Real Estate Headline News 2.21.24

Weekly News Roundup

• Distressed Property Sales Stabilizing Market
• Industrial Real Estate Q4 2023 Review
• Office Real Estate Q4 2023 Review

Distressed Property Sales Stabilizing Market

Investors with cash on hand have begun to snap up distressed properties or provide rescue capital to struggling owners in exchange for preferred returns. As of the end of 2023, commercial-property distress, including financially troubled assets and those taken over by lenders, totaled $85.8 billion, according to data provider MSCI Real Assets. That is up from $56.9 billion at the end of 2022 and the highest level since the third quarter of 2013, MSCI said.

Analysts expect that distress will keep rising in the years ahead as more owners need to refinance. More than $2.2 trillion in commercial mortgages are scheduled to mature between now and the end of 2027, according to data firm Trepp. The rise in distressed sales promises to help stabilize the commercial-property market at a time when sales volume has plummeted owing to higher borrowing rates, and weaker cash flows for some property types. Source: Wall Street Journal

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Industrial Real Estate Q4 2023 Review

New industrial real estate supply nearly tripled demand, as measured by net absorption during 2023, pushing vacancy higher in every region of the country and across nearly all industrial markets. Construction starts dropped each quarter and the construction pipeline contracted, helping to ease vacancy concerns. The balance between supply and demand is forecast to return by late-2024 as the market approaches its next growth cycle.

Following two years of white-hot demand for industrial space, supply and demand fell out of balance during 2023. Developers completed a record 607 million square feet of new supply, nearly triple the year’s net absorption total of 231 million square feet. The U.S. average vacancy rate increased by 194 basis points over the year to 5.55% — the highest since the second quarter of 2016.

Despite the uptick, the rate remained well below the 15-year average of 6.4%, although it is forecast to stabilize during the second half of 2024 at around 6.6%, a functional level at which tenants have more lease options and the market isn’t grossly overbuilt. Manufacturing construction spending reached a new high in 2023, largely due to reshoring and the CHIPS Act, and it will continue to expand in 2024. Build-to-suit development is projected to pick up during 2024 as the 10-year speculative construction cycle winds down. Source: Colliers

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Office Real Estate Q4 2023 Review

Among the 79 office markets actively tracked by Colliers, nearly 32% recorded positive absorption in the fourth quarter, with Houston, Dallas, and Minneapolis-St. Paul leading. On the other hand, in six markets negative absorption exceeded 1 million square feet. Tenants continue to prioritize building location, amenities, and communal and collaboration areas in their space. Suburban properties continue to attract the most capital, with buyers placing $10.4 billion in assets in Q4 2023 compared with $4.1 billion in CBD locations.

South Florida also continues to feature the lowest metro vacancy rate outside of the tertiary markets at 9.92%, followed by Las Vegas (11.1%) and Jacksonville (11.7%). Nashville (675,335 square feet) and Grand Rapids (581,788) were the only two metros with occupancy growth of greater than 500,000 square feet in 2023. On an annual basis, for the second year, the Bay Area was the hardest-hit market over the year (negative 11.2 million square feet). New York was next (negative 8.0 million square feet), followed by Boston (negative 6.4 million square feet), with Seattle (negative 5.0 million square feet) and Greater Los Angeles (negative 4.6 million square feet) rounding out the top five.

During the year, the office vacancy rate climbed 120 basis points, to 16.9%. Net absorption, which measures the change in occupied office inventory, declined by 16.9 million square feet during the fourth quarter, resulting in a yearly decrease of just over 68 million square feet. The amount of U.S. office space under construction, at 72.1 million square feet, was 50% below this cycle’s peak of 162.6 million square feet in Q3 2020. In Q4 2023, 5.4 million square feet was completed.

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