Tag: Return to Office

GSA Considers Massive Lease Reductions, Sales of Federal Properties

Posted on by Abigail Grenadier

This week, the General Services Administration (GSA) announced its plan to sell half of the federal properties it leases—a decision that compounds President Trump’s return-to-office mandate and Elon Musk’s “buy out” offered to federal workers. (Newsweek, Feb. 5)

Why It Matters

  • In 2024, GSA owned or leased more than 360 million square feet of space across more than 8,000 buildings nationwide, according to its most recent annual report.
  • Just as federal workers are returning to offices—prompted by a Trump Executive Order —the “cumulative damage” of canceling federal leases under a Department of Government Efficiency (DOGE) led initiative “would be severe.” (GlobeSt, Jan. 30).
  • A recent Trepp analysis quantifies the impact of GSA-leased space in the Chicago, Dallas, Los Angeles, New York City, Washington, DC, and other metro areas where federal tenancy accounts for significant percentages of total office inventory. (Roundtable Weekly, Jan. 31)
  • If enough termination clauses are exercised, these markets could face economic disruption, with no guarantee of equivalent replacement tenants. (GlobeSt., Jan. 30)
  • Last week, a memo was sent from GSA headquarters in Washington, DC instructing regional managers to begin terminating leases on all of the roughly 7,500 federal offices nationwide. Recently appointed acting GSA administrator Stephen Ehikian also announced two of the agency’s properties, including their headquarters building at 1800 F Street, NW,  will be listed for sale in a ‘first step’ to cutting real-estate expenditure. (AP News, Feb. 4).
  • GSA recently appointed Michael Peters as commissioner of the Public Buildings Service (PBS), which will play a role in managing cost-effective workspace solutions for federal agency customers. Peters told staff in an email that non-Defense Department federal building space — both owned and leased — “should be reduced by at least 50%.”  (GlobeSt. Feb. 4)

What to Watch

  • The extent of the GSA’s leased and owned property inventory will be affected by any reductions in the federal workforce.
  • A federal judge on Thursday extended the deadline for government employees to decide on the Trump administration’s “buyout” offer, delaying the original cutoff until Monday amid uncertainty over the evolving terms of the “Fork in the Road” email. (Axios, Feb. 6)
  • As of Thursday, roughly 50,000 federal workers had accepted President Trump’s deferred resignation offer ahead of the original deadline. (Washington Post, Feb. 6 )
  • DOGE, led by Elon Musk, estimates the push for “deferred resignations” could shrink the federal workforce by 5% to 10%. (AP News, Jan. 28) (Axios, Jan. 28)
  • The administration argued the delay was unnecessary and would disrupt workforce expectations, but said it would comply with the order.

The Roundtable will continue to keep members informed about further developments as the administration’s policies evolve.

White House Moves on Plans to Slash Federal Funding, Staff, and Office Leases

Posted on by Abigail Grenadier
The White House

Funding freezes, employee buyouts and scrutiny of the federal office lease portfolio were among the actions taken by the White House and its Department of Government Efficiency (DOGE) this week, as the Trump Administration acted on promises to shrink the federal government.

Federal Funding

  • On Monday, the Office of Management and Budget (OMB) issued a memo implementing a “Temporary Pause” on certain federal financial assistance programs. (Politico, Jan. 28)
  • This directive aimed to stop federal loans and grants “implicated” by seven recent executive orders pertaining to areas such as clean energy, DEI initiatives, transgender rights, and foreign aid.
  • By Wednesday, OMB issued a 2-sentence memo rescinding the temporary pause, with the goal to moot the lawsuit filed in the interim that resulted in a federal court restraining order placing the spending freeze on ice.  (NYT, Jan. 28) (The Hill, Jan. 29)
  • OMB’s reversal does not lift previous holds on funding of programs disfavored by the administration. Underlying Executive Orders remain in effect regarding the U.S. withdrawal from the Paris climate treaty, “unleashing” American energy resources with a preference for oil and gas development, and abandoning federal DEI programs.
  • The administration may also issue future spending freezes. (Politico, Jan. 29) The administration will continue to reshape federal spending policies through executive action, raising significant constitutional issues that could reach the U.S. Supreme Court. (ABA Journal, Jan. 29).

Federal Workforce

  • The Office of Personnel Management (OPM) announced a buyout program offering federal employees severance equal to eight months’ salary if they resign by February 6. (The Hill, Jan. 30)
  • Employees who stay do not have a guarantee of their job – but must return to full-time, in-office work as per an executive order signed by Trump on inauguration day. (Washington Post, Jan. 23)
  • DOGE, led by Elon Musk, estimates the push for “deferred resignations” could shrink the federal workforce by 5% to 10%. (AP News, Jan. 28) (Axios, Jan. 28)
  • Meanwhile, Trump has ousted Democratic appointees of the National Labor Relations Board (NLRB) and the Equal Employment Opportunity Commission (EEOC) before the expiration of their terms. Litigation challenging these firings is highly likely. (Federal News Network, Jan. 28).    

Federal Office Leases

  • DOGE is also reportedly focused on reducing federal government leases in private-sector buildings. Musk has installed “longtime associates” at the General Services Administration (GSA) to reduce the footprint of U.S. owned and leased real estate. (NextGov, Jan. 30)
  • Musk’s visit yesterday to GSA headquarters could “presage more cost-cutting efforts” to “right-size the Federal real estate portfolio of more than 7,500 leases.” (New York Times, Jan. 30)
  • A recent Trepp analysis quantifies the impact of GSA-leased space in the Chicago, Dallas, Los Angeles, New York City, Washington, DC, and other metro areas where federal tenancy accounts for significant percentages of total office inventory.
  • Just as federal workers are returning to offices—prompted by a Trump Executive Order signed after his inauguration—the “cumulative damage” of canceling federal leases under a DOGE-led initiative “would be severe.” (GlobeSt, Jan. 20).

Looking Ahead

  • Ongoing budget reconciliation discussions on Capitol Hill suggest that further government funding cuts remain a possibility as part of broader fiscal policy negotiations. The situation remains fluid, with potential implications for various federal programs.
  • On Wednesday, House Republicans outlined their budget blueprint, setting fiscal targets and potential cuts as they prepare to draft a reconciliation package next week. (Politico, Jan. 29)
  • However, Republicans remain divided on strategy for advancing President Trump’s agenda. House Republicans favor a single-bill approach, while Senate Majority Leader John Thune indicates that his conference has developed an initial budget as part of a two-step plan to pass border security measures, tax cuts, and other priorities. (Politico, Jan. 29)

The Roundtable will continue to stay informed about further developments as the administration’s policies evolve.

Momentum Grows for In-Person Work Across Public and Private Sectors

Posted on by Abigail Grenadier

President Donald Trump’s executive order requiring federal employees to return to in-person work, combined with similar legislative efforts in Congress and private-sector return-to-office mandates, could significantly impact Washington, D.C.’s commercial real estate market.

Federal Mandate May Upend Greater Washington Market

  • On day one of his second term, President Trump signed a mandate requiring all federal workers to return to full-time in-person work. (Washington Post, Jan. 23)
  • “Heads of all departments and agencies in the executive branch of Government shall, as soon as practicable, take all necessary steps to terminate remote work arrangements and require employees to return to work in-person at their respective duty stations on a full-time basis, provided that the department and agency heads shall make exemptions they deem necessary,” the executive order reads. (BisNow, Jan. 20)
  • The order could significantly affect the office market in the Greater Washington region, which is still grappling with economic challenges in the commercial real estate sector and a sluggish recovery in downtown activity post-pandemic. This past summer, D.C. recorded its highest-ever office vacancy rate. (WJLA, Aug. 12)
  • The executive order coincides with reports that the administration is considering selling two-thirds of the federal government’s office portfolio to the private sector and terminating millions of square feet of leased commercial space. (WSJ, Jan. 21)

Mandate Follows a History of Legislative Attempts

  • This executive order aligns with similar efforts from Republicans in Congress to legislate return-to-work mandates for federal employees.
  • On January 16th, Rep. James Comer (R-KY), chairman of the House Oversight and Government Reform Committee, reintroduced the SHOW UP Act, aimed at returning the federal workforce to pre-pandemic telework levels. The bill cleared the House along party lines early in the last Congress, but the Senate didn’t take up the companion bill. (FNN, Jan. 17)
  • Rep. Andy Biggs (R-AZ) has reintroduced the Return to Work Act, a bill that—similarly to the SHOW UP Act—would return federal employees to the telework schedules they had before the COVID-19 pandemic. (FNN, Jan. 17)
  • RER has consistently emphasized that federal policies promoting remote work undermine the health of cities, local tax bases, and small businesses, and urged policymakers to end government policies that encourage remote working arrangements for federal employees. (Roundtable Weekly, Dec. 2023)

Private Sector Efforts

  • Leaders in the private sector are also driving the return-to-office momentum.
  • In a January memo, JPMorgan Chase announced that all employees would be required to return to in-person work by March. ‘Now is the right time to solidify our full-time in-office approach,’ CEO Jamie Dimon and other executives wrote in the company-wide message, emphasizing that they believe this approach is the most effective way to operate the business. (Bloomberg, Jan. 7)
  • Amazon also began 2025 by requiring its nearly 350,000 corporate employees to return to in-person work, including those at its Seattle headquarters and the newly established HQ2 in National Landing. (WMTV, Jan. 2)

Looking Ahead

Despite hesitations, the return-to-office mandates sweeping across both the public and private sectors signal a notable industry shift for commercial real estate and a potential revitalization of urban office hubs. RER strongly supports return-to-office efforts as critical to thriving cities and communities, and looks forward to working alongside our public and private sector partners to drive vibrant downtowns and economies across the country.

Navigating Rising Costs and Policy Challenges in CRE for 2025

Posted on by Abigail Grenadier

While CRE leaders are optimistic about 2025, clear headwinds emerging from escalating construction costs and trade policies threaten to slow development activity and increase strain on industry stakeholders. These challenges demand coordinated efforts between policymakers and the private sector to stabilize costs, address labor shortages, and promote balanced trade measures.

Market & Financial Headwinds in CRE Construction

  • The commercial construction sector is facing mounting challenges that could reshape its trajectory.
  • Labor Shortages: Baby boomer retirements are thinning the skilled workforce, with an estimated 5.4% of construction workers aged 65 or older and poised to exit the industry.
  • Simultaneously, a larger share of young adults is pursuing college over the trades, creating a gap in new talent pipelines. Overall, the national number of job vacancies in construction has doubled between 2017 and 2023. (ConnectCRE, Jan. 2 | Construction Dive, Jan. 2)
  • Rising Capital and Material Costs: Construction loans are difficult to get and relatively expensive, with interest rates hovering above 8%, while material costs remain elevated due to inflation and lingering tariffs on construction imports like lumber, steel, copper, and cement. (ConnectCRE, Jan. 2)

Tariff Proposals

  • Recent trade and policy developments could exacerbate these challenges.
  • Trump Administration’s Tariff Proposals: President-elect Trump has proposed sweeping tariff increases, including a 60% tariff on Chinese imports and an additional 25% tariff on goods from Mexico and Canada.
  • These measures could raise U.S. tariffs to their highest levels since 1934 and result in an $800 billion annual increase in tariffs across markets, according to PwC estimates​​. (Barron’s Jan. 3, Construction Dive)
  • Steel Supply Chain Disruption: President Biden’s decision to block Nippon Steel’s acquisition of U.S. Steel has raised concerns about the future of one of America’s largest steelmakers.
  • The acquisition would bolster U.S. Steel’s production capacity and supply chain stability with investments such as $2.7 billion in capital for aging U.S. steel plants, a shared $500 million annual research & development budget, and the transfer of cutting-edge blast furnace technology to U.S. Steel.
  • With construction being the primary steel-consuming sector, accounting for over 50% of steel consumption, U.S. Steel’s uncertain trajectory could pose challenges for steel-dependent CRE projects. (The Washington Post, Jan. 3 | The Wall Street Journal, Jan. 3)​​

Office Markets & Return to Work

  • The U.S. office market faces a stark divide: while overall vacancy rates remain high due to aging buildings and remote work policies, demand for top-tier office space with modern amenities is surging in major cities. (Axios, Jan. 10 | WSJ, Jan. 7)
  • Tenants occupied 22% more premium office space in late 2023 compared to pre-pandemic levels, according to CBRE. (WSJ, Jan. 7)
  • Many outdated buildings have the potential for conversion to residential use, while landlords of premium properties have regained leverage, scaling back tenant concessions for the first time in four years. (WSJ, Jan. 7)
  • JPMorgan Chase may soon require all employees to return to the office. This move follows a growing trend among major corporations, including Amazon, AT&T, and Walmart, that are ending remote work and returning to pre-pandemic office norms. (Axios, Jan. 1 | Forbes, Jan. 9)
  • RER Board Member Scott Rechler (Chairman & CEO, RXR) highlighted stronger office markets, despite vacancies, and increased transactions and property conversions for New York City in 2025 this week on CNBC’s Squawk Box. (CNBC Squawk, Jan. 8)

As rising costs and shifting policies reshape the CRE landscape, RER is committed to working with policymakers to stabilize material costs, innovate solutions to labor shortages, and adjust trade policies to avoid disproportionate impacts on the CRE sector.

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 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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