Home News Companies still have way too much office space, and they can’t sell it

Companies still have way too much office space, and they can’t sell it

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Collin Madden, founding partner of GEM Real Estate Partners, walks through the vacant office space in the building he owns for sale in the South Lake Union neighborhood of Seattle, Washington May 14, 2021.

Karen Ducey | Reuters

A few things we know about corporate real estate: Cost reduction focus But it’s also probably the last asset you want to sell right now in a soft market.

how soft? 232 million square feet of surplus commercial property is currently being subleased, according to Elizabeth Ptacek, senior director of market analysis at her CoStar, a commercial real estate information and analytics firm. To put these numbers in perspective, Amazon’s HQ2 is 8 million square feet. Moreover, 232 million square feet is double the pre-pandemic surplus level.

The CFO says there is real estate to sell as the company moves to hybrid work and a corporate hub model that uses less satellite offices. And now it’s not for sale. Ptacek says it’s the right decision.

The only property owners selling today are either desperate for cash or sitting on trophy assets. And few of those trophy assets. Well-rented clinics and laboratories with tenants with high credit scores and stable income streams still get a lot of investor attention, according to CoStar, but that’s about it. Companies that have abandoned satellite offices that were the backbone of their in-house staff said Ptacek said, “No one will buy them unless they get a big discount.”

Between the shock to commercial real estate from the work-from-home trend, the ensuing rise in interest rates and the prospect of another recession, Ptacek said commercial property owners should expect a further deterioration. However, now is not the time to sell. CoStar expects subleasing surpluses to continue as companies worry they will need to lay off workers and make other cuts ahead of the recession, with subleasing square footage showing a 30% increase to pre-pandemic levels. She said she would never go back to level.

The slowdown in investment activity, previously described by Ptacek as a gradual slowdown, turned into a “dramatic slowdown” after a pipeline of deals signed in the second and third quarters before interest rates began to rise. will be “The bigger impact is ahead of us, with rising borrowing costs having an impact and in many cases weeding out leveraged investors,” she said.

It’s a bad situation, but for owners of corporate real estate, if the cost of real estate debt is low and their balance sheets are strong, they’re sitting in real estate, she said.

Companies are still in the early stages of experimenting with hybrid work, and economic uncertainty, as well as uncertainty about how office occupancy will change over time, is driving companies to consider asset sales. You will be tempted to delay pulling the trigger. Leases that were due for renewal can be easily called (terminated) and the business can sign a new lease whenever it needs to make that call (perhaps at a better rate). .

“Large companies can be completely remote one day, sign a big lease the next day, tell everyone, ‘Go back to the office. “Everything is very fluid,” Ptacek said.

Uncertainty is the ultimate deal killer, she said. No one wants to buy a property at the risk of no demand unless the rent is cut by 50%. At the moment, it is difficult for both buyers and sellers to reach what is defined as a “reasonable price,” she said.

Businesses should anticipate that a year from now the situation could be even worse.

“It’s probably a fair assumption that this isn’t going to get much better in a year in terms of demand,” she said.

The wave of sluggish sales that usually occurs during recessions has yet to hit and is on schedule, as they tend to lag the recession’s onset by several years. Ptacek says that after 2008, the peak of the wave of distressed asset sales he said did not occur until 2010/2011.

“If the loan comes due and you have problems, it’s either refinancing or selling,” she said. And with more borrowers unable to refinance, the wave of sluggish sales will continue. “There is likely to be a certain amount of pain that weighs on the pricing, so the owner could be in a much worse environment in a few years. But today it is not a good environment,” she said. . she said.

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