Office Market Had It Hard in 2023. Next Year Looks Worse.

https://www.wsj.com/articles/the-office-market-had-it-hard-in-2023-next-year-looks-worse-b7f088ed

"Return-to-office rates also stalled for most of 2023. Kastle Systems, which tracks security-card swipes in 10 major U.S. cities, said that average office attendance is about half of its prepandemic level. Placer.ai, which tracks mobile phone data, puts it in the 60% to 65% range. But it also said the return rate has topped out.

The U.S. office vacancy rate stands at a record 13.6%, up from 9.4% at the end of 2019

That vacancy rate is poised to push higher because nearly half of office leases signed before the pandemic haven't expired, CoStar said. When they do, many of the businesses will likely take less space than they are currently occupying, whether they are renewing or relocating.

Trepp is projecting that the office delinquency rate could be over 8% by the second half of next year."


Sounds painful to me.

This will, at least in the short term, likely further urban decay and degradation.

Time to move some illegal aliens in.

WFH Por Vida!

Pookers said:

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Time to move some illegal aliens in.

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Bidens already on it like white on rice.

About to???? Office has been getting absolutely hammered since the beginning of COVID. Office is done.

Gonna get even worse per the experts in that article.

60% occupancy seems to be the ceiling for on prem employees.

So, would next year be a good time for my wife's company to rent space? Small medical type office?

I've had my practice as a sole practitioner since 2009, occasionally I'll hire an MP&E engineer but generally I'll do my own engineering.

When I went on my own; I had an 80% commercial to residential workload. Today it's the opposite inspite of remaining as the Architect to the same commercial clients and buildings and actually increasing my retail portfolio.

I'm not bothered by it so much as I'm sort of sliding into retirement and becoming more selective regarding the projects I chose to work on. Residential is much more time consuming and therefore less profitable, but more fun...with some clients.

This video is good insight into the history and status quo of the commercial market. The only substantial portion of the realestate market that is booming or substantially active is the 5-6 story mixed use development with underground parking first story retail concrete pedestal and stick built residential upper levels within urban zones. I've noticed a recent trend to expand the model to a second level limited office component. Haven't seen much but some minor adaptive reuse of commercial to residential use but those are generally also within urban cores and where allowed by zoning codes, here in VA we have some progressive thinking on the matter most counties, cities an towns have adapted their ordinances to allow for it. Stafford County actually was the first to adopt Form Zoning as part of their Ordinance a pretty rare zoning tool. I suppose one could say that places like the Town of Herndon and others did this by adopting and enforcing a Historic or what they call Heritage Preservation Zone in the mid 80's. But Form Zoning has nothing to do with Historic Preservation and more to do with New Urbanism or Transportation Oriented Development (reads as, walkable urban zones).

Snapshot for Texas Office Markets

Occupancy and Overall Rental Rate PSF
=============================
Dallas-Fort Worth..... 82.2% and $30.33
Houston..................... 81.2% and $29.62
Austin........................ 83.4% and $43.31
San Antonio.............. 87.3% and $28.36
El Paso...................... 94.7% and $22.43
Corpus Christi........... 89.2% and $19.06

Existing Space and Under Construction (SF)
================================
Dallas-Fort Worth..... 424 M and 8.1 M (1.91%)
Houston..................... 356 M and 3.1 M (0.88%)
Austin........................ 133 M and 6.5 M (4.89%)
San Antonio.............. 91.7 M and 542 K (0.59%)
El Paso...................... 25.5 M and 56K (0.22%)
Corpus Christi........... 12.4 M and 0 (0%)

Current Market Cap Rate
================================
Dallas-Fort Worth..... 8.1%
Houston..................... 9.1%
Austin........................ 7.0%
San Antonio.............. 10.0%
El Paso...................... 10.3%
Corpus Christi........... 10.1%

It would be interesting to see that in more granular detail. Anecdotally from property manager at my building, newer class A and industrial are doing well. 70s-80s era class A are gettin hammered (people staying in office are going for newer digs because they can afford it and there's no backfill for the older properties).

Kenneth_2003 said:

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This will, at least in the short term, likely further urban decay and degradation.

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It will be interesting to see if and how some of these empty office buildings in downtown cores get repurposed. Companies like https://www.metz-kelly.com/ specialize in converting older buildings into housing, particularly those that have been left vacant after the pandemic. I imagine those conversions are fairly pricey with all of the reconfiguration.

ThunderCougarFalconBird said:

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It would be interesting to see that in more granular detail. Anecdotally from property manager at my building, newer class A and industrial are doing well. 70s-80s era class A are gettin hammered (people staying in office are going for newer digs because they can afford it and there's no backfill for the older properties).

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I could provide it but I think CoStar might object if I shared too much data.....don't want to lose my subscription

New space is more desirable because it features the amenities, layout, and locations that the market desires. Older class A space costs a lot with regard to TI to address amenities and layout concerns but location is location, and not much can be done about that absent a paradigm shift such a large scale redevelopment projects in these areas.

Technically the Banks, Hedge Funds, Govt Agencies, and Insurance companies (and ultimately the Fed) that hold the notes are going to get monkey hammered.

It's not like these properties are owned by individual dudes who dabble in CRE as a side hustle.......


This is how this goes.....
Tenants will walk away from leases (already happened, happening), LLCs that pay the mortgage will give the keys back to the note holder (happening at an increasing rate) Daddy FED will paper it all over with some new emergency lending/buyback program (aka money printing) with a catchy name (always at the ready), then sell the properties at pennies on the dollar to their friends who are holding cash on the sidelines (already happening and will accelerate in 2024 into 2026).

frenchtoast said:

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Kenneth_2003 said:

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This will, at least in the short term, likely further urban decay and degradation.

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It will be interesting to see if and how some of these empty office buildings in downtown cores get repurposed. Companies like https://www.metz-kelly.com/ specialize in converting older buildings into housing, particularly those that have been left vacant after the pandemic. I imagine those conversions are fairly pricey with all of the reconfiguration.

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there's the basic issues with footprint (not enough direct access to sunlight/windows) and infrastructure (2 bathrooms per floor instead of multi-unit set-ups, etc.). Lots of buildings where the cost to convert is simply too high compared to the resulting housing brought to market.

Zergling Rush said:

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Technically the Banks, Hedge Funds, Govt Agencies, and Insurance companies (and ultimately the Fed) that hold the notes are going to get monkey hammered.

It's not like these properties are owned by individual dudes who dabble in CRE as a side hustle.......


This is how this goes.....
Tenants will walk away from leases, LLCs that pay the mortgage will give the keys back to the note holder, Daddy FED will paper it all over with some new emergency lending/buyback program (aka money printing) with a catchy name, then sell the properties at pennies on the dollar to their friends who are holding cash on the sidelines.

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Hello RTC days

And then the banking industry takes a fall when businesses begin handing over the keys to their mortgaged buildings; something most are contractually allowed to do based on how the contracts for commercial buildings are written. Businesses are obligated periodically to renegotiate their mortgage or walk away. Just wait until they begin walking away. First wave is expected in '24.

Rocky Rider said:

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And then the banking industry takes a fall when businesses begin handing over the keys to their mortgaged buildings; something most are contractually allowed to do based on how the contracts for commercial buildings are written. Businesses are obligated periodically to renegotiate their mortgage or walk away. Just wait until they begin walking away. First wave is expected in '24.

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Same thing will also happen with residential real estate with all of the ARMs that were signed 3-5 years ago and that ballon is fixin to come due. Refinancing the ballon at 7%+ after being in the 2%-3% range for several years.

Sgt. Schultz said:

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ThunderCougarFalconBird said:

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It would be interesting to see that in more granular detail. Anecdotally from property manager at my building, newer class A and industrial are doing well. 70s-80s era class A are gettin hammered (people staying in office are going for newer digs because they can afford it and there's no backfill for the older properties).

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I could provide it but I think CoStar might object if I shared too much data.....don't want to lose my subscription

New space is more desirable because it features the amenities, layout, and locations that the market desires. Older class A space costs a lot with regard to TI to address amenities and layout concerns but location is location, and not much can be done about that absent a paradigm shift such a large scale redevelopment projects in these areas.

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All of this. There is a huge flight to quality going on right now. In certain markets like Austin, depending on the location, there are office buildings where the dirt as vacant is worth more than the current occupancy even at 80% occupancy, so there will be some redevelopment plays available. But you won't be able to redevelop everything because there isn't enough absorption to take on all that space at once.

HTownAg98 said:

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Sgt. Schultz said:

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ThunderCougarFalconBird said:

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It would be interesting to see that in more granular detail. Anecdotally from property manager at my building, newer class A and industrial are doing well. 70s-80s era class A are gettin hammered (people staying in office are going for newer digs because they can afford it and there's no backfill for the older properties).

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I could provide it but I think CoStar might object if I shared too much data.....don't want to lose my subscription

New space is more desirable because it features the amenities, layout, and locations that the market desires. Older class A space costs a lot with regard to TI to address amenities and layout concerns but location is location, and not much can be done about that absent a paradigm shift such a large scale redevelopment projects in these areas.

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All of this. There is a huge flight to quality going on right now. In certain markets like Austin, depending on the location, there are office buildings where the dirt as vacant is worth more than the current occupancy even at 80% occupancy, so there will be some redevelopment plays available. But you won't be able to redevelop everything because there isn't enough absorption to take on all that space at once.

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Agree!!!

A few years ago, I appraised a multi-story office building near downtown Austin that was fully occupied and their rent was what could be considered stratospheric for the level of amenities offered. Still, in the highest and best use analysis it was determined that it was feasible to raze the building and redevelop with a mixed-use multifamily & street level retail project, and it really wasn't even a close call. Austin is a crazy market as the techies have a rather perverse mindset when it comes to real estate. Its almost like they don't care what it cost, they just do it. My thinking is the world has changed so fast, they don't really view anything as long-term and have a mindset of "I want the best now because I will cash out or do something different in a few years." Its really having a throw-away or everything is disposable mindset.

And that mindset doesn't work with land, because land doesn't depreciate.

Will we eventually see local taxing authorities with giant tax liens on Class A buildings that wont sell?

Sgt. Schultz said:

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ThunderCougarFalconBird said:

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It would be interesting to see that in more granular detail. Anecdotally from property manager at my building, newer class A and industrial are doing well. 70s-80s era class A are gettin hammered (people staying in office are going for newer digs because they can afford it and there's no backfill for the older properties).

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I could provide it but I think CoStar might object if I shared too much data.....don't want to lose my subscription

New space is more desirable because it features the amenities, layout, and locations that the market desires. Older class A space costs a lot with regard to TI to address amenities and layout concerns but location is location, and not much can be done about that absent a paradigm shift such a large scale redevelopment projects in these areas.

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our office building is in the near suburbs to DC

they have been spending millions upgrading all the suites that have been empty for years (but not our suite)

Why is there nonstop commercial building construction throughout DFW? I don't get it.

Sgt. Schultz said:

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Rocky Rider said:

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And then the banking industry takes a fall when businesses begin handing over the keys to their mortgaged buildings; something most are contractually allowed to do based on how the contracts for commercial buildings are written. Businesses are obligated periodically to renegotiate their mortgage or walk away. Just wait until they begin walking away. First wave is expected in '24.

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Same thing will also happen with residential real estate with all of the ARMs that were signed 3-5 years ago and that ballon is fixin to come due. Refinancing the ballon at 7%+ after being in the 2%-3% range for several years.

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I hope we don't have derivatives stacked on top of those like last time or we could see something similar to 2008.

Maroon Elephant said:

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Why is there nonstop commercial building construction throughout DFW? I don't get it.

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It doesn't make sense. I can understand residential, retail, and light industrial construction to a degree as we are importing millions of illegals and a good many are living in Texas. These folks gotta live somewhere and they gotta buy stuff to live. But office construction? No way considering current occupancy and absorption levels. Maybe developers are betting that inflation will continue for the foreseeable future and its cheaper to build now, hold, and have a longer lease-up period versus waiting until things cost much, much more to construct in the future when occupancy, rental rates, and absorption conditions are more favorable.

It must be white flight, right Dems.

More WFHovaltine please.

Interesting stats.

I have not done a large scale office project since pre-covid. Mainly MF and SF. The latter dropped off heavily middle last year, but rumors of it starting to pick up.

Office will likely never be the same.

Maroon Elephant said:

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Why is there nonstop commercial building construction throughout DFW? I don't get it.

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My guess is that the projects were conceived and investors funded these things a year or two ago. I just had a developer present an opportunity to me for a fancy mixed use development in Austin. They had started at $150k minimum investment and had gotten all the way down to $25k because no one was investing. I looked at the numbers and couldn't make them work though, based on current market interest rates. The whole thing was conceived at much lower rates, but they haven't started because it's not fully funded yet.

Anecdotally, we are in the middle of trying to expand our office and our landlord has made it an absolute pain. They have had space adjacent to us vacant for over a year and are trying to make us pay almost double per square foot for it than we pay now. The other side of our floor has a tenant whose lease is up in early 2025, but I get the impression they aren't planning to keep it all.

Zergling Rush said:

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Technically the Banks, Hedge Funds, Govt Agencies, and Insurance companies (and ultimately the Fed) that hold the notes are going to get monkey hammered.

It's not like these properties are owned by individual dudes who dabble in CRE as a side hustle.......


This is how this goes.....
Tenants will walk away from leases (already happened, happening), LLCs that pay the mortgage will give the keys back to the note holder (happening at an increasing rate) Daddy FED will paper it all over with some new emergency lending/buyback program (aka money printing) with a catchy name (always at the ready), then sell the properties at pennies on the dollar to their friends who are holding cash on the sidelines (already happening and will accelerate in 2024 into 2026).

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You have just related a scenario described over and over in the book The Creature From Jeckyl Island except the banks and governments will be made whole. We the peopke will pay for this through further devaluation of our currency(inflation) through the printing of money out of thin air.