More Distressed Office Moves Are on the Way

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Good morning. Current economic conditions may lead to a significant uptick in distress for the office market in 2023. Years of unprecedented growth in warehouse and industrial space might finally be cooling. Meanwhile, Keystone Group is breaking ground on a massive $1B mixed-use project in Indianapolis.

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📊 Poll

When do you think the pace of financing and transactions will pick up?

Second quarter | Third quarter | Fourth quarter | Next year

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📖 Read Marcus & Millichap’s 2023 Retail National Investment Forecast for the latest US retail sector metrics, trends, analyses, and predictions.

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🎧 Listen to how our current supply impacts rents and how Twitter has changed the game on this episode of the FORT with Chris Powers.

ONGOING DISTRESS

Continued Distress and Decreased Demand Drives a Drop in US Office Sales and Prices

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The hits keep coming for the US office market as the sector grapples with declining demand and persisting distress. With pricier debt and a potential recession on the horizon, a new report from CommercialEdge shows office space in January traded for 25% less than last year.

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Nosediving, not thriving: According to a report from CommercialEdge, only $1.9B in office trades have been made so far this year at an average of $202 per SF. That’s a 25% decline from the $5.9B recorded last January. The tech industry, which signed the biggest office leases last year, has also been contracting.

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Winners and losers: Major metro areas like Manhattan and San Diego recorded zero sales of offices with at least 25 KSF in January. Meanwhile, Houston and Miami maintained dominance, enjoying $324M and $316M in sales. Boston saw only $56M in activity, but notched the highest average price per SF at $1,054. Average asking rents also grew $38.04 in January, a 1.1% YoY gain.

➥ THE TAKEAWAY

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What the future holds: According to CommercialEdge, expect distressed properties sold and converted into life sciences or multifamily, with many spaces redeveloped from the ground up. There’s still 123.6 MSF of office space under construction, with Boston, Manhattan, Dallas, Austin, and San Francisco accounting for more than a quarter of new supply.

WAREHOUSED

The Industrial Property Boom is Finally Running Its Course

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The pandemic triggered a surge in warehouse demand as e-commerce ramped up due to remote work and supply chain snarls. But the economic headwinds that had been propping up the industrial sector are finally dying down as the pandemic wanes.

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Losing leverage: Over the last three years, warehouse and industrial rents spiked, with places like SoCal seeing 70% annual rent growth. This year, a weaker economy is weighing the market down, and industrial owners are hitting an affordability wall. More spaces are up for sublease, and there’s reduced leasing activity across the board, according to analysts at Savills.

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The tables have turned: After years of landlords calling the shots, the balance of power is swinging back in favor of industrial tenants. As a result, landlords are becoming much more flexible with lease terms. That means rent declines and concessions, like a few months free or even lower lease renewals. Colliers expects slower e-commerce growth to limit rent growth to just 4–6% this year.

➥ THE TAKEAWAY

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Slowing down in places: High asking rents in hotbeds like SoCal have prompted industrial tenants to move to more affordable metros like Phoenix or Reno. This kind of movement implies a general slowdown, but also demonstrates that there’s still tenant interest—they’re just looking for better deals. It’s also worth remembering that the industrial sector enjoyed stupendous growth over the past three years, and this year’s decline may merely be a return to normalcy.

GOOOOOAL!

Keystone Group, Soccer Club JV For Landmark Indy Stadium

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While major metros like NYC and San Fran have experienced growing pains since the Fed’s rate hikes kicked in, Indianapolis is having its moment in the spotlight. Keystone Group and soccer club Indy Eleven have even teamed up to build a new mixed-use development.

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Time to play ball: Anchored by a 20K-seater multipurpose stadium, the $1B mixed-use project will offer all the amenities expected from a modern downtown strip. Breaking ground this May, the space will also feature 600 apartment units, 205 KSF of office space, 200 KSF of retail and restaurants, a hotel, and multiple public plazas. It’s a tall order, and it won’t come cheap.

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In it for Indy: Construction on this scale in the region is projected to create 1,000 jobs for the greater Indianapolis community. The stadium project could have a significant impact on the city’s quality of life, potentially attracting new residents and spurring further development. The co-developers have also tapped design firm Populous and hired AECOM Hunt as the construction manager.

➥ THE TAKEAWAY

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Keep the ball rolling: Indy is experiencing the kind of success usually reserved for bigger coastal cities. In 2022, the region saw the highest rent growth of any American metro as more residents flocked downtown, part of a recent trend of wealthier Americans moving to smaller, more affordable cities. As the CRE landscape continues to change, the JV is a bold bet on the continued growth of Indianapolis.

📰 Editors’ Picks

Industrial demand: Leading Charlotte-based developer Childress Klein and private equity real estate sponsor Altus Equity Group have teamed up for one of the largest historical spec build industrial projects within the Charleston MSA.
Preaching to the choir: Newmark (NWMRK) anticipates declining real estate sales this year. Their Q4 results were down 38% YoY, led by a 62% decline in property sales.
Blowing bubbles: As VC firms lose their minds over AI and ML all over again, history suggests that a new bubble could emerge despite interest rates being so high.
Staying positive: Data center REITs Equinix (EQIX) and Digital Realty (DLR) had strong Q4 results even as big cloud providers like AWS (AMZN) and Microsoft (MSFT) slow down their growth.
Dueling developers: Florida condo owners and developers are duking it out over attempts to buy, demolish, and redevelop communities despite the state’s “condo termination” law.
Brace for impact: Fannie Mae (FNMA) is facing losses on multifamily loans this year. They increased loan loss reserves to $11.4B (compared to $5.7B in 2021), causing net income to fall to $12.9B last year.
Multi-talented: Wexford Real Estate exec Matija Pecotić had a temporary change in job description this weekend as the part-time tennis pro joined the 2023 Delray Beach Open.
Grass is always greener: A new report from Henley & Partners revealed that the wealthiest Americans are flocking to smaller cities rather than major metros. Notable destinations include Austin, TX, and West Palm Beach, FL.
Diversification is key: As present economic conditions leave investors with cold feet, Kiplinger encourages investors to consider CRE as an opportunity to diversify.
Looking familiar: Berkadia found that investment sales advisors and mortgage bankers expect multifamily fundamentals to stay strong and return to pre-pandemic levels.
Tastemaker: Tampa, FL has finally found its footing as a “cool” city, spurred by a development spree that brought conventions, world-class amenities, restaurants, and nightlife to its downtown.
Lap of luxury: Hyatt (H) posted healthy Q4 profits, offering more affordable prices for travelers. However, the hotel chain is doubling down on luxury properties even as competitors focus on budget offerings.
Not sticking around: Faced with too-high borrowing costs, single-family home investors have begun to flee the market. According to Redfin (RDFN), investors purchased 17.8% of all homes sold in their metro areas, compared to 19.4% last year.

📰 Deals & Dealmakers

Empire state of mind: The Empire State Building has signed leases for over 100 KSF of office space while tourists have begun to flock en masse to the historic NYC landmark.
Marriott in the middle: Developer Sam Chang has secured $35M in financing from State Bank Texas for the Marriott SpringHill project at 223 West 46th Street in Times Square.
Breaking new ground: Agilent Technologies Inc. (A) is investing $725M in its Denver-area campus to expand it by 200 KSF and increase capacity by 100%.
Sale on the shore: AT&T (T) will sell an old telecom site in Miami’s North Beach Town Center district to developer 6940 North Beach LLC. The site plan calls for a 10-story, 134.57 KSF mixed-use space.
Healthy assets: Newmark has brokered a $26.4M deal between Acadia Realty Trust and Benderson Development for the sale of a 54.23 KSF retail asset that includes a Whole Foods and Walgreens in Cambridge, MA.
Back in action: After filing for chapter 11 bankruptcy in 2020, Century 21 is making a comeback and will be reopening its flagship NYC store at 22 Cortlandt Street this spring. Only four out of six floors will be operational.

💼 Talent Collective

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In partnership with Bullpen

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