The 10 Top Issues Facing CRE and Ruth in the Commercial Observer on Office Obsolescence
In our last blog, I mentioned that I was Co-Chair of the recent international convention of the Counselors of Real Estate. In connection with the conference, the Counselors issued their annual Top 10 list of major issues facing real estate which was fascinating.
There are some common themes in several of the top 10, which include global political uncertainty at no. 1, high financing costs as no. 2 and the looming debt cliff for commercial loan maturity as no. 3 on the hit parade.
Interestingly, office vacancies will drive adaptive reuse in urban cores was down the list at number 9. Other key issues include the expectation of higher capitalization (return) rates by investors at 4, soaring insurance costs (5), affordable housing looking out of reach (6), artificial intelligence (7), extreme weather events (8), and the divide between buyers and sellers narrowing (some good news at no. 10). You can read the Counselors’ one paragraph discussion of each issue in the article from CityBiz of Chicago below.
And while we are on the subject of common themes, I was quoted extensively in an excellent article (see below) by Brian Pascus in the Commercial Observer that discussed the dispute between RFR, the 50% owner of the Chrysler Building and Cooper Union, which owns of the land beneath the Chrysler Building. Cooper Union is scheduled to receive ground lease payments of $32 million per year from RFR. However, RFR hasn’t paid rent since May and has missed $21 million in payments thus far. Accordingly, the school recently terminated the ground lease and took control of the Chrysler Building from RFR, which promptly filed a lawsuit seeking to stop the college from taking over.
Most importantly, the article brilliantly captured the big picture which is that many office landlords now own a potentially obsolete asset due to the extraordinary confluence of events and factors that have plagued all buildings that are not brand new and chock full of the latest amenities designed to lure affluent tenants.
I explained the situation as follows:
“The landlord, RFR, was put in a terrible predicament,” said Colp-Haber, speaking broadly about office as an asset class. “Look at the forces you have to deal with: On the income side the rents are down 30 percent from 2019, demand for product is down 40 percent; then your expenses are all up dramatically, you’ve got loans coming due that were at 3.5 percent when you made them, now you might not even get any refinancing. Your bank is not returning your call, and you used to borrow 80 percent loan-to-value, and now you’ll be getting 50 percent if you’re lucky.
Much of it is not of the landlord’s own making,” she added. “Like so many landlords in New York, RFR has fallen victim to the circumstances that surround these buildings from both a financial and a logistical standpoint.”
So looking at the big picture, what are the possible answers - conversions to residential and other non-office uses such as healthcare and education, back to the office mandates, changes of business culture, tax credits and incentives, a lower interest rate environment, and buildings with better amenities, among others? Whatever they may be, a long road lies ahead for the office industry as the debate rages regarding whether valuations of all but the trophy properties have hit bottom or have further to fall.
In the meantime, if you are a tenant let Wharton Property Advisors help you navigate these cross-currents to secure the many excellent office bargains on offer. We always represent our clients with integrity, creativity, independence and diligence.