Weekly CRE News Roundup: $800B Office Depreciation, Affordable Housing Concerns, & NYC Construction
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
Happy Friday! Welcome to the first edition of our weekly commercial real estate news roundup, where we take you through some of the week's most notable events in the industry.
On today's agenda:
- The McKinsey Global Institute predicts that, within the next 7 years, the ongoing popularity of remote work will depreciate the office space sectors in key US cities by nearly $800 billion.
- Government protections, including a 30-year tax credit program, on affordable housing are set to expire soon, leaving many concerned about the future of nearly 200,000 affordable housing units.
- Despite the prevalence of the phrase “ongoing economic uncertainty,” NYC developers are still chancing the market, filing plans for nearly 17 million square feet of new developments within the last year.
Let's get started.
#1 – The Predicted $800 Billion Depreciation of Key Office Space Sectors
The office space sector in the US has seen its fair share of turmoil thanks to the ramifications of the COVID-19 pandemic. The work-from-home movement, an already highly sought-after idea among employees before the onset of the virus, exploded in notoriety, forcing employers to make some tough decisions about their balance sheet expenses.
The McKinsey Global Institute shares much of the same pessimism around the office space sector, predicting that key cities in the nation will see the value of their office spaces depreciate by nearly $800 billion this decade.
According to their report, office space attendance has stabilized at “30% below pre-pandemic norms.” Because many are no longer tied to city centers, shopping habits have also shifted: McKinsey states that retail store foot traffic in major metropolitan areas “remains 10% to 20% below pre-pandemic levels.”
The solution? Hybrid and work-from-home trends are here to stay. Property owners in both retail and office space will be forced to adapt sooner or later. McKinsey sees flex space and “mixed-use neighorhoods” as possible hedges.
#2 – Concerns Loom Over Affordable Housing
Landlords of affordable housing may be raising rents to market levels soon thanks to the oncoming expiration of several government protections around these rental units.
One of the government protections in question is a 30-year tax credit program that was built to incentivize the construction of affordable housing units and keep rents low. With that on its way out, the speculation around what could happen next isn't looking good.
According to Moody's Analytics, nearly 200,000 low-cost affordable housing units in Dallas, Chicago, and Houston could see their rents rise to meet average market rates by 2027.
To recoup lost income and compensate for rising expenses, landlords of affordable housing are already starting to opt out of the aforementioned government tax incentive, putting long-term renters of affordable housing in difficult situations.
#3 – Uncertainty Who? CRE Developers Plan to Build in NYC
Not everybody feels like New York City's commercial real estate market is headed for disaster: Some developers, in fact, are still filing plans to build in the city while keeping its affordability crisis top-of-mind.
Notably, four major developers have filed plans to build a total of nearly 6 million square feet of new commercial real estate in NYC in an effort to free themselves of a stagnant holding pattern. These include The Chetrit Group, Extell Development, The Domain Companies, and Taconic Partners.
These new plans for development come about despite the recently terminated 421a tax relief program. But the strategy, as most speculate, may be for these well-funded developers to leverage interest rate volatility and produce higher long-term returns via ownership groups.
Other Goings-On Around the Industry
Here are some other notable events going on in the commercial real estate industry this week.
- Coastal Apartment REITs Make a Comeback: While many thousands sought out more affordable multifamily housing in the Sun Belt last year, coastal housing is starting to make a comeback.
- AI in Commercial Real Estate: This industry hasn't been the most well-known for picking up the latest technology trends, but artificial intelligence (AI) may prove to be the exception.
- Tax Breaks in the Lone Star State: More tax relief for homeowners in Texas is on its way.
- Multifamily Supply: Net demand for multifamily housing is bouncing back, but an influx in new supply is posing new challenges.
- Recession-Resistant Self-Storage: Prospective homebuyers are still being squeezed out of the market, propping up demand for self-storage as existing tenants hold onto their leases and new renters enter the market.
Thanks for reading this week's commercial real estate news! Until next week, stay diligent, do your research, and happy investing.
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