Tag: Office Markets

CRE’s Year of Transformation: Lessons from 2024 and Outlook for 2025

Posted on by Abigail Grenadier

As 2024 comes to a close, the commercial real estate industry has made significant strides in recovery and adaptation.

2024 Roundtable Highlights

  • Over the past year, industry confidence has rebounded. RER’s Q4 Sentiment Index reached 73—a three-year high—and a 12-point jump from Q1 of this year. Despite ongoing challenges, the industry has demonstrated resilience and emerged stronger.
  • RER President & CEO Jeffrey DeBoer spoke about the industry’s 2025 priorities in a recent episode of the Leading Voices in Real Estate podcast, saying, “Real estate cuts across all aspects of our economy, and it’s what makes cities strong. You can’t find a time in history where nations have been strong without healthy cities. Right now, cities are struggling, and we want to help them back.”
  • Looking ahead to 2025, RER remains focused onadvancing policies that support liquidity, innovation, and adaptive reuse to ensure CRE remains a pillar of economic growth and community development.
  • 2025 Policy Priorities Survey: Next week we will be distributing our Policy Issues Survey to all members to gather input on our policy priorities for 2025.

Top Takeaways from 2024

Construction skyline
  • Key drivers of the industry’s growing confidence include easing interest rates and improving financial conditions, which have helped to stabilize asset values and encourage investment activity. By year-end, easing monetary policy and growing investor confidence have started to open up capital availability, with more progress expected in 2025. (Roundtable Weekly, Nov. 8)

  • Office-to-residential conversions saw a banner year, with more than 70 projects completed in 2024. Bolstered by the growing number of state and local incentive programs, 71 million sq. ft. (1.7% of U.S. office inventory) was undergoing or planned for conversion​ as of Q3. Property conversions will continue to see growing momentum in 2025, helping to alleviate elevated vacancy rates. (CBRE, Nov. 11)

  • Loan modifications and extensions, encouraged by regulators and supported by RER, have helped many distressed owners stabilize properties and avoid defaults. While 2024 was a challenging year for the office sector, markets have started to reach an inflection point as capital becomes more available, vacancy rates start to peak, return-to-office momentum grows, and transaction activity picks up. (Roundtable Weekly, Nov. 15)

  • Meanwhile, multifamily and industrial assets—especially data centers—continued to demonstrate strength, benefiting from robust tenant demand and the rapid expansion of AI-driven technologies. (CBRE, Dec. 11)

Prospects for 2025 and Trends to Watch

  • Economic growth: The CRE sector is poised to benefit from moderate economic growth and a more favorable interest rate environment. Investors are cautiously optimistic about improving liquidity and stabilizing valuations, which could unlock much-needed capital. (Commercial Observer, Dec. 10, CBRE, Dec. 11)

  • Office recovery: In San Francisco, office vacancy rates have dropped for the first time in four years—a sign that the office sector is beginning to turn the corner on the pandemic-era economy. Conversion activity is also expected to remain robust, supported by state and local incentives. (S.F. Chronicle, Dec. 16, GlobeSt., Dec. 17)

    • As RER Chair Emeritus William C. Rudin (Co-Executive Chairman, Rudin) recently told Squawk Box, “the demise of office and New York City are greatly exaggerated…there is capital, the CMBS market is back, the banks are coming back to the market,” indicating a welcome trend that could help drive an office revival across America’s downtowns.

  • The data center market will likely see explosive growth driven by artificial intelligence and cloud computing, although power constraints may limit development. Demand for data centers is expected to grow 160% by 2030, driving the buildout of the physical infrastructure needed to support the next digital revolution. (Goldman Sachs, May 14) (McKinsey, Oct. 29)

  • Political and regulatory shifts following the 2024 election—including potential changes to trade, immigration, and fiscal policies with a new Congress and presidential administration—could pose new opportunities or risks in 2025.  Collaborating with and educating policymakers on the impact these policies have on real estate will be crucial to ensuring that public policies support economic growth, job creation, housing affordability, and industry stability.

Heading into 2025, RER will continue advocating for policies that strengthen economic growth and capital availability while addressing industry challenges, including expanded tax credits for affordable housing and property conversions, permitting reform, and other initiatives that support a vibrant and resilient CRE sector.

Post Election, CRE Shows Signs of Recovery Heading into 2025

Posted on by Abigail Grenadier

The commercial real estate sector is at a critical inflection point, with numerous positive indicators signaling substantial progress on recovery and growth since the pandemic’s initial disruption to the industry.

Key factors driving the change are easing interest rates, continued return-to-office momentum, property conversions and rising office demand from tech and AI sectors, though some challenges remain.

Driving Factors in CRE’s Recovery

  • Interest rates have continued to ease, with the Federal Reserve cutting rates by another 0.25 percentage points last week. While inflation has shown some lingering signs of persistence, Fed Chair Jerome Powell indicated that interest rates are likely to continue to come down slowly and deliberately in the coming months. (Roundtable Weekly, Nov. 8, AP, Nov. 14)
  • CRE lending has also improved, with buyers and owners taking advantage of lower interest rates. Total commercial and multifamily originations increased by 59% year-over-year across many property types including healthcare, retail, multifamily and industrial, though office lending remains relatively stagnant. (GlobeSt, Nov. 12) (Bisnow, Nov. 11)
  • Office leasing has seen an uptick, with several major brokers, including JLL and CBRE, reporting significant increases in office leasing revenue. Larger lease sizes and a rising return-to-office trend have been key contributors, with the average number of in-office days required per week by employers up 50% compared to last year​. (CoStar, Nov. 11)
  • Regional office visit data indicates that October 2024 was the busiest in-office month since the pandemic for major hubs like Atlanta, Dallas, Houston, Denver, Washington, D.C., Chicago, and San Francisco. (GlobeSt., Nov. 15)
  • Office leasing has been further buoyed by growing demand from tech and AI companies. Tech firms leased 9.9 million square feet of U.S. office space during the third quarter, the highest level in nearly three years—supporting activity in high-value office locations such as San Francisco, Seattle, and New York. (WSJ, Nov. 12)

Property Conversions

  • Property conversions have been a bright spot in 2024, with 73 projects already completed this year and another 30 scheduled to be completed by year-end.
  • The vast majority are office-to-residential conversions—71 million sq. ft., or 1.7%, of U.S. office inventory was planned for or already undergoing conversion, helping to increase the supply of housing, boost downtown vibrancy and ease office vacancy rates. (CBRE, Nov. 11)

What’s Next: RER’s Real Estate Capital Policy Advisory Committee (RECPAC) will be meeting in person next week on November 19, 2024 in New York to discuss the economic outlook, capital and debt markets and much more.

Office Markets Stabilize as More Companies Mandate In-Person Work

Posted on by Abigail Grenadier

After years of acquiescing to remote and hybrid work arrangements, major companies are reversing course, a positive sign for demand for office space and the continued recovery of America’s downtowns and city centers.

Office Leasing Gains Traction

  • 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)
  • Amazon and HSBC lead the charge: Amazon has ordered corporate staff back five days a week and is searching for more office space in Manhattan. HSBC Bank increased its U.S. headquarters space by 35,000 square feet after attendance rose to 80%. (WSJ, Oct. 29)
  • Dell Technologies and 3M are also tightening in-office requirements, with Dell mandating full-time office work for its global sales teams, and 3M seeking higher attendance from senior employees. (Bloomberg, Oct. 21)
  • More firms requiring in-office presence: The proportion of firms requiring employees in-office five days a week rose to 33% in Q3, up from 31% in Q2, according to Flex Index, which tracks workplace strategies. (WSJ, Oct. 29)
  • Tech sector demand surges: Over the past twelve months, demand for office space has surged in tech-centric cities such as Seattle, Boston, and San Francisco, as tech employers revisit their office needs and reconsider remote work policies. (VTO News Release, Oct. 30)

Vacancy Rates Show Signs of Stabilizing

  • Vacancy rates show signs of stabilization: The vacancy rate is stabilizing at a near-record level of 13.8%, up from 9.4% in the fourth quarter of 2019.
  • Since the second quarter of 2020, U.S. office tenants have vacated close to 209 million square feet of space, the highest amount ever for a four-and-half-year period, according to data firm CoStar Group. (WSJ, Oct. 29)
  • 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. (Roundtable Weekly, Oct. 18)
  • The 46th edition of PwC and the Urban Land Institute’s Emerging Trends in Real Estate report released this week, depicts the commercial real estate industry as gradually returning to normalcy after the significant disruptions caused by the pandemic. “Investors’ focus is shifting back to the typical cyclical changes that occur throughout business cycles,” the report noted. (GlobeSt. Nov. 1 | Report, Oct. 29)

The Roundtable’s Q4 2024 Sentiment Survey which measures senior executives’ confidence and expectations about the commercial real estate market environment will be available next week.

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.

Fed Holds Rates Steady: Implications for Commercial Real Estate

Posted on by Abigail Grenadier

The Federal Reserve chose to maintain current interest rates at the same level since last July, despite calls from economists and policymakers to implement a cut. (AP News, July 31 | Axios, July 31)

Fed’s Decision

  • Fed chair Jerome Powell emphasized the need for data-driven decisions, indicating that future rate adjustments will hinge on economic indicators. (Washington Post, July 31)
  • During the June meeting, Fed officials released their Summary of Economic Projections report, which showed that policymakers penciled in just one rate cut this year, down from the three initially estimated at the start of the year. (RW, June 14)
  • After the decision, Powell said, “a reduction in our policy rate could be on the table as soon as the next meeting in September.” (Barrons, Aug.1)
  • In June, Senators Elizabeth Warren (D-MA), Jacky Rosen (D-NV), and John Hickenlooper (D-CO) wrote to Powell, urging the Fed to cut the federal funds interest rates from a two-decade-high of 5.5 percent, citing that high interest rates are increasing the costs of housing and insurance, and exacerbating the housing supply crisis. (Letter)
  • In their letter on housing prices, they emphasized that “The country is already facing a severe housing shortage, and the Fed’s refusal to bring down interest rates is exacerbating this shortage and driving higher inflation rates…Lower mortgage rates would encourage more people to sell their homes, which would in turn increase housing supply, decrease prices, ease the costs of renting, and ultimately increase homeownership.”

CRE Markets

RER board member Owen Thomas (BXP)
  • With interest rates unchanged at a 23-year high, the commercial real estate sector faces significant challenges, particularly in financing and investment, as higher rates increase borrowing costs and reduce demand for development.
  • Higher interest rates and the pandemic-induced shift to remote work have left a lasting impact on office demand, prompting landlords to rethink space utilization.
  • In a recent interview with Bloomberg Television, RER board member Owen Thomas (BXP) discussed the transformation of the office market and the need for innovation and adaptability in the face of changing tenant needs and market conditions. (Watch interview)

The Fed’s next meeting is scheduled for September 17-18, 2024.

Fed Report Cites Office Loans as Potential Economic Vulnerability

Posted on by Abigail Grenadier
The Federal Reserve Board’s semiannual Financial Stability Report, April 2024

Potential losses from certain office real estate loans are an economic vulnerability within the U.S. financial system—yet considered less of a threat than last year, according to the Federal Reserve Board’s semiannual Financial Stability Report. The Fed report noted that if inflation persists and higher interest rates linger during the ongoing, post-pandemic adjustment to remote work, a wave of maturing loans could pose CRE refinancing risks for regional U.S. banks. (Fed report | Bloomberg and Reuters, April 19)

Office Sector Risk

  • The financial stability report focused on four areas of risk, including asset valuations. CRE stress was the third most cited risk, moving down from second in last October’s survey. (KPMG, April 22, 2024 and Roundtable Weekly, Oct. 27, 2023)
  • This month’s Fed report also acknowledged unique strains on CRE, especially in the office sector, “where vulnerabilities have mounted in the post-pandemic period.”
  • The report added that continued economic pressures could reduce investor risk appetite and lead to a “more pronounced correction in commercial property prices.” This, in turn, could “reduce the willingness of financial intermediaries to supply credit to the economy” and further weigh on overall economic activity.
  • Despite ongoing concerns about CRE, the Fed survey also found that the issuance of non-agency securities started to recover in the first three months of 2024.
  • A separate report from DoubleLine shows signs of improvement for the commercial mortgage-backed securities market and other capital markets and notes that borrowers in some sectors, including office, are finding access to credit. (Bloomberg, April 24)

The Roundtable’s all-member June 20-21 Annual Meeting will include a Joint Research Committee and Real Estate Capital Policy Advisory Committee Meeting to drill down into specific CRE capital and credit market trends and issues.

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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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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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