Editors’ Weekly News Roundup, May 15th – May 19th
The current challenges facing the office sector were on the radar of Connect CRE readers this past week. Three of the five most read stories reviewed those challenges, and there were others just outside the top five.
Ranking first was Fire-Sale Pricing Comes to Office Investment Sales, which was based on a Wall Street Journal report. The prices that office owners have accepted recently point to a new phase of the slump in the sector, with more landlords now ready to capitulate.
As evidence, the WSJ quoted Steven Jacobs, president of online auction platform Ten-X, who said listings of office properties on the site are increasing. “Office inventory is growing,” he said. “Investors want out.”
It may not be a deliberate omission, but it’s worth noting that the 3,000-acre master-planned community envisioned by developer David Craig doesn’t include an office component. With strong readership both in Texas and nationally, Developer to Build “Mega, Mega” Project in N. Texas told of Craig’s plans for a development fronting Lake Texoma on the border of Texas and Oklahoma.
The project, which Craig said will be on a scale North Texas hasn’t seen before, will include a resort hotel, retail, restaurants, an upscale marina and about 7,500 homes and rental units. Again, though, no office.
As an investor, entrepreneur, philanthropist and published author, Sam Zell did it all. He was a mainstay of commercial real estate over the past few decades, although his investment acumen also extended into other sectors. He sponsored 12 IPOs across a range of industries and was among the first to tap into emerging markets outside the U.S. A breaking news story that nobody expected, Sam Zell Dies, Age 81, became the past week’s third most read story.
Given that Zell was among the pioneer advocates of REITs, helping build the sector into the $4-trillion industry it is today, it’s fitting that at the time of his death he chaired two of them: Equity Residential, where former CEO David Neithercut has succeeded him as chairman; and Equity Commonwealth, an office REIT which was reconstituted following a successful activist investor campaign in 2014.
A survey from CBRE found that office occupiers are clearer in 2023 about their space requirements than they were a year ago. Connect CRE’s report on that survey, Occupiers Get a Handle on Their Post-Pandemic Office Needs, noted that on the plus side for landlords, two-thirds of occupiers are expecting employees to show up at the office at least some of the time.
On the less-positive side, 53% of companies surveyed said they expect their office portfolios to get smaller over the next three years compared to 46% that anticipate either no change or expansion.
It’s safe to assume that a literal zombie apocalypse is likely to happen only in movies or on TV, but something like it could be coming to some major U.S. cities via the office sector. Boston Consulting Group (BCG) produced an article titled “Countering the Curse of Zombie Buildings,” defining a zombie state for office properties as space utilization of 50% or less.
We covered that BCG report, and spoke with its author, for what became the fifth most read story of last week, Less Use and Increased Vacancies Mean “Zombie” Office Buildings. Although the BCG forecast was grim—especially for cities with high concentrations of office properties, such as New York—the article also recommended ways in which office owners can remedy encroaching zombie-ism in their own portfolios.
Coming in just outside the top five were two other stories related to the office sector. In Chicago, Groupon has walked away from its headquarters lease of nearly 300,000 square feet, paying nearly $10 million to terminate the lease two years early and giving landlord Sterling Bay the challenge of backfilling the space.
In New York, Sandeep Mathrani, who led WeWork through a transformative period following a failed IPO, is stepping down as chairman, CEO and director. He’s joining private equity firm Sycamore Partners to lead its real estate activity.