RealEstateNews 1.13.25

Weekly News Roundup

• Mismanagement Fueled Palisades Fires
• Big Investors Buying Shopping Centers
• Office Properties that are in Demand

Mismanagement Fueled Palisades Fires

In less than one day, more than 80,000 Californians have been evacuated, multiple injured, and at least two dead. With more than 4,000 acres of some of the nation’s most valuable property up in flames, the Southern California wildfires could prove one of the most costly disasters in American history.

As Los Angeles firefighters faced down the most destructive blaze in the city’s history, they ran out of water. Fire crews were forced to watch as entire blocks of the Pacific Palisades — one of the most scenic and celeb-packed neighborhoods in LA — were incinerated in a matter of hours late Tuesday and early Wednesday. The water shortage was the result of years of mismanagement of LA’s water system. The city has 114 massive water tanks that store water for and help ensure consistent flow. But they are inadequate. All were full when the fire started Tuesday. Three 1 million-gallon tanks supply the hydrants in the Pacific Palisades.  The first was empty before 5 p.m. The last was trained by 3 a.m. Wednesday. Without the water tanks, the city’s system was simply not able to maintain pressure to the hydrants.

Mismanagement didn’t stop with water supply. California Policy Center co-founder Edward Ring said the dearth of logging, grazing and forest thinning, often blocked by environmentalists’ lawsuits, has allowed California’s forest density to increase to about five times what it has been for the past 20 million years. The added density has turned the state’s forests into tinderboxes that can create intense wildfires. Many homeowners face this disaster without insurance. Most insurers who have limited their offer in the state mentioned the rising wildfire risk as well as the state’s regulations as the main reasons behind their decision. Unable to increase their premiums to a level that will match their growing risk, companies have decided instead to cut coverage.

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Big Investors Buying Shopping Centers

Open-air neighborhood shopping centers are now one of the hardest types of commercial real estate to find space in. They have been fuller than America’s e-commerce warehouses for almost two years, according to data from CBRE, partly because there has been a flood of new industrial warehouse construction and practically none for retail. Rising occupancy rates in these retail centers have caught the eye of institutional investors. In November, Blackstone spent $4 billion on shopping-center owner Retail Opportunity Investments. Bain Capital was also interested in buying the company, according to news reports. The deal was Blackstone’s biggest bet on U.S. retail since 2011.   

Flexible work schedules are driving more traffic to neighborhood retail centers. White-collar workers who used to spend five days a week at a downtown office are now likely to work a day or two from home and can visit the grocery store at lunchtime. Stronger retailers have invested heavily in their e-commerce supply chains and are now better able to compete. They also have figured out how to use physical stores to their advantage. Retailers offer curbside pickup so that shoppers can retrieve their online orders in person, and they incentivize customers to physically hand in online returns. This keeps retailers’ home-delivery costs down and drives traffic to their stores.

Building costs have risen much faster than retail rents in recent years, so it is cheaper to buy an existing neighborhood shopping center than to build one from scratch. This bodes well for current landlords who will enjoy pricing power for the first time in years. According to Green Street, shopping-center rents in the top 50 U.S. markets would need to rise around 65% for fresh construction to be profitable. Source: Wall Street Journal

Office Properties that are in Demand

The troubled U.S. office industry is starting the new year with a problem it hasn’t contended with in years: Some business districts face a looming shortage of top-shelf workspace. Office vacancy overall remains near record levels in many cities, where a glut of unwanted and aging workspace is keeping a lid on rents and depressing office values. Decades of overbuilding made the U.S. office market vulnerable when the pandemic hit and remote work flourished. More recently, big firms in technology, finance, transportation and entertainment are telling their employees they need to be in the office more often, in some cases five days a week.

These large tenants tend to want the same thing—buildings offering plenty of outdoor space, upscale fitness centers and restaurants, and locations near transport hubs. They are increasingly finding slim pickings, especially for hot spots such as New York City’s Park Avenue, Miami’s Brickell district and Century City in Los Angeles. Yet even some tenants in cities hardest-hit by the glut of space, such as Washington, D.C., and Chicago, are shocked by the few choices on the top shelf. 

Now, the country’s largest office owners are moving to fill that void. After years when most developers wouldn’t even consider new office projects, firms such as Hines and BXP have ones in the early planning stages or already under way. That bullish bet contrasts sharply with most of the rest of the office market, where the divide between the winners and losers has rarely been wider. Tenants occupied 22% more top-tier office space in the third quarter of last year than they did at the end of 2019, according to real-estate services firm CBRE Group. For the rest of the office market, businesses occupied 5% less space in October than tenants did before the pandemic started, CBRE said. Many of those buildings increasingly look like candidates for residential conversion or the wrecking ball. Source: Wall Street Journal