March 2024

North America

·Silicon Valley City office tower trades at 77% discount. Clear signs of the Silicon Valley city’s struggle to regain its footing post pandemic. Entity funded by Shoe Palace CEO George Mersho paid $34.2m ($105 psf) for a two-building office property, Market Square Tower, in San Jose, California. This is a 77% discount from its previous price tag of $141.3m for the 325,000 sq ft office tower, which is currently c. 26% vacant and was last renovated in 2020. Downtown San Jose office vacancy rate is currently estimated at 26%. Google has returned around 2.7 million sq ft of previously leased space to the city’s market as it completes its owner occupied office scheme. This follows the sale of 303 Almaden, 163,000 sq ft office property, which sold at a 70% discount to its 2017 traded price. (Source: CoStar, 2024)

·Small US industrial properties are one of the best performers. Since the pandemic, smaller industrial properties have maintained resilient occupancy rates with rental growth evident in the sector. Big box distribution centres are now facing large headwinds as new development started during the pandemic reach completion In large numbers. However, supply for smaller industrial properties have remained low as securing land and entitlements near major cities have proved difficult or unfeasible for developers. Nashville, Tennessee, Jacksonville, Tampa and Orlando are driving the sector preference towards small industrial with the majority of tenants being businesses that cater growing local housing stocks such as HVAC contractors, plumbers and electricians. Other target markets include critical port areas, battery belt (EV manufacturing regions) and distribution infrastructure/ cargo airport areas. (Source: CoStar, 2024)

Tightest 20 US Industrial Markets

·Oxford Properties, major Ontario pension fund, takes 7.2% loss in real estate investments. OMERS, which manages CA $128.6b of investments on behalf of Ontario municipal employees recorded a CA $1.5b loss in its real estate portfolio through its subsidiary, Oxford Properties Group. Decline in office valuations despite low vacancy rates were considered the main reason for the loss whilst favourable leasing momentum in the industrial and retail sector partially offset this. This is in-line with other Canadian pension funds posting negative results for its real estate activities as CDPQ (Quebec’s public pension fund) posted a 6.2% loss for the year. Canadian pension funds hold a higher proportion of their assets in real estate (10-15%) compared to other global pension funds. (Source: OMERS, CoStar, 2024)

·Largest Manhattan office to go through residential conversion. 25 Water Street, a 22-storey property in the Financial District of Manhattan and previous headquarters of The Daily News and JP Morgan, will be the largest office-to-residential conversion in Manhattan to date. Project involves construction of ten stories above the former 22-storey office building and renovation of 1.1 million sq ft of interiors into 1,300 rental units. More than 55,300 apartments are currently being converted nationwide with office-to-residential conversion pipeline quadrupling in the last 4 years. The trend is most prominent in Washington DC, New York and Dallas with New York seeing the largest uptick in residential conversion last year. (Source: CoStar, Business Insider, The Real Deal, Rent Café, Yardi Matrix, 2024)

US Office-to-Residential Conversion Pipeline

US Planned Office-to-Residential Conversion by Metro Area

·Retail giant Macy’s plans to close 150 stores across the US, sending waves through the US retail industry. Macy’s plans to close 150 stores as the business is up for sale through a buyout. There is no guarantee that a sale will take place but the loss of such a major department store will impact footfall in retail malls, sales in neighbouring retail tenants and wider revenue streams for rental landlords. All-cash buyout proposals to buyout Macy’s at a valuation of $6.6b is being reviewed. Macy’s anchors more than 80 malls (100m sq ft) with more than $24b in CMBS loans having Macy’s anchored malls as collateral. $3.6b of this debt is already in special servicing with most of this debt tied to retail landlords Brookfield, Simon Property Group and Unibail-Rodamco-Westfield. (Source: CoStar, Morningstar DBRS, 2024)

Europe

·Occupiers show strong preference for office space close to main London transport hubs. Office space near London’s main transport nodes have seen vacancy rates steadily failing as shorter commute times for employees become ever more important. Offices vacancy within a 0.2mile radius of major transport nodes including Cannon Street, Charing Cross, Euston, King’s Cross, Liverpool Street, London Bridge, Paddington, Victoria and Waterloo have seen steady decreases. The spread between vacancy rates in these micro-locations versus the Central London average is the highest in 15 years. Reducing commute time to lure staff back to the office can be seen as a driving force behind resilient rents and absorption in these submarkets with many new office development schemes within these areas already seeing strong leasing momentum including successful pre-lets at Paddington Square, 201 Bishopsgate and 2 Finsbury Avenue. (Source: CoStar, 2024)

Vacancy Rates in London Offices Within 0.2 Mile Radius From Mainline Train Station

·Modular housebuilding businesses continue the string of collapses. Beattie Passive, family-run UK modular housebuilding business specialising in energy-efficient homes, has filed a notice to appoint administrators. Despite strong underlying market fundamentals around the need for more homes and speed of construction, delays in larger housebuilders’ projects, volatile macroenvironment, unreliable pipeline and issues with the planning system have further exacerbated modular housebuilders. Beattie Passive follows Lighthouse (Sheffield-based specialist), Modulous (modular housebuilding start-up), L&G’s modular arm, Ilke Homes have all either appointed administrators, placed into voluntary liquidation or are winding down. Even Goldman Sachs-backed TopHat has announced its cost-saving programme, which included cutting 70 jobs. (Source: React, 2024)

·Flexible offices provider, IWG, posts highest revenue levels in its 35-year history. IWG, the flexible offices group behind Regus and Spaces, has had revenue increase by more than 10% to £3.3b Year on Year. EBITDA has increased by 34% to £403m driven mainly by higher revenue and strategic cost cuts, in a clear bifurcation from its competitor WeWork. IWG has focused on a differentiated business model where it focuses more on partnerships or managed agreements where it manages spaces on behalf of occupiers or landlords rather than taking on full lease liabilities. Mark Dixon, CEO of IWG, claims IWG benefits from the uptake in the hybrid working model as it becomes the preferred way of working for many occupiers. The momentum has been focused on companies seeking to reduce concentration in large sites in city hubs whilst choosing more top-quality office accommodation in suburbs and towns closer to where employees reside. They expect a tenfold increase in footprint across France in the coming years. (Source: IWG, CoStar, 2024)

·UK open-ended property funds continue to be hit by outflows. Since October 2018, when fund outflows materially ramped up more than £7.5b of cumulative fund outflow has been recorded across UK property funds. 62 out of 65 months since has been net fund outflows, excluding temporary periods where funds were gated from redemptions during the pandemic. Open ended funds have turned unpopular for many investors and fund managers with notable institutions putting an end to their open-end property funds due to the liquidity mismatch including M&G Investment’s Property Portfolio and Nuveen’s Janus Henderson UK Property PAIF. (Source: Calastone, CoStar, 2024)

UK Property Fund Net Flow

·German Non-Performing Loans (NPLs) jump 50%. Volume of NPLs in the German commercial real estate lending market has significantly increased by more than 50% within the last year, according the European Banking Authority. NPL volume as of Sep 2023 stands at €9.7b, from €6.2b in Sep 2022. Office loans with floating interest rates with imminent maturity dates have been hit with the steepest discounts to par value with PwC studies showing half of office space leased in Germany is not occupied. However, the market is not expecting the same wave of distressed loan sales seen in the GFC of 2008 as LTVs are considerably lower and the first-ranking nature of most loans provide some level of protection mechanism. (Source: European Banking Authority, PwC, CoStar, 2024)