- Up to a third of office real estate could disappear, according to apocalyptic predictions about emptying downtowns and ending many white-collar jobs in high-rise buildings.
- But the top tier of commercial buildings will face a shortage in the coming years as construction of luxury Class A real estate heads to new lows.
- Old trophy buildings are selling at discounted prices and some landlords facing debt refinancing at high interest rates will struggle, but rental transactions in the luxury real estate market have already increased this year, according to Coster Group. This is higher than the period from 2015 to 2019, before the coronavirus outbreak.
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More pain awaits the nation’s office real estate market, with maturing debt having to be refinanced and leases expiring in waves, but with a seemingly counterintuitive message: be. Leading companies from real estate intelligence firm CoStar Group: Prepare for office space shortages.
That’s exactly right. As the commercial real estate market across downtown America is described in apocalyptic terms, CoStar sees a shortage on the horizon, and there’s one important caveat for top companies to keep in mind: there is.
The more office real estate disappears, the CEO of major bondholder TCW Group recently gave CNBC an estimate that up to one-third of office real estate is still expected to disappear, and the market’s largest companies. will compete for more office real estate. Top tier of Class A commercial space. Add to that the fact that more companies are returning to an in-office reality closer to pre-pandemic expectations, and competition may be more intense than the weaker side of the market suggests.
CoStar’s assertions about the upcoming office space shortage are based on a consideration of current data on rental and construction activity compared to recent market history. New buildings 0-3 years old stand to win as office occupiers scrutinize their footprint more closely and expirations on leases signed pre-pandemic continue to loom over the coming months. It has been found that. Since the beginning of 2020, net new occupancy has exceeded 175 million square feet, averaging 12.7 million square feet per quarter. By comparison, the quarterly average for similar properties from 2011 to 2019 was 11.7 million square feet. From 2008 to 2010 during the Great Recession, the quarterly average was 13.6 million square feet.
Phil Mobley, national director of office analysis at CoStar Group, said: “Modern luxury office space continues to be in demand, even in difficult economic times, as it has historically. “There is,” he said.
Google’s mixed-use campus on New York’s Hudson River, which opened in 2022, includes a two-acre rooftop and public gathering space.
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And supply will become increasingly unable to support demand. Buildings 0 to 3 years old now account for 2.4% of U.S. office inventory, which is in line with the 2015-2019 average, but Mobley said construction has slowed dramatically. He said that He has fewer than 30 million square feet of construction started in 2023, and this year’s number of starts is his lowest since 2011. Currently, there are approximately 200 million square feet of office space in buildings that are 0 to 3 years old, but that number will be less than 150 square feet. 1 million by early 2026, and by mid-2027 he plans to have less than 100 million. That’s only about 1% of inventory at that point. Even in the aftermath of the 2013-2014 Great Recession, buildings 0-3 years old never made up less than his 1.3% of inventory.
“The very types of space that have historically been most in demand by tenants will be in short supply, even in a recession,” Mobley said.
This doesn’t mean there won’t be any more headlines about trophy buildings being sold at discounted prices. However, these deals also mean that now is the time for favorable deals for tenants. On a quarterly basis, the number of new lease transactions is higher this year than from 2015 to 2019. Transactions are taking up less square footage, which explains why vacancy rates across the market are rising, and lease expirations are also part of the reason for the rise in vacancy rates. Still, deals are “very concentrated” in the premium space, Mobley said.
Meanwhile, the landlords of iconic trophy buildings are offering perks ranging from generous donations towards custom extensions to months of rent-free. However, it is unclear how long that will last. As more luxury buildings sell at depressed prices, investors write down the value of their real estate holdings, and bonds go bad, new owners can put their finances in order with attractive terms for tenants. . But the game is ending for building owners who need to refinance in the short term. A case in point is the recent deal in which the city of Los Angeles occupied multiple floors of an iconic gas company tower, which would have accounted for 11% of new quarterly leasing activity in the market, but bondholders rejected by.
Judging by today’s inventory levels, the U.S. housing market has never recovered from the financial crisis, which is one of the factors driving up home prices across the country. But Mobley says there’s a more similar example of the office space crash. It’s an exodus of retail that was overbuilt and underbuilt since e-commerce disrupted the industry. Class B malls are still empty, but upscale “experiential” retail stores are not.
“It’s just like a public office,” Mobley said.
CoStar estimates that more than half of the leases signed until 2020, when they expire, still remain. “Enterprises are faced with these renewal decisions and are now focused on utilization,” he said. This hints at a world in which tenants will need less space, but competition for the best square footage on the market will intensify as we continue to advocate for the world of work to return to pre-pandemic in-person collaboration. I am.
We believe that offices are a tool to maximize employee effectiveness, and as a result, we want to be in prime locations, not in iconic buildings that are 10-20 years old, facing lease expirations. – The best opportunity is now, Mobley said.