Amazon HQ2 Delays, Water Coolers, and Cali Cuts

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Good morning. Welcome back to the work week. Today’s edition is all about the constantly shifting landscape of real estate strategies in the post-pandemic office market.

Amazon has hit pause on the construction of its second headquarters
Investors are resorting to water coolers to gauge return-to-office rates
California’s government plans to reduce 1.16 MSF of office space

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Before we dive in…be sure to save your spot for tomorrow’s webinar with Bullpen. They will explore strategies, tactics, and on-the-ground realities for investing in LIHTC properties.

REMOTE WORK

Amazon Hits Pause on $2.5B HQ2 in Arlington, VA

COURTESY OF NBBJ/AMAZON

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Amazon’s HQ2 is getting cold feet and is now more like HQ1.5. The online shopping behemoth has recently announced that it’s hitting the brakes on the $2.5-billion construction of its highly anticipated second headquarters in Arlington, VA.

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Status update: Amazon’s real estate chief confirmed the temporary postponement of the second phase of the PenPlace development project in Arlington, Virginia, which included three 22-story office buildings and was expected to cost $2.5B. The news of the delay comes on the back of the company’s largest-ever round of layoffs and a refining of its policy on employees working from home.

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Shifting space: While Amazon has put the groundbreaking of PenPlace on ice, the first phase of the project is almost complete, called Met Park, and is set to welcome around 8,000 employees to the campus in late spring. Met Park will have space for more than 14,000 employees.

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False promises: After a competitive bidding war similar to a municipal version of The Bachelor, Amazon selected Virginia as the location for its HQ2 in 2018. The company promised to deliver 25,000 jobs to the area and boost the local economy, in return for tax benefits and infrastructure enhancements totaling $800 million.

➥ THE TAKEAWAY

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Big picture: Amazon’s decision to pause its expansion plans in Northern Virginia may cause problems for local developers, construction workers, and service staff who were relying on the company’s growth. This move is part of a larger trend seen among other big tech companies such as Meta and Twitter, which have been reducing their real estate to save costs after hiring thousands of employees and expanding their office space.

NEW BENCHMARK

Water Coolers Emerge as the New RTO Yardstick

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Want to know if your colleagues are back in the office? Forget the security logs and access cards. Just take a peek at the watercoolers.

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Occupancy rates: According to a Boston-based startup called Bevi, the amount of water being dispensed from their internet-connected coolers at over 5,000 businesses across the US is a reliable indicator of office occupancy rates. Bevi’s data shows that usage of their machines has been mirroring the office occupancy rates tracked by security firm Kastle Systems throughout the pandemic.

Bevi; Kastle Systems

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Cooler consumption: As offices began to reopen last year, water cooler usage increased to just over 40% of pre-pandemic levels. And this year, the trend has continued, with Bevi’s delivery volumes outpacing Kastle’s index by 5 percentage points, possibly due to increased consumption from smaller companies that aren’t included in Kastle’s commercial office building tracking.

➥ THE TAKEAWAY

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Why it matters: Who knew that the humble watercooler could provide such valuable insights into office trends? In fact, Bevi’s CEO, Sean Grundy, has received inquiries from hedge funds and other investors who want to use the data to inform their investment decisions. It seems that the amount of water people drink is not just an indicator of their thirst, but also of how much time they’re spending in the office.

CUTTING BACK

CA Government Plans to Trim 132 Office Leases

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One of California’s biggest office tenants, the state government, is on a mission to slim down its leased real estate portfolio — a move that could spell trouble for the already beleaguered workspace property market.

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No mercy: In a bold move to further reduce its leased real estate portfolio, the California state government has announced plans to chop off an additional 1.16 MSF (132 leases) of office space, dealing yet another blow to the already struggling office market. The Department of General Services (DGS) has already earmarked 767,000 SF for reduction, but clearly, they are not satisfied with merely being one of the largest office users in the state.

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Saving the big bucks: The government is determined to save $35M per year by cutting back office space, in response to the growing trend of remote work. This may sound like a small change for the state with the world’s fifth-largest economy, but hey, every penny counts! The DGS manages a whopping 36.5 MSF for state programs, with 13.2 MSF in 59 state-owned office buildings.

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Office spaces still in demand: Despite reducing office space, the DGS and California’s government are still committed to utilizing office space for conducting core business functions. After all, modern office spaces are essential for the efficient functioning of the state government. The government is even investing in its construction and renovation. Consolidation efforts will continue, but modern office spaces will be a priority.

➥ THE TAKEAWAY

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Zoom out: It’s not just California that is facing decreased demand for office space. The pandemic has hit the entire US office market hard, with owners of less desirable buildings feeling the pinch. Cushman & Wakefield’s report “Obsolescence Equals Opportunity” predicts that office vacancy rates will be 55% higher by 2030 than they were before the pandemic. This means that around a quarter of all office spaces in the US will require a complete transformation.

📰 NEWS

Over the Weekend

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💰 Jeffrey Soffer buys Story nightclub building for $23M. Soffer co-owns the nightclub with David Grutman, and the purchase comes amid a lawsuit by Amnesia International, the ownership entity for Story. READ MORE

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🛒 Publix increases capital budget to $2.3B for 2023. The grocer reported $54.5B in sales during fiscal 2022, a 13.6% increase over 2021. The spending will fuel growth plans and investment in existing stores and operations. READ MORE

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🏢 Salesforce is further reducing its RE footprint. The company has put 125,000 SF of office space at Salesforce Tower in San Francisco on the sublease market with the help of CBRE. This brings the total space the company wants to offload in the city to over 1 MSF. READ MORE

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🔥 Hot inflation data raises US borrowing costs to a 15-year high, sparking debate on how much more interest rates must increase to curb rising consumer prices. Two-year Treasury note yield reaches 4.94%, 10-year and 30-year Treasury yields exceed 4%. READ MORE

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🗽 The Flatiron Building in NYC will be auctioned to settle a dispute among current owners (GFP Real Estate, Newmark, Sorgente Group, and ABS Real Estate Partners), who comprise 75% of the ownership. The landmarked building will be auctioned on March 22 by Mannion Auctions. READ MORE

✍️ SNIPPETS

Daily Picks

EV plant: Scout Motors Inc., an EV manufacturer from California, will set up its manufacturing operations in Blythewood, Richland County, with a potential $2B investment to create over 4,000 permanent jobs, setting new records for economic development in the county.
Buying Brickell: Menesse International acquires the last undeveloped site on Brickell Avenue for $6M, with plans to develop a high-end boutique condominium, expanding the firm’s presence in the South Florida market, and with more acquisitions to come.
Opportunities abound: A married couple with a $19M real estate portfolio consisting of 47 units discuss why the housing market presents lucrative opportunities for investors in 2023 and identify the top regions to invest in.
Slim pickens: T Boone Pickens’ Mesa Vista Ranch in Texas was sold for $60M less than its original listing price of $250M, after being on the market for five years without finding a buyer. The 65,000-acre estate has been struggling to attract buyers since 2017.
Misrepresented: Less than a year after securing a $329M loan to buy over 1,000 apartments in Los Angeles, Laguna Point Properties is now more than 30 days delinquent. However, the loan is not in default.
Cut its losses: Nordstrom is closing all 13 of its stores in Canada by late June and ceasing operations of its e-commerce platform due to profitability issues, becoming the latest US retailer to cut losses in the country. Some 2,500 employees will lose their jobs.

⏪ ICYMI

Last Week’s Highlights

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Will CRE Deal Flow Thaw in Spring? | CRE Daily

‘Good things come to those who wait’ isn’t exactly an investor mantra (perhaps it should be). But with more Fed clarity expected as winter thaws into spring,

https://newsletter.credaily.com/p/can-find-attractive-loans-right-now

Private Credit is Targeting Void Left by Banks | CRE Daily

Direct lenders, who are already significant participants in leveraged buyout financing, perceive a remarkable opportunity to capture market share.

https://newsletter.credaily.com/p/big-banks-back-back-foot

Ready Capital Snaps Up Broadmark | CRE Daily

Ready Capital and Broadmark Realty Capital plan to merge and become the fourth-largest commercial mortgage REIT, worth $2.6B, before Q2 wraps.

https://newsletter.credaily.com/p/meet-new-4thlargest-commercial-mortgage-reit

Apartment Rents Cool Amid Huge Wave Of New Supply | CRE Daily

Apartment rents are likely to keep declining in the upcoming months due to the largest delivery of new apartments in almost 40 years.

https://newsletter.credaily.com/p/apartment-rents-drop

CRE Prices Experience Sharpest Annual Decline Since 2010 | CRE Daily

Commercial property prices in January fell at the fastest annual rate since the Global Financial Crisis, per a new MSCI report.

https://newsletter.credaily.com/p/cre-prices-experience-sharpest-annual-decline-since-2010

📈 Chart of the Day

CRE Analyst

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To gauge the decline in transaction activity, one can examine brokerage revenues. Recent year-end results from major brokerages show a clear trend of decreased activity in leasing and capital markets.

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Leasing revenues fell by 14% and capital markets revenues by 48% in 2022. Executives predict a continuation of slow activity in the first half of 2023, with a potential rebound in late 2023. As a result, cost-cutting is expected to be a theme for the year.