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Posted Jan 20, 2024, 12:31 AM
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Join Date: Oct 2021
Posts: 241
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Apparently a lot of office leases will be expiring from 2024 through 2028. This could impact newer office building competition for tenants. Companies currently housed in smaller, older buildings with leases that will be expiring and that still plan on expanding their office footprint might seek to move into proposed office towers that have not yet been constructed. However, most companies still seem to be more interested in moving into existing office towers in Midtown and Hudson Yards.
https://commercialobserver.com/2024/...t-cmbs-market/
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Wave of Office Lease Expirations Set to Impact CMBS Market
By Mike Haas January 16, 2024
Office vacancies nationwide reached an all-time high at the start of the year, and CRED iQ’s data shows roughly 217 million square feet of office space have leases with expiration dates in 2024 or 2025. As tenants regroup and resize their office footprints, CRED iQ explored the intersection of record vacancy rates with near- and medium-term lease expirations.
Downsizing and non-renewal by office tenants is a contributing factor to headwinds facing the office sector, which has been plagued by sustained growth of remote working and tenants’ need to shed space, reduce real estate costs, and right-size physical footprints during a period of economic uncertainty.
A high-level view of lease expirations provides a general sense, or foreboding in some instances, of the mechanics that the office sector needs to work through as the property type falls out of favor with lenders, investors and other commercial real estate industry constituents. Lease expiration analysis offers an important dimension to evaluate when and where the next pockets of elevated office distress will materialize.
Office collateral has been a primary contributor to incremental distress in CRE throughout 2023. CRED iQ’s distressed rate for CMBS office loans, which includes delinquent loans and specially serviced loans secured by office collateral, was 9.9 percent as of December 2023. Furthermore, the distressed rate for office collateral has more than doubled compared to 12 months prior.
CRED iQ examined over 866 million square feet for CMBS office and mixed-use collateral properties. For this exercise, CRED iQ focused on lease rollover over the next five-plus years. It should be noted that office collateral securing CMBS does not represent the entire office market, but rather serves as a proxy to identify challenges facing the larger universe of office properties.
Our analysis found that more than 500 million square feet of net rentable area (NRA) is scheduled to expire over the next five years for office and mixed-use properties secured by CMBS loans, and that 112 million square feet of office space is set to expire in 2024. Another 105 million square feet is also slated to expire in 2025 for a total of 217 million square feet of near-term rollover risks.
Lease expiration figures were further parsed by geographic location to provide a granular view by metropolitan statistical area (MSA). A detailed view of lease expirations by individual office markets helps identify which MSA vacancy rates are at risk of being stressed. The data was parsed to isolate the next two years and the next five years.
In both time frames, the New York region had the highest gross space in the country and the most leases scheduled to expire. More than 173 million square feet of leases in the New York region are scheduled to expire in through 2028, with 32 million square feet scheduled to expire in 2024 and 2025.
Other noteworthy regions with elevated lease rollover in the next two years include the markets of Los Angeles (15 million square feet), Chicago (12 million square feet), Philadelphia (9 million square feet) and San Francisco (8 million square feet), accounting for an aggregate 44 million square feet.
Major office assets to monitor in 2024
The $940 million loan secured by the Worldwide Plaza office tower in New York City will be facing increased vacancy in 2024 with 33 percent of the NRA scheduled to expire. The 2024 lease rollover is highly impacted by the second-largest tenant, Cravath, Swaine & Moore’s lease expiration on Aug. 31. The tenant currently represents 30 percent of the NRA and has confirmed it will be terminating its lease at expiration to downsize and relocate to Hudson Yards. Two additional top five tenants have leases scheduled to expire in the next five years including Worldwide Plaza Garage (6 percent NRA, 2027) and WNET.org (5 percent, 2026). The property was 91 percent occupied as of September 2023.
More than 1,500 leases from tenants that are the sole occupant of a property are scheduled to expire in the next five years. This represents 161 million square feet (19 percent) of the total NRA set to expire. Over 275 leases are scheduled to expire in the next two years, however the highest number expire in 2028.
The Google and Amazon office portfolio is backed by two sole-tenant office properties in the San Jose market. The Technology Corners property (700,000 square feet) and Moffett Towers Building D (357,000 square feet) are leased by Google and Amazon, respectively. Google accounts for 66 percent of the portfolio NRA with a lease expiration scheduled on Sept. 30, while Amazon’s lease expires on Feb. 29. Neither tenant has early termination options, however Google has a seven-year renewal option and Amazon has two seven-year renewal options. Servicer commentary indicates the borrower is negotiating with Google for a renewal. On top of the upcoming lease expirations, the $412.4 million loan is scheduled to mature this month.
To be fair, many tenants will renew or even expand footprints in certain office buildings. However, rising vacancy rates — in excess of 20 percent and even reaching 30 percent in certain markets — indicate a high level of risk that many tenants will downsize or fail to renew altogether. Lease expirations may have possibly favorable outcomes for office landlords, including a renewal or a new direct lease that resets rents higher if market conditions allow. However, high vacancies and downward pressures on net effective rents may lead to reductions in cash flow and trigger subsequent distressed scenarios.
Mike Haas is the founder and CEO of CRED iQ.
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https://www.thecity.nyc/2023/12/19/t...ice-space-nyc/
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Nowadays, Hudson Yards buildings are collecting the highest office rents in the city — as Cushman & Wakefield noted in a 2022 study done for a Hudson Yards Infrastructure Corp. bond prospectus. Asking prices for the Hudson Yards offices averaged about $118.54 per square foot, or 80% higher than for the supposedly comparable office buildings in the Penn Station area.
The bottom line, the academic study finds, is that “the tax breaks were likely unnecessary.”
Rachel Weber, a co-author who is a professor of urban planning and policy at the University of Illinois in Chicago, said that when major developments are planned, there is often uncertainty about the property value, an ambiguity that can be exploited.
Ultimately, the majority of Hudson Yards office tenants moved in from other parts of the city, especially Midtown — where office vacancy rates are now much higher.
“I would just argue that a lot of the subsidy to Hudson Yards ended up just costing other parts of Manhattan,” Weber said.
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Reluctance of banks to issue loans and high interest rates have also been a persistent issue in the last few years in addition to competition from Midtown and Hudson Yards and remote work:
https://www.cbsnews.com/news/empty-o...es-60-minutes/
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But it's not just the real estate industry that is impacted. The effects of vacant office space could ripple through the economy because many buildings are financed through short-term loans from banks. If real estate firms are unable to make rent money from commercial tenants, they may default on their loans, increasing the risk for banks.
Refinancing no longer a given for office loans
Work-from-home has also been a drag for real estate companies like SL Green, who have seen shares tumble since the pandemic, even as they pay down their building loans. Commercial real estate is a world built on loans –big ones– and the assumption is that those loans can be refinanced, with little friction, every 5 to 10 years, but that's not the case anymore.
To complicate matters for office building owners, interest rates have spiked to historic highs, and now the mortgage is coming due: $1.5 trillion in commercial real estate loans expire in the next two years, according to analysts.
Banks used to be willing to lend real estate companies more for buildings, Van Nieuwerburgh said. Now office owners will be forced to either pay out of pocket to make up the difference or walk away.
"And to make matters worse, interest rates are now much higher. Interest rates have essentially doubled," he said. "So the cost of that new mortgage, even if you can get one, will be much higher."
Office building troubles bleed into the banking sector
Commercial real estate plays a huge role in the typical bank's business, according to Van Nieuwerburgh.
"And I'm talking mostly about these smaller and medium size, maybe regional banks," Van Nieuwerburgh said. "They have a lot of exposure. That is their bread-and-butter activity. About 30% of all their loans are commercial real estate loans."
Van Nieuwerburgh sees it as a potential crisis.
In December, nationwide office loan delinquency rates were around 6% — almost four times what they were a year ago — but banks have been reluctant to write down those losses.
David Aviram from Maverick Real Estate keeps tabs on the debt on every office building in New York City and buys distressed debt on the cheap. He says New York is awash in billions worth of commercial real estate loans at risk of not being paid.
"We know that there's this buildup of bad debt in the system, but it's not being dealt with just yet," he said. "And it's in large part because the banks have been kicking the can down the road as best they can, trying to push this off as far as they can."
What does that mean?
"It means that banks are entering into extensions on a lot of their bad loans, which essentially changed their classification from a nonperforming loan, a loan that's in distress, to a performing loan, a healthy loan, even though they haven't received a pay down on the loan and the collateral value on that loan continues to drop," Aviram said.
The "urban doom loop"
It all makes for a familiar tune –a downturn in real estate, made worse by bad loans, contaminates banks and, potentially, the entire economy. Echoes of the global financial crisis of 2008 are hard to ignore. Whether the trouble with offices ends in a simple pricing correction or becomes a systemic crisis, likely there's pain coming for building owners, banks and for cities themselves.
"In the long run, property taxes on those buildings will also fall by 40%. And these commercial property tax revenues are an important component of the budget of local governments, which means less money for police departments, public safety, less money for sanitation, trash collection," Van Nieuwerburgh said. "And some people are going to decide that, you know, the quality of life has deteriorated too much and they want out. And, in fact, that's what we've seen."
According to Van Nieuwerburgh, America's 10 largest cities have lost about 2 million residents in the last three years. That also means their tax base is smaller.
"And now the cycle continues," Van Nieuwerburgh said. "And we end up in something that we have called an urban doom loop."
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Last edited by worldtrade2021; Jan 20, 2024 at 12:50 AM.
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