February 2024

North America

·New York and London office vacancy gap is largest in the last two decades. New York has lost more than 40 million sq ft of office demand over the last four years with job redundancies in the tech sector fuelling office shedding. Manhattan’s high crime rates with New Yorkers’ relatively larger suburban houses and long commutes into the Big Apple has made back-to-the-office a lot harder. Vacancy rates in the two cities were identical pre- GFC in 2008. Vacancy rates vary by submarket with traditional Manhattan submarkets (Chelsea and SoHo) at 15% vacancy whilst Murray Hill and the Financial District vacancy rates at 20%. By comparison, West End London office vacancy rates sit below 5% and 10% in parts of the City. Looking ahead, vacancy in New York is forecasted to rise above 18% by 2026. (Source: CoStar, Knight Frank, 2024)

New York v. London Office Vacancy Rate (%)

·Some experts say US office market have more to fall. There is in excess of $2.7b of outstanding office loans with delinquency rates at 7.3% at year-end 2023 compared to 1.4% the year before.  Most commercial brokerages saw more than 50% declines in revenue last year. However, experts believe the office market will adapt naturally as later stages of recovery and further expansion inevitably kicks in. Many investors have remained on the sidelines as office valuations and deals have fallen approximately 60% YoY as of Q4 2023. Delinquency rates for Fitch-rated office loans sold on the CMBS market is forecasted to increase from 3.3% in Q4 2023 to 8.1% in Q4 2024 and subsequently just under 10.0% in 2025 as refinancing becomes more challenging. (Source: CoStar, CBRE, 2024)

·Data centre demand in North America is recording new highs fuelled by AI growth. Strongest leasing demand ever recorded in the industry with companies leasing or pre-leasing 4.3GW of power capacity within data centres in 2023. Expanded bandwidth through higher density racks has become the mainstream solution. Data centre racks are loading 5 times the power. Cost of data centre development has increased further due to inflationary costs; however, the largest obstacle for developers is finding sites with access to such power throughout North America with developers expanding beyond traditional markets. (Source: CoStar, CBRE, 2024)

·RXR, one of New York’s largest office landlords, partners with Ares Management to buy distressed New York office buildings. RXR, one of New York’s largest property developers, has launched a new $1bn fund with financial backing of Ares Management, $49bn AUM alternative investment manager, to invest in New York City’s distressed office buildings. Better clarity on where forward-looking interest rates lie and the thawing of the paralysis/ lack of transaction volume in the office market is becoming evident according to the partners. They will be selectively targeting office buildings around the city which are still appealing but would require fresh capital injection to recreate sought after office products or to streamline the capital structure. They believe the best opportunities lie in the upper-middle class of the Class A market, which are high quality properties trading at historically low prices. (Source: Financial Times, 2024)

·Some progress made in WeWork negotiations to recover from bankruptcy protection. WeWork has only reached new agreements for 3% of its nearly 300 US locations in bankruptcy proceedings. The company seeks to reject nearly 90 leases but has withdrawn rent payments for some locations, raising concerns among landlords. WeWork is aiming to reduce its future rent obligations and has renegotiated leases with over 80 landlords globally, saving over $1.5 billion. The company faces a tight deadline (March 4th) to decide on assuming or rejecting leases and could face liquidation if it fails to comply with bankruptcy code. WeWork aims to stay in most locations but at lower rent rates and believes in its ability to emerge as a profitable business. (Source: Bankruptcy Court for the District of New Jersey, CoStar, 2024)

Europe

·APAC investors with c. £14bn of capital targeting London offices. Agencies are anticipating a significant surge in Asian investment and global private family and Ultra High Net Worth capital into the London property market in 2024 with Singapore leading the way. This follows a wait-and-see approach from Asian investors since the pandemic, but stabilising pricing and financing rates are enticing them back. Colliers expects strong activity from Singapore, Hong Kong, Japan, and Malaysia, with Chinese investment likely coming primarily from private entities. South Korean investors are expected to be net sellers in 2024. Colliers predicts a busy spring with deal announcements and expects significant Asian investor presence at upcoming industry events. (Source: CoStar, Colliers, 2024)

APAC Capital Activity Map

·Despite London headlines suggesting a decline in office space demand, a study reveals tenants actually took only 0.6% less space on average when relocating. However, large downsizing moves by companies like HSBC skewed the data, as they significantly reduced their space needs. When these large-scale downsizings and uncompleted deals are factored in, the actual space reduction reaches a significant 33%. The study focused on larger, high-profile moves and excluded smaller cost-cutting relocations, potentially underestimating the full picture. Despite work-from-home trends, the analysis suggests a strong demand for quality, central workspaces as companies adapt to hybrid work models. (Source: Colliers, React, 2024)

Space taken by occupiers in 2023 compared to their previous office requirement by industry sector (excl. HSBC relocation)

·Patrizia hit by €4.1m loss in 2023, materially down from €7.2m profit in 2022. Patrizia’s €2.6bn acquisitions in 2023 was not sufficient enough to offset €2.7bn in asset devaluation, equating to a 3.2% decline in AUM to €57.3bn. 45% of the acquisitions in 2023 was from its infrastructure investments (non-real estate), which now comprises 16% of total AUM. CFO Christoph Glaser expects AUM to shrink further to €54bn with continued devaluation pressure especially in office properties. Patrizia has gone through a 10% reduction in headcount across its offices with EBITDA down by 31.5% compared to 2022. After a disappointing fundraising, which fell from €2bn to €500m, Patrizia has started making new acquisitions temporarily on its own balance sheet including seed investments for its new value add fund, residential fund, and retail fund (warehousing office properties).  (Source: React, 2024)

·European hoteliers face challenges due to a changing market and guest expectations. Guests are more discerning than ever and hoteliers need to anticipate and cater to changing expectations, offering experiences, not just rooms. Inflation and potential recessionary threats (UK has recently entered a technical recession) are squeezing profit margins. Operational efficiency and adjusting pricing strategically is a solution. Technology can streamline operations, improve guest experiences through features like contactless check-in and personalise offerings; however, human touch remains essential as guests still value personalised service. Europe is currently grappling with significant labour shortage and hotels need to invest in employee culture, offer competitive compensation and highlight career opportunities. (Source: Wyndham Hotels & Resorts, BWH Hotels, CoStar, 2024)

·The non-bank lending market offers various options for borrowers, ranging from low-risk to higher-risk financing options. With falling interest rates, the potential for increased borrowing and investment activity is high. New lenders are entering the market, which will bring more competition and potentially impact pricing. Non-bank lenders are underwriting larger loan quantum, providing much needed liquidity for larger real estate assets. Alternative lenders continue to remain supportive of creative coverage metrics even at sub 1.0x interest coverage ratios as long as structural protections are in place. (Source: Knight Frank, 2024)

Loan Margins by Asset Class (UK)