RealEstateNews 11.18.24

Weekly News Roundup

• Real Estate Royalty Selling
• Extend and Pretend in CRE
• AI Creating Office Demand

Real Estate Royalty Selling

The office market’s downturn is forcing some of the New York’s multigenerational family owners to do something they managed to avoid during world wars, financial meltdowns and a global pandemic: Sell their core properties. Families like the Rudins and the Kaufmans built their New York empires by passing these buildings from one generation to the next. The office properties steadily rose in value and provided a comfortable living for an expanding number of children, grandchildren, nieces and nephews. 

Today, U.S. office vacancies are near record levels and demand looks permanently impaired by remote work and companies doing more with less space. Properties that had been reliable cash cows now require substantial upgrades or other capital infusions to replace departing or shrinking tenants. For many families in their third and fourth generation of ownership, it makes more sense to sell for whatever they can get. The Kaufman family agreed to sell a downtown office tower this year and are marketing another one in midtown. Like others, the Kaufmans are selling the family jewels at values significantly below what they were five years ago.

Lately some office markets are showing a few positive signs, as bosses call workers back to the office. But the buildings that stand to benefit are new ones or those in top-tier locations, like Rockefeller Center, that have gone through extensive upgrades. Tenants are moving to those amenity-laden spaces to give their employees more of an incentive to put up with lengthy commutes. Many of New York’s real-estate families own older buildings in less desirable locations, offering few of the special features that attract tenants. They also have large vacancies that are costly to fill these days. Landlords feel the need to offer free rent and spend heavily on new interiors to compete. Source: Wall Street Journal

For commentary and insights… click on the above video

Extend and Pretend in CRE

In a recent paper the Federal Reserve Bank of New York documented greater challenges in the CRE market than banks are admitting. Banks have “extended-and-pretended” their distressed CRE mortgages in the post-pandemic period to delay the recognition of losses. Banks with weaker marked-to-market capital—largely due to losses in their securities portfolio since 2022:Q1—have extended the maturity of their impaired CRE mortgages coming due and pretended that such credit provision was not as distressed to avoid further depleting their capital. Source: New York Fed

AI Creating Office Demand

Technology companies’ leasing of office space jumped in the third quarter to its highest level in nearly three years, reflecting the growth of artificial-intelligence firms and job growth in the tech industry. Tech firms leased 9.9 million square feet of U.S. office space during the third quarter. That was up from about eight million in the second quarter, and the highest amount since the fourth quarter of 2021, according to a new report from commercial real-estate services firm CBRE Group.

Hiring by tech companies has also edged higher, resulting in an uptick in office demand. Job growth was up 1% for the year through July, compared with all of 2023 when it rose 0.3%. That is still well off the 5.4% growth in 2021, CBRE said. The U.S. office market remains in a glut, in part because many tech companies are taking less space when signing new leases because of hybrid workplace strategies. About 30 million people in the U.S., or 19.5% of employed people, worked remotely at least some of the time in 2024, the report said. That was nearly double the 10% who worked remotely in 2020.

A growing slice of office-leasing demand is coming from new AI companies like OpenAI and Anthropic that are growing in cities such as San Francisco, New York, Seattle and Boston.  In recent months, some high-profile companies such as Amazon.com have called workers back to offices five days a week. AI firms backed by venture-capital firms have leased 6 million square feet in the top six markets since 2019, said Colin Yasukochi, head of CBRE’s Tech Insights Center. “That figure doesn’t include expansion by AI businesses that are part of big technology companies like Alphabet’s Google and Microsoft. We see AI as a huge catalyst going forward.” Source: Wall Street Journal