The Rapid Change of Commercial Real Estate

So we hear a lot of commercial real estate right now and not all of it good. A lot of focus on office buildings. But we’ve learned that commercial real estate is more than just office buildings. It’s part of it. But not all of it.

Give us a sense overall how commercial real estate is doing. Well, of course, office buildings are the most difficult part of the commercial real estate story today. When you look at other asset classes. So, for instance, industrial buildings, which is a big asset class, medical office buildings, hotels, life sciences buildings,

Multifamily institutional quality, apartment buildings, basically very strong fundamentals. And when I say fundamentals, I mean the following. Well, east, in fact, some of them historically well leased, strong rental rates and upward pressure on rental rates in a lot of cases, not a lot of new supply coming on.

That’s what we mean by fundamentals. And when you get beyond office buildings, the fundamentals in the commercial real estate group of asset classes are generally very strong. And even within office buildings, there’s a slice of office buildings, I’m going to say, for 30 to 40 percent of

Them, these newer, better configured, better infrastructure office buildings where companies are trying to create a really high quality experience for their employees to get them back in the office. Those assets are doing quite well. So the storm, the headlines, the headline grabbing stories of an 80 percent vacant office building.

That’s an anecdote. That’s not a proxy for what’s going on in commercial real estate. So we still have the newer buildings. We’re learning to call them A’s or a plus, as has the BS and CS. Yes. But if you take a look at commercial real estate, the office portion of it right now.

How much of it’s a how it is being, which would see, would you say, in general? Well, I think if you look at true A or a plus, it’s maybe a quarter of the a quarter of the space out there.

But you could go down a little further and have some very nice buildings that, if upgraded appropriately, would be true ways. And then you probably have the bottom core quarter or so that are real problematic buildings that are either going to have to be mega redeveloped or

Probably scraped and turned into land sites. And then in between, you have a variety of different kinds of buildings, some of which can be repurposed maybe into multifamily or. That’s very difficult to do. Some of them will be upgraded to class A buildings and someone will go the way of land also.

So if different parts to commercial real estate and then within the office part of commercial real estate, you’ve got different classes to look at. What about geography? Because another thing that we have heard is that it depends on what metropolitan area you’re talking about.

San Francisco, maybe troubled. New York, maybe that’s a great Chicago. But then there are others, whether it is Miami, for example, some parts of Texas are doing pretty well. Well, you mentioned San Francisco first. So that’s that’s probably the toughest story out there in office buildings.

And it’s for more reasons than just the tough to get people back in the office. First of all, everybody knows that’s where so much concentration of tech occupancy is. Those companies have laid off a lot of people. But David, think about this.

We all know that the technology companies that are going backwards with head count now are going to go the other direction for sure in the long run. We know that’s going to happen in that part of what’s going on is going to come back. And then, of course, you do have the

Cyclical thing with the with the economy being down a little bit and you have the secular thing with people not being back in the office as much. And technology companies kind of led that charge. But by the way, if you see what’s going on now, the technology companies are

Talking about getting their people back into the office, talking about it, but they’re getting that done. I mean, we just this week passed the milestone in New York of 50 percent occupancy, and that is by use of the sort of security cards they know they’re actually in the office.

Is it ever going to come back to where it was before? Well, New York is a good example of quite a bit of the spectrum of what’s going on. So in in class, say, top quality buildings here in New York, you go over the Hudson yards or you go to one

Vanderbilt midtown across from Grand Central Station. These buildings are doing well and they’re going to continue to do well and they’re doing well because they create a great, great story for the client or for the tenants and their people, a great experience for their people. Other buildings are suffering more

Because they don’t create that experience, but they’re all slowly filling up. We did see a flat spot for quite awhile. I’m going to say from earlier this year till about now. But we’re starting to see it rise a little bit again now.

And you really are seeing a push from companies to get people back in. I do not think it’s going to go back to where it was. And in fact, the work we’ve done would suggest that in the long run, companies are going to take maybe 80 percent of the space.

Maybe as little as 75 percent of the space they previously had. As you mentioned, there’s the financing aspect as well. We read a lot right now about maybe some arrears building up, maybe some concern about a New Year refinance this year. What is the situation in financing of

Office buildings right now? What are the risks out there? Well, we’ve looked at that everywhere. You can imagine. I would start with banks. So you’ve heard a lot. We’ve all heard a lot because of some of the bank challenges we had a couple of

Months ago, that commercial real estate was going to put a lot of pressure on banks and office buildings in particular. We’re going to put a lot of pressure on banks. The facts are about about one and a half, one and a half percent of bank

Assets or an office building loans one and a half percent. And that’s all office building loans, all office buildings, loans. Now, we think that there is going to be some jeopardy among that portfolio loans. But we think it’s going to be like 20,

25 percent of those loans. So take 25 percent of one and a half percent. And you can see that the banks aren’t going to have a really big problem coming from commercial real estate. They will have some problems. They will have some loans that need to be restructured. They’ll have some foreclosures.

We know that some of that’s going on already. But again, this headline, this anecdotal driven, sensationalized headline about all the crashing down that’s going to take place, it’s really overstated, putting aside crashing down. There are some adjustments going on. How far along that adjustment period, particularly aspect of valuations.

Obviously, valuations come down both because interest rates are going up. So it’s more expensive to finance things, but there’s somewhat less demand for at least some office buildings. Where are we on that adjustment evaluations? Well, I mentioned all those asset classes earlier in our discussion. Values have come down for all those

Asset classes. And the reason that one of the real drivers of that is the cost of debt goes up when the cost of debt goes up. It’s more expensive deleverage or buildings devalue, the equity goes down. Office buildings have gone down the most.

The other asset classes may have gone down 10, 15 percent, office buildings, maybe as much as 30 percent. We do think that the decline in values has kind of run its course and will stabilize now and we’ll start to come back later this year. The fact matter is, interest rates have

Stabilized. We think they’re going to start to come down. Inflation appears to have peaked. It’s coming down. And so we think the decline in values has kind of played out. So I do want to put words in your mouth,

But I think what I’m hearing you say is, by and large, looking at as far as you can, you think maybe the market has largely discounted what it needs to discount at this point? I think that’s probably the case now.

We all we all need to figure out what’s going to go on with the economy right now. The economy has performed better than we thought. It was going to perform quite a bit better around the world. And in fact, there’s now an expectation that we won’t even have a recession in Europe

If we ended up with a worse recession than we think we’re gonna get. Values would come down further because people would stop spending money of all types, including try to spend less on rents. But we think values have kind of hit the bottom, are going to start recovering.

And we think we believe that we’re going to have a mild recession. That’s going to take place later this year. Be relatively short and you’ll start to see things come back. By the way, there is a massive amount of capital on the sidelines that wants to

Invest in commercial real estate. And there is a massive amount of real estate that wants to be refinanced or sold. And everybody’s uncertain about what’s going on with values. And as soon as we have some certainty, as soon as we think interest rates have

Peaked and are coming down, you’ll start to see those assets trade and get refinanced. As in so many places, you need the buyer and the seller to agree on that price. And they need him to be confident that it’s kind of gotten where it’s going to get to.

Robert Sulentic, CBRE CEO breaks downsigns of stress in commercial real estate and explains why office buildings occupancies are unlikely to return to pre-pandemic levels.

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20 Komentar

  1. The guy is full of it! Office buildings won’t cash flow

  2. Old people are funny. We are not going to return to the office buddy

  3. 2 owners of famous hotels in SF walked away from their loan a few days ago.

  4. He is absolutely right 😂
    – Different asset classes
    – A, B, C, D different building classes in office section
    – Geographical differences
    – Cyclical vs long run 80%; Tech office usage
    – Financing, banks 1/2% assets in office buildings loans, 20% out of the 1/2% will be problematic
    – Headlines sensational overstated
    – Ultimately, the economy will determine the results

  5. This was about as optimistic a view as you can imagine for this industry. Unfortunately he is looking through rose coloured glasses. There will be a massive correction in this industry. Between malls, retailers (people shopping online) and office workers (hybrid here to stay) there is a big crash coming. I’m sorry to give a sober analysis to guys like Robert in this interview.

  6. Tell me lies, tell me sweet little lies!😂

  7. He’s trying to sell a mule as a horse

  8. the landscape of commercial WILL have to convert into housing- the Elites have signed off on this already- it's a lost decades folks

  9. RIP Commercial real estate.💐💐


  11. Californians are abandoning commercial offices and retail space. My coastal town is probably 1/3 empty.

  12. People want houses, including the people in them. Hoping that working people default does not solve the problem that working people need homes.

  13. I want to buy some warehouse space here in Dallas but the prices are double new construction costs.

    On commercial income property they want to sell at a 4.5% yield when your borrowing costs are 7.5%.

    You have -3% return day one. The rent income doesnt come close to covering the interest. Zero deals at all.

    Anything with a slightly higher yield is old, obsolete and full of asbestos.

  14. The increase in rent and real estate prices can be a real challenge, especially for the economically disadvantaged. Real estate software can play a role in improving affordability by streamlining property management, enabling better data analysis for informed decision-making, and potentially identifying opportunities for more affordable housing solutions. While it's not a silver bullet, it's a step towards addressing these issues and making the real estate market more accessible to everyone.

  15. Office space is going to shit here in Australia.
    I worked in agency for the last year on a heavily focused office market and it’s dire.
    There is a huge discrepancy between what buyers there are and the vendors. The correction is very much occurring and a long way from the bottom.
    Also a huge sublease market on top of a very stagnant office market.

    Check out JLL Q2 office report. Says it clearly.

  16. Classic lying (((nose))). All CRE is screwed.

  17. Thanks to the Chinese release of the COVID-19 bioweapon… still want to invest in China…..they want us dead
    Go to any city in the US and you'll see nothing but closures……

  18. States can relax rules to covert office to hotels or apartments

  19. Kastle represents only 2% of office buildings.. metro usage statistics and new sublease additions are better statistics

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