CoStar Group National Director of Office Analytics Phil Mobley joins America’s Commercial Real Estate Show to share current office property performance, property values, and forecasts. Discussions include office property tenant trends, lender workout strategies, and areas of opportunity in the current market. He starts off noting the sector as having continued challenges nationally with vacancy at 13.3% and more like 17% plus if owner occupied and medical are excluded. he notes that tenants have given back about 160m sf since 2020 in what he refers to as a soft demand market. Just after 7 minutes in he discusses geographic differences, noting Miami and Las Vegas as performing well as people relocate to these markets.
The Discussion: Navigating the Turbulent Waters of the U.S. Office Real Estate Market
Introduction:
The recent episode of “America’s Commercial Real Estate Show” delves into the complexities of the U.S. office real estate market, exploring key trends, challenges, and potential opportunities. The show features insights from Phil Mobley, National Director of Office Analytics with the CoStar Group.
The Office Market Landscape:
The conversation begins with an overview of the current state of the office market in the United States. Phil Mobley provides a snapshot, highlighting a challenging environment with a national vacancy rate of 13.3%, up from 9.5% in 2020. When considering owner-occupied and medical office spaces, the vacancy rate increases to around 17%. This rise is attributed to factors such as companies downsizing, increased remote work, and a soft demand market.
Forecasts and Trends:
Mobley projects a continued negative trend, expecting overall vacancy rates to reach 17% and non-owner occupied, non-medical spaces to surpass 20% by the end of 2026. The forecast includes a mild recession in the coming months, contributing to the challenges in the demand for office spaces. Additionally, Mobley notes a 10% decline in office property values so far, with an anticipated further 20% decline by 2026.
Class and Geographic Variations:
The discussion touches upon variations in the office market based on property class and geographic location. Class A properties exhibit higher vacancy rates than Class B, partly due to a concentration of sublease inventory in Class A spaces. Geographically, Mobley highlights divergent trends, with certain markets like Miami performing well, driven by population growth and corporate migration. In contrast, downtowns of major cities face challenges, especially those with long commutes and a high proportion of remote-working technology professionals.
Leasing Trends and Tenant Behavior:
Mobley delves into leasing trends, emphasizing a reduction in the average size of new leases, down approximately 20% from pre-pandemic levels. Larger companies are taking less space, influenced by hybrid work arrangements and increased attention to space utilization. Smaller tenants, however, are more active in the market, exploring new locations and contributing to the overall reduction in average lease size.
Lender Trends and Distressed Loans:
The conversation shifts to lender trends and distressed loans, with Mobley noting a rise in delinquency rates, particularly in commercial mortgage-backed securities (CMBS). The discussion highlights the challenges faced by multi-tenant buildings with high lease exposure risk and underutilized spaces, signaling potential difficulties in loan workouts.
Opportunities in the Market:
Despite the challenges, Mobley identifies opportunities in the market, particularly for high-quality, premium spaces acquired directly from landlords. While larger companies have favored such spaces, Mobley anticipates a shift in tenant preferences towards sublease inventory, offering a 30% discount. This change could lead to a reset in the leasing market, prompting tenants to reevaluate their choices and potentially driving downward pressure on rents.
Conclusion:
The conversation concludes with insights into the evolving dynamics of the office real estate market. As the sector undergoes a reset, winners and losers emerge, emphasizing the importance of adapting to changing tenant preferences and the need for flexible strategies in navigating the turbulent waters of the U.S. office market.
Related Resources: