Business

Companies still have too much office space and they can’t sell


Collin Madden, founding partner of GEM Real Estate Partners, walks past empty office space in a building they own for sale in the South Lake Union neighborhood of Seattle, Washington, May 14, 2021.

Karen Ducey | Reuters

A few things we know about corporate real estate: that is the focus of cost cutting for companies, but it can also be the last property you want to sell now on the soft market.

Soft how? According to Elizabeth Ptacek, senior director of market analysis at commercial real estate information and analytics firm CoStar, there is currently 232 million square feet of excess commercial real estate available for sublease. To put those numbers into perspective, Amazon’s HQ2 is 8 million square feet. To add, 232 million square feet is more than double the surplus compared to pre-pandemic levels.

CFOs have told us that as their companies transition to a hybrid and corporate-centric model of less use of satellite offices, if at all, there will be real estate for sale. . And they don’t sell it now. Ptacek says it was the right decision.

The sole property owners who are selling today are either hungry for cash or they are sitting on trophy property. And those title assets are few and far between. According to CoStar, well-rented medical offices and labs with tenants with high credit scores and secure income streams are still attracting a lot of attention from investors, but that’s the point. . Any company that has given up a satellite office that was once key to its in-house employees is sitting on a property that Ptacek says, “no one will buy for anything less than a dollar.” substantial discount.”

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Between the shock to commercial real estate from telework, then higher interest rates and the prospect of another recession, now is no time to sell even as Ptacek says owners Owning commercial real estate should expect it to get worse. CoStar predicts that a subleasing surplus will persist as companies worry about needing to lay off workers and make other cuts ahead of the recession, and that goes even further: The rental yield will never return to pre-pandemic levels, she said.

The slowdown in investment activity, which Ptacek describes as a gradual slowdown so far, will turn into a “significant slowdown” after contracts are signed in the second and third quarters before interest rates begin. start to increase is closed. “The bigger impact is ahead, and absolutely the higher borrowing costs are going to have an impact, and in many cases, get rid of investors taking out debt,” she said.

It’s a bad situation, but she says that for corporate property owners, if the cost of real estate debt is cheap and the balance sheet is solid, sit in real estate.

With companies still in the early days of testing their combined work, it’s not just the economic uncertainty but the uncertainty about office usage trends over time that makes companies want to deactivate the sale of assets. Renewed leases are an easy call to make (end it), and companies can always sign new leases (possibly at a better rate) if and when they need to. show that call.

“It’s all still shaken and you see, you see one day the big companies are completely out of reach and the next day sign giant leases and say to everyone, ‘Back to the office,’ and then that’s the minute they make the staff express their astonishment and they say, ‘Never mind.’ Ptacek said.

Uncertainty is the ultimate deal killer, she said. No one wants to buy a property with the risk of no demand but a 50% cut in rent. It is currently difficult for either buyer or seller to reach what is defined as “fair price,” she said.

Companies should expect the situation to get worse a year from now.

“It’s probably a fair assumption that this won’t get much better in a year, in terms of demand,” she said. “There could be another leg in the deals.”

The wave of tough sales that often occur during a recession hasn’t happened yet, and that’s as planned, as they tend to delay the start of a recession by a few years. Ptacek notes that after 2008, the peak of the wave of difficult asset sales did not occur until 2010/2011.

“When loans come due and they get stuck, it’s either refinancing or selling,” she said. And more borrowers won’t be able to refinance, and a wave of hard sales follows. “There will probably be some degree of difficulty that will weigh on valuation, so as an owner you could find yourself in a position in a few years where the environment even even less favorable. But it doesn’t look like a good environment today,” she said.

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