Talking CRE & Climate Tech

This week's top CRE transactions, tech stories, and takeaways:

1. CRE Increasingly Hands Assets To Lenders ??

Building owners are increasingly surrendering properties to lenders via deed-in-lieu-of-foreclosure transactions. According to a CoStar analysis, office buildings comprised 43% of all such transactions in the second quarter, a notable increase from the 20% average in 2022 and higher than pre-pandemic levels. The share of office buildings being voluntarily surrendered has more than doubled from the 20% average in 2022, surpassing pre-pandemic levels. In the first half of 2023, 33% of foreclosures were voluntary surrenders of office properties. Currently, owners plan to abandon 21 office buildings totaling 2.6 million square feet with an outstanding balance of $290M. ??

Notably, Blackstone and Boston Properties recently engaged in a deed-in-lieu-of-foreclosure agreement concerning the 657,000 square foot Metropolitan Square office building, situated just a block from the White House in Washington, D.C. The building, which was partially financed through a mezzanine loan held by Artemis Real Estate Partners, was acquired by Artemis. Boston Properties intends to maintain its 20% stake in the building, with Artemis assuming Blackstone's 80% share instead of proceeding with foreclosure.

Our Take:??? The increasing number of deed-in-lieu transactions in the office real estate sector signals a profound change. The high cost of refinancing, coupled with decreasing property values and altered work habits resulting in lower occupancy rates, makes holding onto these assets less viable for many owners. This trend may lead to more office sales at lower prices as lenders take over properties and seek to liquidate them. The shift in office use patterns, with a significant reduction in space requirements by businesses, suggests that the traditional office real estate market likely won't return to pre-pandemic levels for some time.? This could create opportunities for new investors or for existing ones to diversify their portfolios, but it also indicates a challenging period ahead for the commercial real estate market.

2. CRE's Diversity & Inclusion Metrics Improve ??

The Bisnow DEI Data Series, now in its fourth year, revealed a slow but significant increase in diversity within the leadership of the commercial real estate (CRE) industry. Despite a challenging economic environment characterized by layoffs, bankruptcies, and foreclosures, there's been notable progress in diversifying leadership roles in CRE. People of color now represent 12.8% of C-suite positions in top CRE firms, up from 11.6% in 2022. Women's representation in these roles has increased to 26.2% from 25.6% the previous year. Women now hold 31.9% of board seats, while people of color account for 19.6%. However, the majority of C-suite roles and board seats remain predominantly held by white men. The economic downturn has made diversity initiatives a lower priority, with some firms reducing diversity-focused roles. The commercial real estate finance sector showed the most growth in diversity, while brokerage and development sectors lagged behind. The report emphasizes that long-term diversity, equity, and inclusion (DEI) plans are more successful than short-term measures. ??

Our Take: ?? The findings from Bisnow's DEI Data Series suggest a complex future for diversity and inclusion in CRE. The increase in diverse leadership reflects a positive trend, indicating growing awareness and effort towards inclusivity. However, the troubled real estate market poses a significant threat to these gains. Economic pressures have led some firms to cut costs, including diversity-focused positions, potentially stalling or reversing progress. This dichotomy suggests that while diversity is valued, it may still be perceived as secondary to immediate financial concerns. For the future, firms with established, long-term diversity plans are likely to fare better in maintaining and building upon their progress, even in challenging economic times. This resilience could set a precedent for the industry, highlighting the importance of integrating diversity into the core business strategy rather than treating it as a peripheral concern. The overall trend suggests that while progress is being made, sustained commitment and strategic integration of diversity goals are crucial for long-term change in the CRE sector. ??

3. News & Notes ??

?? DOE allocates $169M for electric heat pump manufacturing across 13 states.

?? Gov. Gretchen Whitmer is expected to sign a new Michigan clean energy bill.

?? DOE grants aim to enhance the clean energy workforce, building efficiency.

?? CRE Stocks posted the biggest rally (see Vornado & SL Green) since the COVID vaccine in response to new inflation data and hints of pause on rate hikes.

About Cortex Sustainability Intelligence

Cortex Sustainability Intelligence utilizes advanced AI to support the commercial real estate industry in effectively translating their sustainability objectives into actionable steps that hold significance not only in the current moment, but also in the face of upcoming regulatory milestones. Specifically designed for office buildings, our intuitive decarbonization platform equips teams with the tools to amplify operational effectiveness, make informed decisions about capital investments, and tactically address regulatory risks.

To learn more about Cortex, please visit www.cortexintel.com ??