330 MSF Obsolete Offices, New Opportunities

With the U.S. office market facing the possibility of 330 million square feet of obsolete space by the end of the decade, meeting the market’s call to action presents an opportunity for owners to tap into its upside potential.

Jordan B.
March 17, 2023

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Good morning. And happy St. Patrick’s Day to our Irish, half-Irish, and “I swear I’m 10% Irish” readers. 🍀

In today’s issue, Cushman & Wakefield predicts that obsolete office space in the US may reach 330 million sq ft by 2030, creating a rare opportunity for property owners. Meanwhile, Blackstone’s BREIT’s just had its best monthly return in the past six months.

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⏱️ Read time: ± 5 minutes

IT’S ALL RELATIVE

330 MSF of Empty Offices = 330 MSF of New Opportunities?

A recent Cushman & Wakefield (CWK) analysis shows that the U.S. office market could be saddled with an additional 330 MSF of obsolete office space by the end of the decade and 1.1 BSF in total by 2030.

Isn’t it time for a makeover, Scranton? About 70% of the nation’s office buildings were developed before 1990, and tenants are seeking higher quality space as leases expire and companies seek to entice workers back to better offices. Naturally, this also leads to more empty, unusable office space. The analysis indicates that, by 2030, vacancy rates could hover around 18%, where 13% is considered a ‘healthy’ rate.

When the 20/80 rule backfires: That 5% difference in predicted vacancy rates adds up to 330 MSF of empty offices. Right now, unused office space is concentrated in a few battered metros, with over 50% of office vacancies located in just 7% of U.S. office markets. Unsurprisingly, the cities most impacted by the shift in office demand have far older office buildings, on average, alongside higher rents.

Survival of the flexible: To prevent vacancy rates from rising to unhealthy levels, office owners may need to reposition space to meet tenant demands, such as investing in updated wellness and lifestyle amenities or repurposing buildings for residential, life science, or even industrial uses. There’s an office tower in California with oil pumps on some floors, so anything’s possible.

➥ THE TAKEAWAY

Half full or half empty? Cushman & Wakefield know that office owners in former gateway cities are in hot water that’s only getting hotter by the day. They’re urging property owners to reassess their office spaces now to ensure properties can meet the needs of tenants for years to come, or risk facing even higher vacancy rates in the near term. Fortunately, by 2030, U.S. office demand is projected to be 4.6 BSF, 6% higher than the current figure.

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NOT TOO SHABBY

BREIT Bounces Back With Best Monthly Return in 6 Months

Blackstone Real Estate Income Trust (BREIT) reported its largest total return in six months in February, due to advantageous positions amid rising rates and higher rents.

Not bad, but not great: The fund’s lowest-fee share class posted an 0.7% total return in February, which was something to celebrate. Its trailing 12-month returns, however, stood at 5.7%, still paling in comparison to returns from the share class in the good old days. BREIT’s 12-month returns clocked in at a respectable 8.4% in 2022 and a jaw-dropping 30.2% in 2021.

Not as anxious, but still peeved: In January, on-edge investors tried to withdraw $3.9B from BREIT, which was only able to give back $1.4B. Since then, total requested redemptions fell month over month by 26%. Earlier this month, the fund limited withdrawals for the fourth consecutive period, due to an initial rush to pull money out.

A tremendous show of support: The fund received a big boost in January when the University of California provided a $4B endowment despite BREIT’s redemption request denial headlines, and added another $500M to its commitment in February. Currently, BREIT boasts a net asset value of $70.5B, with $14B in liquidity for acquisitions.

➥ THE TAKEAWAY

Giving it the old college try: Despite a rocky few months, BREIT’s return performance in February suggested that the embattled fund is beginning to recover from the rash of investor redemptions it experienced earlier this year. Despite its beleaguered status, BREIT’s near-term outlook is starting to look a whole lot better.

✍️ Daily Picks

Not in the green: SL Green Realty’s (SLG) share price fell 65% in the past year, leading to a rise in shorting. The company wants to reduce debt and sell off assets to clean up their balance sheet.
Long time coming: Most people weren’t paying attention to Northwest Arkansas when Walmart (WMT) moved in. Now everyone wants a piece of it.
Not as simple as it seems: JV parties should carefully consider the complex impacts that an office-to-residential conversion can have on the terms governing their partnership.
Please, not again: The Fed is expected to raise rates again, with the two-year U.S. Treasury climbing to 4.3% on Tuesday due to untamed inflation.
Respect your elders: U.S. nursing homes saw hundreds of closures and fewer investments during the pandemic. But the industry is rebounding due to new demand from Baby Boomers.
How about I offer you less? Brookfield Properties (BAM) wants a 49% stake in One Liberty Plaza at a significantly reduced price, reflecting the troubled state of office values this year.
Feeling strong: Builder confidence for single-family homes rose in March, with the National Association of Home Builders/Wells Fargo Housing Market Index rising two points to 44.
The bad and the ugly: CRE started 2023 with lower demand, higher vacancies, and negative office net absorption, but could also be hit by higher interest and geopolitics in coming months.

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🤝 Deals & Dealmakers

Merger of the day: The Surface Transportation Board approved the $31B merger of Canadian Pacific and Kansas City Southern, which will reduce truckloads, add union jobs, and improve safety.
Grassy quads: The University of SoCal bought a 60 KSF Dupont Circle building for an eastern hub for teaching, research, lobbying, recruiting, alumni networking, and community outreach.
Build it big: GPI Companies secured $84M in construction financing for Overland & Ayres, a 201-unit housing development that will be integrated with their West End office campus in LA.
Acquisition of the day: Blackstone (BX) agreed to acquire Cvent for $4.6B with a minority investment from the Abu Dhabi Investment Authority and Vista Equity Partners.
Train riders need burgers, too: Shake Shack (SHAK) signed a 3,380 SF lease in Pennsylvania Station, which is expected to benefit from the return of employees to the office soon.
First of its kind: Skanska’s 17xM project, located near the Golden Triangle neighborhood in DC, is the first WiredScore SmartScore-certified office building in North America.

📈 Chart of the Day

The blue line represents the SOFR forward curve on 02/28/23. The orange line represents the same curve on 03/15/23. The projected difference by December ‘23 is 160 bps.