Tag: CRE Conversions

Back to the Office: Vacancies Ease, Optimism Grows

Posted on by Abigail Grenadier

Office vacancy rates are beginning to show signs of easing as companies ramp up efforts to bring employees back to the office, fueling optimism across commercial real estate. The office sector also saw key highlights in property conversions and sustainability efforts this week.

Driving Factors

  • Office leasing demand has seen a noticeable uptick, partially thanks to broader factors such as greater economic stability and a stronger push from companies for employees to return to the office. (The Business Journal, Oct. 14)
  • A mix of lower office vacancy rates and high-profile return-to-office mandates, like Amazon’s, could help stabilize a sector still grappling with the remote work shift. (Roundtable Weekly, Sept. 20)

Market Sentiment

  • Although vacancy rates remain a concern, leasing activity is up in major cities across the US, such as New York City, Washington, D.C., Boston, and San Francisco. (Boston RE Times, Oct. 4; GlobeSt., Oct. 14; SF Examiner, Oct. 15 | Bisnow, Oct. 16)
  • As reported in our Q3 2024 Sentiment Index, which measures commercial real estate executives’ confidence and expectations about the industry environment, there is growing confidence in the future of the commercial real estate market despite ongoing challenges. (Roundtable Weekly, Sept. 6)
  • The Roundtable’s Q4 Sentiment Index survey is currently underway and expected to be released in early November.
  • Additionally, JLL’s latest Global Future of Work survey found that organizations are “planning to increase and rebalance organizational headcount in the coming years and many are ready to invest into their real estate, expecting to increase budget and footprint.”
  • Over 60% of survey respondents anticipate increased workplace utilization in the next five years, prioritizing more efficient and responsible use of real estate assets. (JLL Survey 2024)

Property Conversions

Construction skyline
  • Office-to-residential conversions are gaining traction as a solution to address high vacancy rates and housing shortages.
  • In 2024, the number of office spaces being converted into apartments increased to 55,000, a staggering 357% jump from 2021, according to data from Yardi Matrix. (New York Post, Oct. 14)
  • Property conversions can be a cost-effective means to re-purpose assets, provide new, affordable housing, revive struggling city centers and small businesses, restore local revenue sources, and reduce energy consumption. (Roundtable Weekly, Oct. 4)

Sustainable Innovation

  • Investments in sustainability efforts also reflect growing confidence in the industry rebound and stability heading into 2025.
  • “The Federal Buy Clean Initiative, and BXP’s aligned construction specifications, send a strong demand signal to concrete producers that helps drive market transformation,” said Ben Myers, Co-Vice Chair of the Roundtable’s Sustainability Policy Advisory Committee (Senior Vice President, BXP). “As an active developer, we are interested in cost-effective methods of supply chain engagement to create more sustainable outcomes.”

The Roundtable continues to advocate for energy-efficient solutions, supporting property conversions and innovative building methods that align with the evolving needs of modern offices. These efforts are essential to creating sustainable workspaces and revitalizing cities.

Real Estate Coalition Urges House Members to Support Bipartisan CRE Conversions Bill

Posted on by Abigail Grenadier

A Roundtable-led coalition of 17 national real estate organizations wrote to members of the House of Representatives voicing their support for the introduction of the Revitalizing Downtowns and Main Streets Act, which would create a market-based tax incentive for converting older commercial buildings to residential use.  (Coalition letter)

 Revitalizing Downtowns and Main Streets Act

  • The House Ways and Means Committee Members Mike Carey (R-OH) and Jimmy Gomez (D-CA) will introduce the Revitalizing Downtowns and Main Streets Act in the coming weeks.
  • If enacted, the bill would be a step forward in the effort to modernize U.S. real estate, create new and affordable housing, and strengthen cities and neighborhoods that continue to suffer from the aftereffects of the pandemic and changing business needs. 
  • Currently, only 2% of vacant offices are undergoing the conversion process (CBRE). However, 15% of office buildings are suitable for residential conversion. (White House, Oct. 2023)
  • The bill would create a new and temporary 20% tax credit for qualified property conversion expenditures, modeled after the historic rehabilitation credit.
  • The total credit authority would be limited to $15 billion, allocated by state housing finance agencies based on feasibility and impact.
  • Larger credits would be available for projects in rural areas, low-income census tracts, and economically distressed areas.

Roundtable Advocacy

The Roundtable’s Tax Policy Advisory Committee Meeting
  • The Real Estate Roundtable has supported similar versions of conversion legislation, such as the Revitalizing Downtowns Act (S. 2511, H.R. 4759), introduced by Sen. Debbie Stabenow (D-MI) and Rep. Jimmy Gomez (D-CA) to encourage the conversion of older buildings into new uses.
  • The new bill addresses and incorporates most of the recommendations the coalition made collectively to the Revitalizing Downtowns Act in the October 2022 letter.  (June 2024 letter  | October 2022 letter)
  • Since then, many states and localities have taken bold action to support property conversion efforts.
  • Both letters are the product of a property conversions working group created by The Roundtable’s Tax Policy Advisory Committee (TPAC). The working group has reviewed and considered the challenges and impediments confronting potential property conversion activities. 

The Roundtable’s Tax Policy Advisory Committee will continue to respond to legislative proposals affecting potential property conversion activities.

Roundtable Recommends Agency Actions to Accelerate Property Conversions

Posted on by Abigail Grenadier
Jared Bernstein, chair of the White House Council of Economic Advisors, right, and Roundtable President and CEO Jeffrey DeBoer

The Real Estate Roundtable urged the Biden administration to take a series of actions to support commercial-to-residential property conversions in an April 15 letter to Jared Bernstein, chair of the White House Council of Economic Advisors. (see Meeting story above)

Improving Agency Resources

  • The Roundtable’s letter aims to harness various federal loan programs and tax incentives to provide financial support for CRE conversions.
  • These programs, enhanced by President Biden’s Bipartisan Infrastructure Law and Inflation Reduction Act, can ideally be tailored to accelerate projects that transform underutilized assets into housing. 
  • RER’s letter states, “The Federal Guidebook’s featured programs have not lived up to their promise—yet.” The Roundtable’s suggestions to improve these U.S. agency resources support goals to increase housing supply, revitalize urban downtowns, and cut carbon emissions.

Roundtable Recommendations

Real Estate Roundtable letter on property conversions April 15, 2024
  • The April 15 letter urges agency actions to streamline environmental reviews, hasten the federal loan underwriting process, and layer various agency loan platforms to help finance housing conversions.
  • The letter recommends specific improvements to the Department of Transportation’s loan programs for transit-oriented development, which can also resonate for resources offered by HUD, DOE and EPA.
  • The Roundtable letter also details changes to the tax code and exisiting incentives that can increase energy efficiency and renewable energy investments in commercial-to-residential building conversions.

The Roundtable will continue to coordinate with White House staff and encourage modifications to federal regulations and laws that can improve CRE conversion projects.

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Fed Cautions About Office Sector as Vacancies Climb and Loan Modifications Surge

Posted on by Abigail Grenadier
La Salle Street, Chicago, Illinois, USA

Recent reports show U.S. office vacancies climbed to nearly 20% during Q1 2024 after loan modifications more than doubled last year compared to 2023. Meanwhile, Federal Reserve Board Vice Chair for Supervision Michael Barr cautioned this week that federal regulators are “looking carefully at banks with heavy concentrations in office commercial real estate where there are significant, expected price declines.” (Moody’s Analytics, April 2 | CRED iQ, March 28 | (C-SPAN video, April 3)

Office Sector

  • Preliminary data from Moody’s Analytics reinforces the long-term, negative ramifications of hybrid work models. The Q1 2024 office vacancy rate set a new record at 19.8%, up from 19.6% in the prior quarter, and beating two historic peaks of 19.3% in 1986 and 1991. (Bloomberg, April 2 | Quartz, April 3 | CRE Daily, April 4)
  • “The office stress isn’t quite done yet,” said Thomas LaSalvia, Moody’s head of commercial real estate economics and an author of the report. He added, “This is part of a longer-term evolution where we are seeing obsolete buildings in obsolete neighborhoods.” (Bloomberg, April 2)
  • Brookfield’s Feb. 14 report, “The Misunderstood U.S. Office Market,” emphasizes that high vacancy rates are due to an excess of dated, functionally obsolete office buildings and an undersupply of offices that satisfy tenants’ changing needs.
  • A Roundtable-led coalition of 16 national real estate organizations urged the expansion of a 20 percent tax credit for qualified property conversion expenditures in an Oct. 12, 2022 letter to policymakers. The recommended enhancements included expanding the category of properties eligible for the credit to various types of commercial buildings such as shopping centers and hotels. (Roundtable Weekly, Nov. 11, 2022)

Fed Oversight & CRE Sectors

Federal Reserve Board Vice Chair for Supervision Michael Barr
  • The Fed’s top market supervisor told the National Community Reinvestment Coalition on April 3 that CRE refinancing deals will “take some time to work through” as the Fed closely monitors office sector conditions. (C-Span | BGov, April 3 | Roundtable Weekly, March 8)
  • Barr said, “This is the kind of thing where it is likely a slow-moving train as the financial sector and commercial real estate market move forward. Over the next two to three years, we are going to see how properties deal with refinancing in a higher interest rate environment. Occupancy rates have lowered because of work-from-home, so for some categories of office CRE they are more exposed to risk.”
Kathleen McCarthy
  • Kathleen McCarthy, global co-head of Blackstone Real Estate and chair-elect of The Real Estate Roundtable, commented to CNBC’s “Closing Bell Overtime” on April 3 that the office sector is different from other CRE investment areas that have performed well. “We do feel like there’s a bottoming happening. There’s no V-shaped recovery … but we do see the cost of capital coming down, we’re seeing more liquidity in markets, and perhaps more importantly for the long term, we’re seeing a sharp decline in new supply,” she said.
  • Barron’s recognized McCarthy this week as one of the 100 Most Influential Woman in Finance. She commented on her upcoming role as Roundtable Chair: “To bring together my interest in policy and have a position to help our whole industry in Washington is really exciting.” (Barron’s, April 4)

Commercial and multifamily market conditions will be discussed during RER’s April 15-16 Spring Meeting in Washington DC (Roundtable-level members only) with guests including White House Council of Economic Advisers Chairman Jared Bernstein,  House Democratic Leader Hakeem Jeffries (D-NY), and House Financial Services Member French Hill (R-AK). 

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Office Vacancy Rates Rise as Remote Work Arrangements Linger

Posted on by Abigail Grenadier

Recent media reports show the U.S. commercial real estate office market continues to adapt to pressures from remote work, increased vacancy rates, and difficulties with price discovery.

Building Value and Rent

  • On March 26, the Wall Street Journal cited CoStar data showing that average U.S. asking office rents rose despite lower office demand and more empty space.
  • David Bitner, the head of global research for Newmark told the Journal that if rents were cut to fill empty space, it “would significantly reduce the appraised values of their buildings. This in turn could lead to a covenant default on their loans or at minimum would make it harder for them to refinance.” 
  • The Journal noted that the value of office buildings will reset after owners and lenders manage to restructure mortgages or sell distressed properties. Another major influence on office rental rates is the adoption of new hybrid workplace arrangements by businesses that require less space. (Article: “The Office Market Is in Turmoil. So Why Are Rents More Expensive?”)
  • According to an MSCI index, the average value of office buildings in central business districts fell nearly 41% from July 2022 to the beginning of this year. (Wall Street Journal, March 26)
  • The New York Times reported on March 14 about the options facing municipal officials as nearly $3 trillion of outstanding commercial real estate debt is coming due by 2028 while tax revenues from commercial properties drop. The consequences of remote work and a post-pandemic shift in the use of the built environment are leading city officials to assess lower tax revenue assessments and consider policy changes to incentivize commercial-to-residential conversions, cutbacks to local services, or raise taxes.

Vacancy Rates Increase

  • Commercial Edge’s National Office Report reported on March 22 that there was a noticeable adjustment in demand for office spaces in the first two months of this year, partly due to the ongoing shift towards remote and hybrid work models. These challenges were exacerbated by higher interest rates and ongoing economic uncertainties that put pressure on upcoming maturing loans.
  • The report also shows that the national office vacancy rate is 17.9 percent, up 140 basis points year-over-year. It also stated that San Francisco’s vacancy rate climbed 480 basis points year-over-year to 23.4 percent.

Government Remote Work

Real Estate Roundtable President and CEO Jeffrey DeBoer
Real Estate Roundtable President and CEO Jeffrey DeBoer spoke at the PREA conference last week.
  • For public buildings, the influence of return-to-office trends on federal employees was reflected in the $1.2 trillion government funding package recently signed by President Biden. (Reuters, March 23 | Roundtable Weekly, March 22)
  • The fiscal 2024 measure included six new requirements for agencies to report data about federal telework, return-to-office trends, and use of federal office space. (Federal News Network, March 21)
  • Roundtable President and CEO Jeffrey DeBoer has consistently emphasized that federal policies promoting remote work undermine the health of cities, local tax bases, and small businesses. The Real Estate Roundtable has urged President Biden and national policymakers to end government policies that encourage remote working arrangements for federal employees. (RER letter to President Biden, Dec. 2022; RER letter to Senate, April 2023)

Mr DeBoer, speaking last week in Nashville at the Pension Real Estate Association (PREA) conference, noted that office vacancy rates are a bit misleading given the significant number of aging and obsolete building that do not functionally meet modern tenant demands. The Roundtable continues to urge incentives to encourage the conversion of these buildings to much-needed housing.  

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Industry Leaders Discuss Office Market Pressures, Challenges, Opportunities

Posted on by Abigail Grenadier
Aerial Point of View of Downtown Nashville, Tennessee

The ramifications of declining values for certain office properties were the focus of several national media interviews this week with industry leaders. The pressures, challenges, and opportunities of the current office market are the consequence of remote work and a post-pandemic shift in the use of the built environment—realities that are leading city officials to assess lower tax revenue assessments and consider policy changes to incentivize commercial-to-residential conversions, cutbacks to local services, or raising taxes. (New York Times, March 14)

Office Conversions

• Roundtable Chairman Emeritus Bill Rudin (Co-Chairman and CEO, Rudin Management Co.)
  • The New York Times reported this week on the options facing municipal officials as nearly $3 trillion of outstanding commercial real estate debt is coming due by 2028 while tax revenue from commercial properties drops. Refinancing certain office assets at reduced values remains difficult during a period of high interest rates and heightened regulatory concern about regional banks’ office loan concentrations. (Trepp, Dec. 21, 2023 and Roundtable Weekly, March 8)
  • Rudin offered examples in New York City of successful office reuse. He also emphasized how other cities need to convert obsolete office buildings to residential use by changing multiple dwelling laws, zoning statutes, and a providing a robust tax abatement to incentivize capital into the marketplace for conversions.  
  • “It’s a public-private partnership. The capital will come to those projects with the right structure that start creating housing on all levels: affordable, workforce, market rate,” Rudin said.

Evolving Opportunities

Real Estate Roundtable Member Hessam Nadji (President and CEO, Marcus & Millichap)
  • Roundtable Member Hessam Nadji (President and CEO, Marcus & Millichap) spoke with CNBC’s Worldwide Exchange today about the bifurcated office market. He added that investors are exploring opportunities in shopping centers and high-quality offices in suburban markets.
  • “(We are) hearing from various institutional investors that it’s the time to buy. Prices have adjusted. There’s record capital on the sidelines. And when you combine those two with confidence that the economy is going to hold up pretty well, you’re going to see capital come back,” Nadji said.
  • Blackstone President and Chief Operating Officer Jon Gray discussed investor opportunities in commercial real estate yesterday with Bloomberg Television.
  • “As investors, sometimes, one of the risks is that you miss it by being overly cautious and I think now is probably a good time before rates come down. There are definitely assets that were financed in a different era, particularly in commercial real estate because there has been a more profound impact in the office sector—and that will create opportunities,” Gray said.

On the public buildings front, the Biden administration’s 2025 budget plan proposes $425 million for the General Services Administration to reduce the federal footprint and long-term costs through a new “optimization program.” (Federal News Network, March 11)

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