEM Real Estate Partners, walks through empty office space in a building they own that is up for sale in the South Lake Union neighborhood in Seattle, Washington, May 14, 2021.
Karen Ducey | Reuters
A few things we know about corporate real estate: it's a focus of cost-cutting for companies, but it's also probably the last asset you want to sell now in a soft market.

How soft? According to Elizabeth Ptacek, senior director of market analytics at commercial real estate information and analytics company CoStar, there is currently 232 million square feet of surplus commercial real estate up for sub-leasing. To put those numbers into perspective, Amazon's HQ2 is 8 million square feet. Even more telling, the 232 million square feet is twice the level of surplus from before the pandemic.

CFOs have told us that as their companies go to hybrid work and corporate hub models that make less use, if any use, of satellite offices, there is real estate to be sold. And they aren't selling it now. Ptacek says that's the right decision.

The only property owners selling today are either desperate for cash or they are sitting on trophy assets. And those trophy assets are few and far between. Well-leased medical offices and laboratories with high credit score tenants and secure income streams are still attracting plenty of attention from investors, according to CoStar, but that's about it. Any corporation that has abandoned a satellite office that used to be key for its in-office staff, is sitting on a property that Ptacek says, "no one will buy for anything less than a substantial discount."

Between the shock to commercial real estate from the remote work trend, followed by the higher interest rates and the prospect of another recession, now is no time to sell even if Ptacek says commercial real estate owners should expect it will get worse yet. CoStar projects that the sub-leasing surplus will persist as companies worry about needing to lay off workers and make other cuts ahead of a recession, and it goes further: the subleasing square footage will never return to the pre-pandemic level, she said.

The slowdown in investment activity that Ptacek described as a gradual slowdown so far, will become a "dramatic slowdown" after the pipeline of deals signed in Q2 and Q3 before rates started to rise are closed. "The bigger impact is ahead of us, and absolutely the higher borrowing cost will have an impact, and in many cases, eliminate the levered investors," she said.

It's a bad situation, but she said that for owners of corporate real estate, if the cost of real estate debt is cheap and the balance sheet is solid, sit on the real estate.

With companies still in the early days of their hybrid work experiments, it's not just economic uncertainty but uncertainty about how in-office occupancy trends over time which should make companies want to hold off pulling the trigger on asset sales. Leases that were up for renewal were an easy call to make (end it), and firms can always sign new leases (likely at even better rates) if and when they need to make that call.

"It's all still shaking out and you see it, you see the big companies one day fully remote and the next day signing huge leases and telling everyone, 'Back in the office,' and then the minute they do employees express consternation and they say, 'Never mind.' It's all very much in flux," Ptacek said.

Uncertainty is the ultimate deal killer, she said. No one wants to buy assets with the risk of no demand barring rent cuts of 50%. It's difficult right now, she said, for either buyer or seller to reach what would be defined as a "reasonable price."

Companies should expect the situation may be even worse a year from now.

"It's probably a fair assumption that this is not going to be a lot better in a year, in terms of demand," she said. "There could be another leg down in transactions."

The wave of distressed sales that usually occur in downturns have not occurred yet, and that is right on schedule, as they tend to lag the start of downturns by a few years. Ptacek noted that after 2008, the peak in the distressed asset sales wave didn't occur until 2010/2011.

"As loans come due and they have difficulty, it's refinance or sell," she said. And more borrowers won't be able to refinance, and the wave of distressed sales will ensue. "There will likely be some level of distress which will weigh on pricing, so you could as an owner find yourself in a position in a few years where the environment is even less favorable. But it's not like it's a good environment today," she said.

David Goldsmith

All Powerful Moderator
Staff member

Why Office Buildings Are Still in Trouble​

Hybrid work, layoffs and higher interest rates are leaving lots of office space vacant and hurting the commercial real estate business.

With the pandemic receding, children back in school and businesses telling employees to return to the office, the companies that own big office buildings were hoping to move on this fall from a nightmarish two years.
Instead, things got worse.
More office workers are back at their desks than a year ago, but attendance at office buildings in New York, Boston, Atlanta, San Francisco and other cities is languishing well below prepandemic levels. As leases come up for renewal, companies are often opting for smaller offices, saddling landlords with millions of square feet in vacant space. And more space is expected to hit the market in the coming months as companies like Meta, Salesforce and Lyft lay off workers. More than 100,000 technology workers have lost their jobs this year, according to, a site that tracks job cuts.
Higher interest rates are also weighing on the industry. Many landlords are no longer willing or able to acquire and spruce up older buildings or build new ones. Seeing little upside in holding on to sparsely occupied buildings and paying interest on mortgages, some landlords are handing over properties to lenders. Others are seeking to convert office buildings into residential complexes, though that can be expensive and take years.
Wall Street investors appear to think the office space sector is in for a deep slump. The shares of large landlords and developers are trading close to or below their pandemic lows, underperforming the broader stock market by a huge margin. Some bonds backed by office loans are showing signs of stress.

The value of U.S. office buildings could plunge 39 percent, or $454 billion, in the coming years, according to a recent study by business professors at Columbia and New York University.
“We see lots of tenants not renewing their leases, going either fully remote, or renewing their leases but signing up for less space,” said Stijn Van Nieuwerburgh, one of the authors of the paper, and a professor specializing in real estate at Columbia Business School. “It all adds up.”

A sickly office sector can hamper the recovery of cities that depend on the jobs and tax revenue that commercial buildings provide. For example, New York City collected about $6.8 billion in property tax revenue from office towers in the fiscal year that ended in June, or around 9 percent of its total tax revenue, down from $7.5 billion in the previous fiscal year. The market value of office buildings in the city fell $28.6 billion last year, the first such decline since at least 2000, the Office of the State Comptroller estimated.

In a sign of how fast the market has turned down in some places, companies are giving up space that they leased only months earlier. Meta, the parent of Facebook, recently decided to sublet all the space that it signed up for about 10 months earlier in an Austin, Texas, tower called Sixth and Guadalupe. Meta must still pay the rent on 589,000 square feet, but its decision to find somebody else to occupy the space could push rents down across Austin, which until recently was seen as a thriving and growing technology hub.

The struggle to fill empty offices is a national phenomenon.
The amount of office space leased in the United States in the three months that ended in September was nearly a third below the quarterly average for 2018 and 2019, according to Avison Young, a commercial real estate services firm.
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Office vacancy rates across the country stand at a record 19.1 percent, with Chicago, Houston and San Francisco running above 20 percent, according to Jones Lang LaSalle, a commercial real estate services company. That includes the record 185 million square feet, or 3.85 percent of total office space in the country, that is available for sublet. Another 104 million square feet will come onto the market through 2024 as new office buildings are completed, according to Jones Lang LaSalle.

In some ways, New York, the largest office market in the country, with 540 million square feet of space, is particularly vulnerable. Older office buildings in the city are losing their best tenants to new well-equipped buildings in neighborhoods like Hudson Yards on Manhattan’s Far West Side, leaving lots of empty office space in Midtown and downtown.

“The availability downtown is at a record high of 20.2 percent,” said Franklin Wallach, an executive managing director at the brokerage firm Colliers. “These are older buildings in the canyons of Wall Street, and we’re seeing large vacancies, not because of one single tenant but tenant migrations that are all hitting at once.”
Office landlords made it through the pandemic in reasonable health because corporate tenants with long leases kept paying rent even if their employees weren’t coming into the office.
But the landlords, who typically flash sunny optimism even in dark days, are now sounding more cautious. They acknowledge that many corporate tenants are sticking with some form of work-from-home policy, and their bullishness is mostly focused on new buildings.

Still, they believe demand will eventually come back. William C. Rudin, the chief executive of Rudin Management, a New York developer and landlord, said that companies often give back space in downturns. But when the economy improves, corporate executives change their minds and say: “Oh, my God, we don’t have enough space. We’ve got to take more space.”
The work-from-home revolution is not confined to the coasts. Even in Texas, office attendance has not fully recovered — it is 53 percent of prepandemic levels in Dallas, 57 percent in Houston and 62 percent in Austin, according to Kastle Systems, a security card swipe company.
Many landlords say Kastle’s data does not reflect attendance in their buildings. Kastle reports the New York metropolitan area weekly attendance at a little less than 50 percent of prepandemic levels, but Mr. Rudin said his towers were on average roughly 65 percent full over the course of a week. He added that occupancy was much higher at buildings occupied by financial companies, many of which have required employees to come back.

Office landlords borrow money to acquire and construct buildings. So far, most of them are making debt payments, according to data from Trepp. But signs of stress are appearing in commercial mortgage-backed securities, which are backed by payments on office loans and then sliced into layers, where the top layer is more protected against defaults than those at the bottom.
“I think there is more difficulty to come,” said Gunter Seeger, a portfolio manager at Pinebridge Investments, which invests in the debt used to finance office buildings. “It happens in slow motion — you see it coming, but it doesn’t unfold quickly. We’re limping along.”
Investors, for instance, are nervously eyeing bonds backed in part by lease payments from tenants of 300 North LaSalle, a Chicago building owned by the Irvine Company. Boston Consulting Group and Kirkland & Ellis, a law firm, occupy just over 60 percent of the building, and both are set to leave in a couple of years. The price of one of the bonds, which carries a middling rating has slumped 22 percent this year, implying a yield of around 17 percent.

Representatives for the Irvine Company and Kirkland & Ellis declined to comment. Boston Consulting Group did not respond to requests for comment.

Williams & Connolly, a law firm, moved from a building in downtown Washington to a new development at the Wharf. Hines, the owner of the older building, which had a 10-year, $135 million loan against it, agreed this fall with its lender, Allianz Real Estate, to sell the building.
A spokeswoman for Allianz declined to comment.
An executive at Hines, a privately held real estate investment firm, said that the building, which it has owned for more than 30 years, had been a profitable investment. “We continue to operate the building and are working with the lender to sell the property to a third party,” Chuck Watters, senior managing director at Hines, said in a statement.

Landlords are also finding that some tenants are making do with much less space.
In August, KPMG signed a 20-year agreement to move to Two Manhattan West, a skyscraper expected to open next year on the edge of Hudson Yards. KPMG, which has adopted a hybrid work model, is leaving three older buildings and reducing its lease space by 40 percent.

“For our business, we believe a hybrid future — a blend of fully remote, hybrid and on-site teams — will deepen connections among current and potential employees and leaders, delivering us a competitive edge in the marketplace,” said W. Scott Horne, a KPMG spokesman.
Mr. Rudin, whose company owns two of the buildings from which KPMG is moving, said it had a “very good retention rate” but acknowledges that tenants needs change, adding that his firm was improving older buildings and having success leasing them.

Companies may struggle to shrink their office space if most employees are expected to come in, say, three days a week. But, over time, managers will become more adept at minimizing space. And cutting costs could become a priority if the economy slows sharply or slides into a recession.
Mr. Van Nieuwerburgh, the Columbia professor, calculates that New York office space on average costs about $16,000 a year per employee. “That’s real money,” he said, “and companies will try to save that.”