Priced out: How cities are scrambling to re-envision empty office spaces as future homes

Priced out: How cities are scrambling to re-envision empty office spaces as future homes

As rising real estate prices have been reshaping homeownership across the country, the commercial landscape has also been going through a drastic shift, particularly in New York City.

Once packed with glass high rises filled with floors of cubicles for big-name financial institutions, tech start-ups, and other Fortune 500 companies, the city's Financial District is now re-envisioning itself as more welcoming to residences, as hybrid work and a shift in commercial real estate preferences have left many properties empty.

This scene is becoming a common one in other metropolitan areas such as San Fransico, Washington D.C., and Chicago not only for the changing work landscape but also because of recent commercial real estate trends that are forcing commercial landlords to reconsider their land holdings.

This has resulted in a solution that some experts say will be more common throughout the country: converting those office spaces into residential apartments.

For some cities, this is not a new phenomenon.

In the wake of 9-11, New York began rezoning more properties in the Financial District, which realtors rebranded as "FiDi" to attract new residents. But experts say there has been a bigger push since the pandemic ended.

John Cetra, a well-known New York architect, is currently working on a plan to convert 55 Broad St., which once housed Goldman Sachs, into nearly 600 market-rate apartments as part of a $172 million development deal that was approved in July.

Nearby, he's also converting an office building that once housed J. P. Morgan Chase into a 1,300-apartment building.

"What we're seeing now is this kind of acceleration of these buildings from the 50s, 60s, and 70s that are, that are being converted," Cetra told "Start Here" during a tour of the construction site.

Cetra said landowners are rushing to get people inside their properties because they are losing hundreds of millions of dollars a year from the lost rent that is typically used to pay for their mortgages.

Most developers obtain big loans to finance commercial properties and due to low interest rates, they would pay off their mortgage with another loan.

The recent rise in interest rates has forced commercial landowners to reconsider this strategy and the debt has been adding up and the rents to pay them down dwindling. Roughly $1.5 trillion in commercial real estate loans are coming due soon according to the finance analysis group Trepp.

Certa said there is a real chance that some big companies will default on their loans.

"They're looking at it and saying…it's not worth what we thought it was worth," he said of the companies. They might walk away from some of these properties and say, 'I can't pay the debt service. So Mr. Banker, take it back.'"

Chuck Blozies, a San Francisco-based architect, told "Start Here" that his city, which has an office vacancy rate of nearly 40%, has seen a rise in commercial foreclosures.

That, in turn, can create what's known as a "doom loop": empty buildings lead to less tax revenue, which forces the city to cut back on public services. These cutbacks lead to the city being less attractive to businesses and workers, which leads to more vacancies.

"Of course, when the pandemic hit us, it was easy for [tech workers] to work from home," he said.

"I think the consensus is that office use, the way it used to be, is just never going to come back," he added.

Blozies has been leading several commercial to residential conversions in San Fransico and noted that it takes a lot of work to make it a livable space that complies with safety codes.

For example, typically many office rooms are deep within the floor plate and don't require windows for lighting and air, which is mandatory for an apartment. Blozies also pointed out how plumbing for commercial properties also presents architects with a problem.

"Office buildings have, typically, bathrooms ganged in the middle of the building. Residences have bathrooms all over the place. So you essentially need to take the building apart to do plumbing upgrades," he said.

Certa said New York City office towers, with huge floor plans and vast "dark spaces," present obstacles that forced his team to rethink traditional apartment layouts.

"Because of the size of the floor plates, the apartments get kind of long and narrow, but every apartment will have windows, and then they'll have home offices as well, plenty of closet space [and] everything that you'll need in an apartment," Certa said.

Bloizes said he is thinking outside of the box for ways to reuse the dark space in some of his design ideas, including a space where future self-driving cars can enter and exit the building.

"You need an elevator to get them up there, kind of drive in one side, get cleaned up and repaired on a conveyor belt kind of idea, and then drive out again to pick up their next fare," he said.

Although experts say the return on investments for the converted buildings is higher compared to an empty office building, there still is a major cost issue that trickles down to renters.

Due to the expensive nature of the conversion work, many of the apartments are listed as luxury units.

At the same time, neighborhoods that have seen commercial to residential conversions have also adapted. New York's Financial District, for example, has seen a growth in restaurants, shops, event venues, and other businesses that are now catering to the new population.

Some of the neighborhood's residents, like Stephanie Tronis, told "Start Here" they plan on staying there for a long time.

"It's quiet on the weekends. I love that. It's busy enough during the week that it feels like it's a neighborhood, but then on the weekends, it's, it's pretty quiet, which I enjoy," she said.

 

Source: Priced out: How cities are scrambling to re-envision empty office spaces as future homes

https://www.creconsult.net/market-trends/priced-out-how-cities-are-scrambling-to-re-envision-empty-office-spaces-as-future-homes/

Don’t Get Left Behind: Now is the Time to Invest in Multifamily

Don’t Get Left Behind: Now is the Time to Invest in Multifamily

Market conditions continue to change at a pace rarely seen before, providing significant opportunity but also uncertainty. So how do you know when to invest and what to invest in to deliver the best risk-adjusted returns? It comes down to picking the right time, the right assets, and the right partner.

Major newspapers like The Wall Street Journal have run article after article on why the top industry players are lining up billions of dollars to swoop in and buy commercial real estate at deep discounts. The impact of rapidly rising interest rates on property values should present buying opportunities that we haven’t seen since the Great Financial Crisis, and you don’t want to get left behind. Aligning yourself with managers who can pick the right investments will be the key to ensuring you don’t miss out on this wave of opportunity.

Picking the right time—and why that time is now

Several market factors are currently aligning to create what should be some of the most promising investment opportunities since 2009. The recent disruption in capital markets, coupled with the rapid increase in interest rates, is starting to force many property owners to either invest significant new capital or sell their assets. Owners who secured variable-rate debt in recent years are grappling with interest rates that have tripled, substantial increases in reserve requirements, and a steep reduction in operating cash flow. As more and more owners face looming debt maturities or loan rebalances with limited access to liquidity or the ability to refinance, well-capitalized managers will be able to swoop in and acquire these assets on an attractive basis.

Many of these assets will be well-located, high-quality, and strong-performing, but they will come to market not because of inherent underlying issues with real estate but rather because of the current liquidity constraints and the immediate cost implications of near-term debt. We believe this buying window will be relatively short while prices reset, and investors positioned to seize on that window could achieve outsized risk-adjusted returns.

Picking the right assets: resilient and inflation-hedged

Commercial real estate remains a highly favored investment class, and multifamily stands above the rest. Historically, multifamily has maintained its status as the best-performing and most resilient asset class through economic cycles. One of multifamily’s key attributes is its role as an inflation hedge. Multifamily landlords have the flexibility to adjust rental rates on a weekly basis, typically with lease terms not exceeding 12 months. This adaptability becomes especially valuable as inflation rates climb, enabling multifamily property owners to consistently reset rents and align them with the prevailing economic conditions, thus offering an additional layer of protection against downside risks.

Some of the most promising multifamily investment opportunities are expected to emerge in gateway markets. These supply-constrained markets represent a flight to quality and boast strong underlying fundamentals that continue to flourish. Multifamily assets situated in supply-constrained markets, such as those found in the Western U.S., are well-positioned for possible sustained rent growth. These markets, unlike some others like those in the Sunbelt region, face a lower risk of near-term oversupply, making them highly attractive prospects for investors in these volatile times.

Picking the right partner—experience matters!

In many ways, who you invest with is just as important as what you invest in. Investors need to do their diligence and pick a manager with a proven track record of success that spans multiple market cycles. While many operators have had success over the past decade, it is important to separate managers who added value at the real estate level from those that just rode the wave of rising market conditions. As Warren Buffet famously said, “only when the tide goes out do you discover who's been swimming naked.”

Successful investors will be those who can identify and avoid those skinny dippers by partnering with shops that have a proven track record of success over the past 20-plus years through recessionary periods and recovery phases.

Thorough due diligence on operators is paramount to ensuring you align yourself with managers that can adapt to shifting market conditions and capitalize on rapidly emerging opportunities likely to arise in the next 12 to 18 months. Equally important is ensuring that operators' interests align with yours. One effective way to achieve alignment is to prioritize straightforward and transparent partnership structures that offer ample downside protection. This may include arrangements such as avoiding promote crystallizations, ensuring the sponsor has sufficient co-investment in the fund, and crossing waterfalls so the sponsor doesn’t make a profit until investors have earned a return on their entire investment, among other strategies.

Picking the investment structure: the value of tax benefits and transparency

Lastly, seeking investor-friendly structures can be extremely beneficial to investors. We favor closed-end funds because you can earmark capital that helps ensure the fund has sufficient dry powder to move quickly to take advantage of distressed deals and can do so at the right time. This structure allows investors to gain exposure to a diversified portfolio through a single investment with crossed waterfalls and take advantage of the tax benefits afforded real estate investments.

The tax benefits of commercial real estate are also highly attractive when compared to other investments. Through a closed-end structure, you can shield investment income and/or receive a tax loss against other capital gains using depreciation. This allows you to defer ordinary taxes during your hold and not have to repay those amounts until sale, and generally they are recaptured at advantageous rates. Real estate investments have no limit on interest deductions, unlike some other investments, so you also get the full tax benefit of leverage, which is even more advantageous in a higher-rate environment.

How to come out a winner

Now may be an especially favorable moment for family offices and high-net-worth investors to invest in commercial real estate, specifically multifamily. We think the opportunities over the next 12 to 18 months could mirror—or even exceed—those coming out of the Great Financial Crisis, when highly successful investors were able to scoop up strong-performing, well-located assets at deeply discounted prices. With several institutional investors sidelined because of their internal challenges related to allocation issues, redemption requests, or a lack of liquidity in their other investment holdings, now is the time for family offices and HNW investors to capitalize on the distress.

Thoughtful investors who act now to pick managers that have the expertise to identify opportunities, apply appropriate risk-reward assessments, and effectively execute their business plans to enhance value are likely to emerge as the victors in the coming years.

 

Source: Don’t Get Left Behind: Now is the Time to Invest in Multifamily

https://www.creconsult.net/market-trends/dont-get-left-behind-now-is-the-time-to-invest-in-multifamily/

With housing in short supply, developers are converting more empty offices into apartments. But not all buildings are candidates for reuse.
https://www.wsj.com/video/series/wsj-explains/what-it-takes-to-convert-a-multimillion-dollar-office-into-housing/88CDF171-D046-4FD4-A4BB-72130DCCB4C6

CRE Markets Poised for Growth in 2024

CRE Markets are poised for Growth in 2024

Distress in the commercial real estate market has bottomed out, and conditions will soon be on the upswing as more investors from the private equity world seize opportunities to jump into the space, according to Newmark (NMRK) CEO Barry Gosin.

“I think the good news is that we’re at the point where I don’t think it’s going to get worse, and sequentially, it’s going to get better,” Gosin said Tuesday during the Real Estate Board of New York’s (REBNY) annual commercial brokerage holiday luncheon at the Metropolitan Club in Manhattan. “I’m fairly optimistic about the next couple of years.”

Gosin said in the keynote interview, moderated by Cathy Cunningham, executive editor at Commercial Observer, that the commercial real estate market is poised for improvements as more understanding is reached on the future of cap rates after the Federal Reserve raised interest rates by nearly 300 basis points to fight inflation. While property owners have lost 40 to 50 percent of the equity in their investments as a result of the Fed’s policies and $800 billion of loans are due over the next two years, Gosin stressed that the CRE markets are close to gaining more clarity on future valuations.

The market environment is paving the way for new investors to emerge in the CRE space, according to Gosin, especially among private equity firms, given the decreasing amount of lending from banks in the past 18 months.

“It will be really mercenary money, and it will be expensive money, but it will take some time to develop,” Gosin said. “They are just waiting for the moment, and I think the moment is pretty close.”

With individual CRE markets, Gosin said he feels positive about the future of San Francisco despite having lower office occupancy than other large cities. He added that New York is also well positioned for a bounceback with its "middle-of-the-pack" metrics with occupancy and vacancies.

“There is no city that has the energy of New York,” said Gosin, a Brooklyn native. “There is nothing like this city."

The dislocation in the CRE debt markets has been felt even with a successful brokerage like Newmark, where capital markets business is down 60 percent, Gosin said. However, the firm has found other ways to stand out amid the volatility, including increased leasing volume.

Newmark has a “talent first” mentality and added investment sales giants Doug Harmon and Adam Spies along with their team from Cushman & Wakefield last February. The firm was selected by the Federal Deposit Insurance Corporation shortly thereafter to sell roughly $60 billion of loans from Signature Bank after the bank’s March failure.

As the year draws to a close, Gosin said he is bullish on 2024 for not only Newmark but also the CRE market as a whole.

“In a weird way, if the cap rates go higher, the next run will be longer,” Gosin said. “We just have to live through the period of uncertainty, which we’re in, but in my view, I think it’s over."

While he has encountered a myriad of market challenges throughout his lengthy CRE career, Gosin stressed that brokers can persevere through any cycle by working hard and building relationships. He recalled the stock market crash of Oct. 19, 1987, and how his team needed to adjust their plans based on the drastically new economic conditions that resulted.

When asked by Cunningham what the best holiday gift CRE could receive this year would be, Gosin answered “lower interest rates.”

 

Source: CRE Markets Poised for Growth in 2024

https://www.creconsult.net/market-trends/cre-markets-poised-for-growth-in-2024/

2024 Apartment Forecast: Strong Fundamentals Despite Twists & Turns

2024 Apartment Forecast: Strong Fundamentals Despite Twists & Turns Despite concerns about uncertainties and a potential recession, the 2024 forecast for the rental market shows robust fundamentals for multifamily.

Supply surge predictions: The number of new multifamily apartment units under construction reached a record 1M in late 2023. Origin Investments predicts a slowdown in new starts next year due to a lack of funding and ongoing uncertainties. Yardi Matrix analysis also aligns with this prediction.

Rent growth outlook: Rent growth, which cooled due to easing demand and rising supply, is expected to recover slightly in 2024 but remain in the low single digits. Negative rent growth is projected to return to the historic norm within a 2–4% range by 2H24, similar to 2022 levels.

Homeownership barriers: Systemic barriers to homeownership, such as high prices and spiking mortgage rates, contribute to the long-term renter trend. Few buyers can afford homes and existing owners are reluctant to sell. Consensus expectations suggest mortgage rates will ease in 2024 but won't significantly impact the for-sale market.

➥ THE TAKEAWAY

New realities and opportunities: Next year’s apartment forecasts reveal new realities and new opportunities. Hybrid work, driven by the pandemic, will become the new normal, creating demand for rentals that accommodate flexible work-life balance. And insurance, which shot up in 2022 due to natural disasters, may stay high. Despite this, ongoing opportunities and potential returns, particularly in senior debt and preferred equity, are attracting plenty of attention.

https://www.creconsult.net/market-trends/2024-apartment-forecast-strong-fundamentals-despite-twists-turns/

Will the Commercial Market Hit the Reset Button in 2024?

Will the Commercial Market Hit the Reset Button in 2024?

As the real estate market adjusts to new norms in a post-pandemic world, the commercial and investment property sectors are shifting. A retail rebound, changing investor sentiment about climate risks, and eroding affordability are among the top trends commercial real estate professionals are contending with, according to the “Emerging Trends in Real Estate 2024” report from the Urban Land Institute and PwC.

“It is clear that the real estate industry is entering a new era of thinking, building, and operating,” says Anita Kramer, senior vice president of ULI’s Center for Real Estate Economics and Capital Markets. “The emergence of hybrid work models, the strength of the retail sector, and the growth of Sun Belt markets underscore the new reality on the ground, specifically in our top cities—Nashville, Phoenix, Dallas/Fort Worth, Atlanta, and Austin—to watch in 2024.”

The report also cautions about a slowdown in development and investment prospects heading into 2024. “Industry professionals are at a turnkey moment that will require both innovation and adaption to shape a resilient real estate landscape for the future,” Kramer says. Labeling it “The Great Reset” in real estate, ULI and PwC’s report notes some of the following “emerging trends” to watch in 2024.

1. The retail rebound. Demand for retail property has skyrocketed over the past 18 months, with about 35 million square feet of new retail space in the U.S. across all shopping center types. “The industry is coming to realize that the nation will keep shopping for most of its goods and many services in shopping centers indefinitely, even if e-commerce continues to take market share away from in-store retailers,” the report notes. Retail has strengthened as an investor preference compared to recent years, when it was deemed one of the most troubled asset types. The suburbs remain an attraction for retail investors, and grocery-anchored community or neighborhood shopping centers account for 25% of the nation’s retail inventory.
2. Hybrid work isn’t going anywhere. Office employees are showing their preference for a hybrid work setting, a mix between remote and in-person. As such, office buildings are losing their appeal with investors; transactions have fallen more than twice as much as any other major property type. Industry experts are growing concerned about what to do with the high vacancies in office buildings, turning to adaptive reuse or even demolishing and repurposing the land when buildings can’t be used as conversions.
3. Sunny prospects in the Sun Belt. The southern part of the U.S. has emerged as a magnet for growth. Firms and investors are being drawn to the region due to lower regulations, lower taxes, and a growing labor force. The ULI and PwC report notes that the majority of cities on its “markets to watch” list with the best real estate prospects in 2024 are located in the Sun Belt. Industry experts expect many areas in the Sun Belt to continue to see growth due to ongoing, robust migration trends. However, the report cautions that rising risks from climate change, such as excessive heat, could eventually affect the trend of positive investment in the area.
4. Debt comes to the forefront. “Rapidly rising federal debt could potentially ‘crowd out’ private investments in the industry, leading to slower economic growth and higher interest rates, both of which would create long-term delays on property construction, investments, and returns,” the report warns. Credit has become more expensive and more difficult to get. Still, despite the lack of credit availability, “some investors are cautiously pursuing deals and lining up to take advantage of undervalued assets. The industry is seeing its highest ‘buy’ rating since 2010, signaling a favorable entry point for acquisitions after a decade of unabated appreciation.”
5. AI advancements get CRE’s attention. Artificial intelligence will receive plenty of buzz in 2023. But CRE applications were “limited” and “most mundane to date,” the report notes. However, industry experts expect that to change, with greater applications starting to emerge that aim to enhance the property search and analysis process, reshape how investors assess potential investments, improve the customer experience, and provide greater fraud detection in real estate transactions. The report also points to the potential for AI to predict property climate risks, identify investment opportunities, and create higher-performing real estate portfolios. Expect greater offerings and experimentation with AI in the 2024 commercial market, the report notes.
6. Climate change becomes a pressing concern. Billion-dollar climate events in the U.S. are rising, which has led to government regulations and proposed ESG mandates. “Property owners and managers have more reasons than ever to make ESG a priority,” the report notes. Developments may need to be repositioned to spotlight their sustainability, and more buildings will likely need to be retrofitted. “Not every building will be converted; some assets will simply become obsolete and need to be demolished,” the report also notes. In those cases, developers and architects are exploring the design for “disassembly,” which allows for the easy recovery of products, parts, and materials when a building is disassembled or renovated.
7. Downtowns are poised for another reinvention. Urban economists are debating the future of downtowns and how economic forces have been hampering these once-bustling business hubs. Concerns are growing about an “urban doom loop,” as empty office buildings have been left behind in urban cores after employers relocated to the suburbs or downsized their office spaces. This has also led to a decrease in tax revenues, forcing cities to reduce services and possibly stall future commercial and residential growth. The report says downtowns likely will need to be redeveloped, as they have in the past, and focus on building up their “live/work/play” allure to compete with the growth in the suburbs. This may include the conversion of empty office buildings, addressing public transit deficiencies, and “third places”—community spaces where people congregate.
8. Housing affordability deteriorates. Like the residential market, affordability also continues to be a top challenge for the commercial sector. The U.S. has experienced the fastest-ever deterioration in real estate affordability over the past three years as housing prices soared during the pandemic. Further, mortgage rates have more than doubled in a short time. “After sharp rent escalations last year, rent growth has eased for now due to large supply deliveries but is expected to resume,” the report notes. “One answer has stood out to solve the affordability crisis: build more housing—preferably at all price points.”

Source: Will the Commercial Market Hit the Reset Button in 2024?

https://www.creconsult.net/market-trends/will-the-commercial-market-hit-the-reset-button-in-2024/

Miami Tops U.S. Hottest Markets, but the Midwest Heats Up the Competition

Miami Tops U.S. Hottest Markets, but the Midwest Heats Up the Competition

In 2023, the Midwest emerged as the most competitive rental market in the U.S., with three cities in the top five, driven by its affordability, ample space for remote work, and easy access to nature. But Miami still leads the nation.

Factors at play: The Rental Competitivity Index (RCI), developed by RentCafe, is used to gauge the competitiveness of rental markets, incorporating five key metrics: the duration of apartment vacancies, occupancy percentages, the number of renters vying for apartments, lease renewal rates, and the annual completion rate of new apartments. In 2023, the national average RCI was 59.5, but significantly higher in the most competitive markets.

America's heartland: Favored by remote workers for its affordability and space, the Midwest became the hottest region in 2023. High lease renewal rates intensified competition, with the Midwest boasting 10 cities in the top 30 most competitive markets. Leading the Midwest, Milwaukee was the third most competitive nationally, with an RCI score of 113. With most of its population renting and less than 5% of apartments available, finding a rental in Milwaukee was particularly challenging, as apartments stayed on the market for only 33 days, attracting about 14 renters per unit.

Magic in Miami: While the Midwest had the highest number of competitive cities, Miami ranked as the #1 most competitive U.S. rental market with an RCI score of 122. High demand, fueled by job opportunities and no income tax, coupled with locals buying condos, strained rental supply. A 71.2% lease renewal rate led to fierce competition, with 22 applicants per vacancy, twice the national average. North Jersey followed as the second hottest market, with an RCI of 116, appealing to Millennials seeking affordability near NYC.

Small-town living: In 2023, small-town rental markets were also intensely competitive, with Fayetteville, AR, and Providence, RI, leading the charge. Fayetteville, boosted by its university and startup focus, had a 97.2% occupancy rate, and apartments were quickly occupied within 18 days, despite a 2.3% increase in housing. Providence, a popular choice for relocators, faced a severe housing shortage with no new constructions, a 96.6% occupancy rate, and apartments filling up in 35 days, attracting 17 applicants each.

➥ THE TAKEAWAY

Zooming out: The 2023 U.S. rental market saw the Midwest becoming the most competitive region, led by three top-ranking cities, in contrast to a general softening in other areas. Miami emerged as the hottest rental market due to its thriving tech scene and favorable business climate. The RentCafe report revealed a trend of increasing apartment constructions and evolving lease renewal behaviors, highlighting diverse regional rental market dynamics and trends.

https://www.creconsult.net/market-trends/miami-tops-u-s-hottest-markets-but-the-midwest-heats-up-the-competition/