Weekly CRE News Roundup: Property Loans, Advanced Manufacturing, & Pre-Pandemic Leases
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, and welcome to another edition of our commercial real estate news roundup, where we walk you through some of this week's most notable happenings in the industry.
In case you missed it, here's last week's edition, where we discussed the legal heat that the city of Los Angeles is facing from landlords, the industrial sector's healthy performance, and the rising costs of lease concessions around the country.
On today's agenda:
- Banks are struggling to sell commercial property loans as bid-ask spreads widen and commercial property transactions dry up.
- Advanced manufacturing facilities are spearheading the US industrial real estate boom, thanks to increased construction and skilled labor spending.
- Many pre-pandemic office space leases are set to expire soon and likely to result in more office space vacancies, reductions, and turbulence.
Let's get started.
#1 – Lenders in Hot Water as Commercial Property Loans Become Harder to Sell
Lenders, like JPMorgan Chase, Goldman Sachs, and others, are struggling to make a market for commercial debt, especially when it's tied to office space buildings. While multifamily and hospitality values saw year-over-year declines as high as 17%, neither come close to the office space sector's plunge of nearly 30%.
Sellers of commercial debt are starting to turn to alternatives, like seller financing, to keep buyers in play, but alternative approaches may only work for certain property types. The office space sector's turbulent performance over the last few years, thanks to remote work, layoffs, and higher borrowing costs, has made even alternative financing difficult to secure.
Comparatively speaking, the values of multifamily apartments and hotels have held more steadily than those of office space. These asset classes have given lenders some reprieve amidst other commercial real estate uncertainty, providing viable avenues to manage existing debt exposure instead of turning to new debt origination.
Still, the difficulties that lenders are facing in restructuring existing debt, even with such relief, should not be ignored as the office space sector's bid-ask spread continues to widen.
#2 – Increased Construction & Labor Spending on Advanced Manufacturing Boosts US Industrial Sector
For yet another week, the US industrial real estate sector continues to provide light at the end of the nation's commercial real estate tunnel. Increased construction & skilled labor spending on the nation's advanced manufacturing facilities, most especially those in the computer/electronic subsector, spearhead the sector's healthy performance.
The booming popularity of artificial intelligence is driving today's conversation around technological innovation, and the industry's big players are taking notice. Taiwan Semiconductor Manufacturing Co., Intel, and Samsung have all made considerable investments into US industrial real estate for this reason, and even some EV giants, like Hyundai and Panasonic, have made purchases of US advanced manufacturing facilities roughly cumulating $9.5B.
Just over 3% of the nation's entire industrial inventory is currently under construction, rounding out to about 606 million square feet in total. Phoenix, Dallas-Fort Worth, and the Inland Empire are seeing the largest chunks of this new industrial construction at 58.8 million square feet, 52.7 million square feet, and 31.1 million square feet, respectively.
While new industrial starts relaxed in H1 2023 thanks to tighter lending standards and stable demand, many East Coast metros, like Boston, Bridgeport, and New Jersey, saw healthy industrial rent growth.
#3 – Nearly Half of New Office Leases Signed Before the Pandemic Are Set to Expire
According to recent data, nearly 55% of new office leases that were signed before the onset of the COVID-19 pandemic are set to expire, and it's more likely than not that many who are tied to these agreements will vacate rather than renew.
Overall leasing and renewal activity in the US for office space buildings is falling, rounding out to about half of what it was between 2018 and 2019, according to VTS Inc.'s Office Demand Index for July 2023. New leasing activity for US office space fell by 12.5% since the start of the pandemic.
CMBS loans backed by office space are also expected to witness refinancing troubles throughout the remainder of this year: CMBS loan refinancing rates fell to about 72% in Q2 2023, according to Moody's Investors Services. Recent data also illustrates that nearly 260 million square feet of new sublease space are available in the US, signalling even weaker demand and increased risk for the sector.
Landlords are looking to stop the bleeding by resorting to office space conversions and better amenities, but, as things stand today, the odds are not in their favor.
Other Goings-On Around the Industry
Here's some other notable commercial real estate news that surfaced this week:
- Pausing Rate Hikes: Philadelphia's Fed President supports halting more rate hikes should the most recent economic data support it.
- Affordable Housing: Nearly 300 units of affordable housing are slated to be built near the University of Maryland.
- Florida Funding Snafu: Florida's housing director has been suspended, endangering the state's funding for affordable housing.
- NYC Rental Market: Multifamily rents for NYC apartments recently reached record-highs, yet the data points to a potential peak.
- Office Loan Delinquencies: Yea, more bad news for office space financing.
Thanks for reading this week's commercial real estate news roundup! Until next week, do your research, stay diligent, and happy investing.
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