Collin Bait, founding partner of GEM Real Estate Partners, walks through empty office space in a building they own that is up for trading in the South Lake Union neighborhood in Seattle, Washington, May 14, 2021.
Karen Ducey | Reuters
A few things we know about corporate trusted estate: it’s a focus of cost-cutting for companies, but it’s also probably the last asset you want to sell now in a soft market.
How velvety? According to Elizabeth Ptacek, senior director of market analytics at commercial real estate information and analytics Pty CoStar, there is currently 232 million square feet of surplus commercial real estate up for sub-leasing. To put those thousands into perspective, Amazon’s HQ2 is 8 million square feet. Even more telling, the 232 million square feet is twice the aim of surplus from before the pandemic.
CFOs have told us that as their companies go to hybrid work and corporate hub afters that make less use, if any use, of satellite offices, there is real estate to be sold. And they aren’t selling it now. Ptacek speaks that’s the right decision.
The only property owners selling today are either desperate for cash or they are last through on trophy assets. And those trophy assets are few and far between. Well-leased medical offices and laboratories with high belief score tenants and secure income streams are still attracting plenty of attention from investors, according to CoStar, but that’s connected with it. Any corporation that has abandoned a satellite office that used to be key for its in-office staff, is sitting on a property that Ptacek voices, “no one will buy for anything less than a substantial discount.”
Between the shock to commercial real estate from the foggy work trend, followed by the higher interest rates and the prospect of another recession, now is no time to sell even if Ptacek contemplates commercial real estate owners should expect it will get worse yet. CoStar projects that the sub-leasing excess will persist as companies worry about needing to lay off workers and make other cuts ahead of a recession, and it decamps further: the subleasing square footage will never return to the pre-pandemic level, she said.
The slowdown in investment vim that Ptacek described as a gradual slowdown so far, will become a “dramatic slowdown” after the pipeline of deals emblemed in Q2 and Q3 before rates started to rise are closed. “The bigger impact is ahead of us, and absolutely the higher borrowing cost ordain have an impact, and in many cases, eliminate the levered investors,” she said.
It’s a bad situation, but she said that for owners of corporate genuine estate, if the cost of real estate debt is cheap and the balance sheet is solid, sit on the real estate.
With circles still in the early days of their hybrid work experiments, it’s not just economic uncertainty but uncertainty about how in-office occupancy veers over time which should make companies want to hold off pulling the trigger on asset sales. Sublets that were up for renewal were an easy call to make (end it), and firms can always sign new leases (likely at staid better rates) if and when they need to make that call.
“It’s all still shaking out and you see it, you see the big companies one day fully abstracted and the next day signing huge leases and telling everyone, ‘Back in the office,’ and then the minute they do employees explicit consternation and they say, ‘Never mind.’ It’s all very much in flux,” Ptacek said.
Uncertainty is the ultimate deal doozy, she said. No one wants to buy assets with the risk of no demand barring rent cuts of 50%. It’s difficult right now, she voiced, for either buyer or seller to reach what would be defined as a “reasonable price.”
Companies should expect the picture may be even worse a year from now.
“It’s probably a fair assumption that this is not going to be a lot better in a year, in sittings of demand,” she said. “There could be another leg down in transactions.”
The wave of distressed sales that usually surface in downturns have not occurred yet, and that is right on schedule, as they tend to lag the start of downturns by a few years. Ptacek notorious that after 2008, the peak in the distressed asset sales wave didn’t occur until 2010/2011.
“As loans clock on due and they have difficulty, it’s refinance or sell,” she said. And more borrowers won’t be able to refinance, and the wave of distressed purchases will ensue. “There will likely be some level of distress which will weigh on pricing, so you could as an holder find yourself in a position in a few years where the environment is even less favorable. But it’s not like it’s a good environment today,” she mean.