Weekly CRE News Roundup: Office Conversions, National Apartment Growth, & NYC Office Leasing
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! It's another edition of our weekly commercial real estate (CRE) newsletter roundup, where we cover CRE news hot off the press this week.
In case you missed it, here's our most recent roundup, where we discussed the recovering Las Vegas multifamily sector, the distressed NYC multifamily sector, and CRE architects experiencing notable drops in business.
Did you know?: McDonald's (yes, the fast food chain) is one of the largest owners of CRE in the world. It's true—McDonald's owns nearly $30 billion in CRE assets across the globe, nearly twice as much CRE as similar competitors.
Today's Topics:
- The White House has unveiled a national plan to assist property owners in converting unused commercial properties into residential housing, with a focus on office space.
- Apartment growths have been uneven across the country, most likely as a result of varying occupancy shifts in different markets.
- Office leasing in the Big Apple underwent a major spike in October, with a nearly 60% jump in leasing volume from September.
Let's get started.
#1 – Office to Apartment Conversions
The US is currently at a 30-year high for office vacancies, and the White House is instituting a new plan to address the problem of rising vacancies and dead stock in major US cities.
The new plan aims at “sparking investment through new federal funding and repurposing property.”—i.e., turning empty offices into new housing.
More specifically, the plan would accomplish this in a few different ways:
- The Department of Transportation announced new guidance on using funds through the Transportation Infrastructure Finance and Innovation Act (TIFIA) to finance new housing development near transit and transportation options.
- The Department of Housing and Urban Development published a new notice on using the Community Development Block Grant fund for acquiring and converting commercial properties to residential or mixed-use development.
- The Department of Energy released a new “toolkit” for calculating tax deductions and credits that can apply to CRE conversions.
- The White House released a guidebook for conversions that discusses loans, grants, and tax assistance programs for developers converting commercial properties for residential use.
The goal behind the plan is two-fold—stabilize the struggling office market and address rapidly rising rents in various cities across the nation.
#2 – East Outperforms West in Rental Growth
After experiencing two years of incredible growth, the US rental market is starting to soften, with average rental prices down almost 1% since last year. However, the same reports indicate that rental changes have been uneven depending on the region.
The general trend in the data is that cities on the East Coast are seeing better rental gains than West Coast cities. Experts believe that observable trends of uneven rental growth can be explained by three distinct yet interrelated issues:
- East Coast cities have been better at maintaining current apartment occupancy levels despite the influx of new apartments. This capacity for occupancy stability under absorption keeps demand high even as supply increases.
- East Coast cities have gotten more people back to the office, such as Boston, which has caused a small migration of people moving to be closer to their offices.
- High demand for affordable options has caused slight rental increases in some cities, like OKC and Richmond. More affordable options at a lower price point may put downward pressure on rents.
More generally, we should expect to see larger shifts in the multifamily market as more cities invest in affordable housing options.
#3 – NYC Office Performance Shifts Gears
After a long period of poor performance, Manhattan's office real estate market had a busy month, with a 58% spike in leasing volumes. A majority of this growth can be attributed to just four big transactions: Overall, tenants leased just under 2.6 million square feet this month—about a million higher than last month's 1.6 million square feet.
Manhattan's office asking rents also stayed flat between October and November at $75.40 per square foot but still sit below 2020 averages. Availability rates in NYC office space were also at 17.8% in October, representing a 1% YoY growth.
Despite the increases in leasing volume in October, large swaths of the NYC office market remain in trouble. For example, Lower Manhattan sits at a 21% office availability rate, even though monthly leasing volumes in October were 72% higher than five-year averages.
Fortunately, there's a silver lining. Several big-name tenants are reportedly planning to sign triple-digit leases by the end of the year. However, market troubles, particularly those surrounding WeWork's recent bankruptcy filings, could further depress the NYC office market.
Other Goings-On Around the Industry
Below are some other recent happenings in the CRE landscape.
- COVID and Building Ventilation: Experts are coming to terms with the role building ventilation can play in slowing the spread of sickness.
- Market Impacts of Apartment Construction: The impact new apartment construction has on the market depends on absorption capacities.
- LA May Unfreeze Rent Hikes: After nearly three years, LA City Council has declined to extend a freeze on raising rents, which will affect 75% of the city's housing stock.
- Doing More With Multifamily: Multifamily owners are pursuing new technologies and amenities to fill vacancies amidst multifamily slowdowns.
- First Private-Equity ETFs: White Wolf Capital Advisors has filed a brief to start trading ETFs focused on the private-equity market.
Thanks for reading this week's round-up! Until next week, stay diligent, do your due diligence, and happy investing!
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