Home News Office REITs Massacred as the Future these Office Markets Were Built for Got Cancelled by Working-from-Home

Office REITs Massacred as the Future these Office Markets Were Built for Got Cancelled by Working-from-Home

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“We expect more distress from some owners as loan defaults and asset abandonments are likely to increase in the future.”

To wolf richter for wolf street.

Since March 2020, the largest office REITs (listed landlords specializing in office properties) have been massacred in the stock market after previously struggling. Some of them hit all-time highs in 1998, 2000 or 2007, but are down 65% and 75% from those highs. Some of it goes back to the 1990s or his 1980s beginnings.

But the problem for the office market in 2020 and beyond is the biggest oversupply of offices ever since work-from-home was introduced on a large scale, with a record amount of vacant office space hitting the rental market. These REITs were the latest hits because

Interestingly, they plummeted during the March 2020 crash, but then recovered halfway back to their February 2020 levels, but this year they let go again in a very systematic way and entered a new decade. has reached or is approaching the low of . We’ll talk about landlords with large offices in a minute.

These landlords are facing an office glut.

commercial real estate advisory Savills today released the first batch of its third quarter office market report covering 12 major US markets. Houston tops the list with the largest share of vacant office space in the market, with a vacancy rate of 30.7%. San Francisco is ahead of him with 28.9% and he’s second.

The big problem is subleasing space. This is a space that businesses still pay rent to landlords for, but they don’t occupy it and are instead trying to find tenants to sublease to cover the cost of the space. companies are willing to price their subleased space because they don’t need to make a profit on this office space, but they just want to lower the cost of maintaining it until the lease expires. Subleasing space puts downward pressure on effective rents even though landlords are drawing the line.

houston The oil bust that began wreaking havoc in 2015 and the subsequent pandemic and shift to working from home has long been the hardest hit of the large office market. The construction boom that began during the oil boom continued to bring the newest and greatest office towers to market at the worst of times, along with projects that were planned years ago. These glitzy office towers sparked a flight to quality, with businesses leaving old bargains when their leases expired.

Here is the fate of an old Class A office tower built in the 1980s.After a tenant moved into his one of the new luxury towers: – then sold those towers at a foreclosure sale at huge losses of 82% and 88% (this Earlier this year we analyzed here).

It’s the old towers that get caught up in the existential problems, not the newest and greatest. But even the owners of the newest and greatest buildings have to deal with excess and can’t get the rent to make those towers work.And in tech sectors such as San Francisco, office REIT Boston Properties Even the newest and greatest towers, such as our own Salesforce Tower, have very high vacancy rates. Technology is moving away from the latest and greatest, and no one is behind it.

But in Houston, the worst may have finally ended. The occupancy rate has fallen to his 30.7%, which is even worse in the US, down from his 31.1% a year ago. However, available subleased space decreased and then increased again to 7.7 million square feet (MSF).

Leasing activity surged to 3.8 MSF, broadly in line with pre-pandemic activity. However, many of these deals are downsizing moves by energy companies moving from larger spaces in older buildings to smaller spaces in newer buildings, including the consolidation of offices spread across multiple buildings into one. Some were merged. And the current (bigger) bargains of these old buildings hit the market, adding pain and increasing availability. This is happening everywhere.

San Francisco, Through 2019, the hottest office market in the US is on the heels of Houston. The occupancy rate rose from 26.2% a year ago to 28.9%, an all-time high. In Q3 2019 Good Times, availability was 7.1%. From a blistering shortage of offices to the worst office oversupply in three years, tech companies have realized they don’t need the empty office space they’ve taken up for the future. Because that future will not come. Canceled due to the shift to working from home.

Subleased space plummeted to a still-huge 7.7 MSF. Leasing activity fell to his 1.0 MSF, the lowest since lockdown and less than half of the last three third-quarter activity before the pandemic.

Asking rents peaked in 2019 and have been on a downward trend since then. Overall average asking rent fell to $71.25 per square foot (psf) per year in the third quarter.

“We expect average asking and effective rents to continue to come under downward pressure as landlords aggressively contest for occupancy amid weak demand,” Savills said in a San Francisco report. rice field.

“The leasing retreat in the tech sector this year has added another headwind to the struggling office market recovery as many office workers continue to work remotely,” said Savills. “As a result, from the end of the year to 2023, he expects record high availability offices to continue to grow.”

New office towers added one after another.

The table below shows the 12 office markets for which Savills released its third quarter office report today, ranked by vacancy rate.

The two columns on the right show the total size of the office market in millions of square feet in Q3 2021 and Q3 2022.

Bold columns indicate the net amount of office space added since Q3 2021 in millions of square feet. A total of 19.3 million square feet of net new office space was added over the year in these 12 markets.

Seattle/Puget Sound (5.2 MSF), Boston (3.3 MSF) and San Francisco (2.2 MSF) added the most office space in the past year. This will continue for years until the office project is completed. But Houston, a market more than twice as big as San Francisco’s, added only 500,000 square feet as the building boom came full circle.

office space, MSF
Utilization rate YoY increase Q3 2021 total Q3 2022 Total
houston 30.7% 0.5 192.6 193.1
San Francisco 28.9% 2.2 83.3 85.5
Atlanta 25.8% 0.6 174.1 174.7
Los Angeles 25.4% 1.7 219.4 221.1
downtown chicago 24.5% 1.3 148.1 149.4
Philadelphia 21.9% 1.0 132.7 133.7
orange county 21.9% 0.1 85.7 85.8
washington dc 21.5% 0.0 122.6 122.6
silicon valley 20.8% 1.4 85.6 87.0
Seattle/Puget Sound 20.5% 5.2 114.5 119.7
manhattan 18.0% 2.0 467.6 469.6
boston 16.4% 3.3 258.3 261.6
Total office space added in 12 months 19.3

in downtown Chicago, Occupancy rate jumped from 22.4% a year ago to 24.5%,

in Los Angeles, Availability rose to a record 25.4%. Subleased space also jumped to 9.6 MSF from 8.2 MSF a year ago. Netflix and PayPal are some of the vacant office spaces in the subleasing market.

in Seattle/Puget Sound, the utilization rate rose to 20.3%, the highest in the data. Class A availability jumped to a record 20.5%. Sublease space increased to 5.7 MSF.

of silicon valleyBytedance, the parent company of TikTok, subleased 658,000 square feet from Yahoo. Bytedance’s transaction removed 658,000 square feet, reducing available sublease space to 4.5 MSF. Leasing activity in the third quarter rose to 1.7 MSF from 0.9 MSF a year ago, driven by his Bytedance deal of 658,000 square feet.

in Washington DC, the availability rate rose to 21.5% and the subleased space jumped to 3.4 MSF. Leasing activity fell to just 1.1 MSF in the third quarter, the lowest in years, lower than during lockdown, and about half the five-year average activity.

“Heavy concession packages show landlords are being forced to do more to track down potential tenants and retain existing tenants,” Savills said in a Washington, D.C. office report. says. Total 282 psf in reductions and concessions.

“We expect more pain from some owners as office market fundamentals remain weak and more loan defaults and asset abandonments are likely going forward,” Savills said. rice field.

Stocks of office landlords plummeted.

Shares of the five largest office REITs by market capitalization have all fallen sharply from their recent highs, and some have fallen significantly from all-time highs. Many investors buy his REITs for yield, but taking 50% or 70% capital losses to get 5% yield is not a good idea.

boston properties [BXP], The largest of them reached a record high in February 2020 before plummeting in March 2020. In the era of mega-quantitative easing that followed, we regained much of what we lost in March 2020. The Fed’s interest rate hikes began to work their magic, and stocks began to plummet again.

Today, despite modest gains in recent days, the stock is down 48.7% from its February 2020 high, just above its March 2020 low and just short of breaking a 12-year low. .And they’re back where they first were in his 2005 (via data Y-chart):

Kilroy Realtycorp [KRC] It closed today at $43.37, down 50.9% from its February 2020 high (which was about the same level as its previous high in February 2007). Most of that plunge occurred after April 2022. The stock is now back to where it was in 2005 (data from YCharts).

Bornado Realty Trust [VNO] After hitting an all-time high in February 2007, it plummeted during the financial crisis and hit a new all-time high in February 2015. This graph starts here. Since then, the stock has fallen 74%. And since its most recent low in January 2020, the stock has plummeted 66%.

These erroneous stocks are back where they were originally in 1997 (data from YCharts).

cousin property [CUZ] Soared to all-time highs during the dotcom bubble, then plummeted, dipped below highs in 2004, fell again in 2007, and then collapsed. As of today’s close, the stock has plunged 81% from his August 2000 all-time high. It has plunged 45.5% from its February 2020 low.

Stock prices are now back to 1986 levels. But if you bought it then and were able to collect the yield since then, at least you got the dividend yield, so you’re in pretty good shape. If you buy in most of the period after that, the dividend yield is much lower and the capital losses are high, which is a bad deal (data by YCharts).

Highwoods Property The stock has plunged 48.6% since February 2020, most of it since April 2022, with a large trough in between, reaching $26.41 last week, its lowest since then. 2011. Today they closed at his $26.98. These shares are now back where they were originally in 1995 (data from YCharts).

Smaller Office REIT Equity Commonwealth [EQC] is down 31% from February 2020 and down 65% from its all-time high in February 1998. SL Green Realty Corp [OFC] It has fallen 60% since February 2020 and is down 75% from its all-time high in 2007. These office REITs were once one of the hottest stock trends, but they weren’t all that big of a deal after all. Working from home and rising interest rates.

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