September 2024

North America

·Microsoft purchases major Silicon Valley office campus but some offices trading at c. 70% below peak purchase prices in the region. Microsoft has finalised a $330 million purchase of a Mountain View office campus, marking one of the largest real estate deals in Silicon Valley this year. The 33.3-acre property, which spans 634,000 square feet and can accommodate 3,000 employees. The move comes as many tech companies, including Amazon, Meta, and Google, have been downsizing their real estate portfolios, contributing to record-high office vacancies. Despite a post-pandemic leasing rebound, Silicon Valley's office market remains strained, with a 25% availability rate. Rents have fallen from above $80 per square foot pre-pandemic highs to $68 per square foot. Kennedy Wilson sold San Mateo Gateway Center, 222,200 sq ft office campus, for $37.5m (57% decrease from its original purchase price of $87.5m five years ago). San Francisco-based developer, TMG Partners, sells Quad at Tasman, 404,1000 sq ft office campus in Santa Clara, for $51m (66% below the $152m price tag it paid in 2020). (Source: Microsoft, SC Properties, South Bay Development, Santa Clara County Recorder’s Office, CoStar, 2024)

TMG Partners sells Quad at Tasman, seven-building office campus in Santa Clara, California, 66% below its initial purchase price in 2020

·San Francisco office vacancy rate hits a record 37% in Q3 2024- but it does appear to be levelling off. San Francisco’s office vacancy rate surpassed 37% in the third quarter of 2024, setting a new record. The vacancy rate increased by 0.3% due in large part to X’s departure from its 460,000-square-foot headquarters. However, office availability remained flat at 39.1%, suggesting a stabilising market despite continued office shedding. Net absorption remained negative, but new leases, particularly in high-quality spaces, helped offset the impact. The stagnant availability rate indicates the market may be nearing peak vacancy. Year-to-date leasing activity, driven by artificial intelligence tenants, is expected to make 2024 the strongest year since 2019. (Source: CBRE, San Francisco Business Times, CoStar, 2024)

·New York leads global legal office leasing in 2024 with London, Paris, and Brussels emerging as expansion destinations. New York dominated global legal office leasing in the first half of 2024, accounting for over 1.4 million square feet, or a third of the total 4.3 million square feet leased worldwide across the top 15 legal markets. U.S. cities together made up 69% of global legal leasing, driven by American firms' need for more space due to lower occupancy density. In Europe, Paris, Brussels, and London emerged as key "expansion hotspots," with 40% of firms in the EMEA region increasing office space in H1 2024. British law firms are looking to regional cities like Manchester for more competitively priced legal talent, mirroring trends seen in Australia. In China, domestic law firms are expanding, especially in Shanghai, despite international firms scaling down. Globally, legal firms are prioritizing talent and ESG goals, leading to demand for premium office spaces and innovative, tech-enabled designs. (Source: Savills, CoStar, 2024)

Top law firms and legal practices invest heavily into their office space

·Fortress and Hearn surrenders Chicago office tower. Hearn and Fortress Investment Group handed over the 26-story office tower at 2 N. LaSalle St. in Chicago's Loop to the lender after their $138 million loan matured in 2023. This voluntary surrender mirrors a national pattern of office property owners giving up assets due to low demand, rising interest rates, and difficulty refinancing. The lender, Torchlight Loan Services, now holds the building, which is 26% vacant, as older office spaces struggle to compete with new, high-end developments. The COVID-19 pandemic exacerbated these issues, pushing tenants to smaller, premium locations. The Chicago government is backing efforts to convert vacant offices into residential units, signalling potential future changes in the market. (Source: CoStar, 2024)

2 North La Salle Street, Chicago

·Private equity firms including Blue Owl Capital and Partners Group invest $7 billion in US data centers. Blue Owl Capital and Partners Group are leading $7 billion in investments to meet the rising demand for data centers fueled by cloud computing and AI. Blue Owl, Chirisa Technology Parks, and PowerHouse Data Centers have partnered to invest up to $5 billion in large-scale data centers operated by CoreWeave. Meanwhile, Partners Group, alongside global co-investors, has raised $1.9 billion to fund the development of data centers for its portfolio company, EdgeCore Digital Infrastructure. The data center market is experiencing record low vacancy rates and rising prices due to strong demand. Blue Owl's development includes a Virginia data center, while EdgeCore will expand its portfolio, including a new facility in Culpeper, Virginia. Investment in the sector is expected to grow as demand for high-density data centers increases. (Source: CoStar, 2024)

Partners Group’s portfolio company EdgeCore Digital Infrastructure

Europe

·Nuveen and Brookfield test the market with large ticket City office sales like 70 St Mary Axe and Citypoint Tower. Nuveen has listed its 70 St Mary Axe, 316,000 sq ft office skyscraper in London’s City, for £322.3 million, testing the market for large size office sales after Brookfield brought the £500 million Citypoint Tower to the market. This follows a slow year for transactions over £100 million, but market activity has recently surged. Cushman & Wakefield reports that buildings under offer in central London have more than doubled from £700 million in June to £1.54 billion by September. The West End has seen liquidity recover faster, but the City is catching up. 70 St Mary Axe is fully let to 13 tenants with WAULT of 8.8 years and sales proposal reflects a 6% NIY and capital value of £1,095 psf. Nuveen sees increasing core capital returning to London’s office market, suggesting growing investor confidence. This follows Royal London Asset Management’s purchase of 45 Holborn Viaduct in the City of London for £180m from CBRE GI marking the largest sale of an office in City of London this year so far. CBRE GI had previously bought 45 Holborn Viaduct for £250m in 2021. In the South Bank submarket, Almacantar is preparing the sale of 1 Southbank Place, 274,000 sq ft office let to Shell and IBM. Sources are quoting £360m-£400m as the price tag for 1 Southbank Place. (Source: Nuveen, Cushman & Wakefield, CoStar, Brookfield, Royal London, Green Street, 2024)

Nuveen brings 70 St Mary Axe to market for £322m (previously tried to sell building in 2022 for c. £400m)

·Starwood Capital returns to European offices with Dublin acquisition. Starwood Capital is set to re-enter the European office market by acquiring North Dock, a distressed office asset in Dublin, for around €85 million, from a JV between Oaktree and Ireland’s National Asset Management Agency (NAMA). This marks the private equity firm's first standalone office purchase in Europe in about five years. The 200,000 sq ft property, which is 51% leased and generates €5 million in annual rent, is being sold out of receivership after defaulting on a €120 million loan from Pimco. North Dock is Dublin's first NZEB building, and it boasts LEED Gold and BER A3 certifications. Starwood's move signals a broader resurgence of investor interest in European offices, following years of bearish sentiment post-pandemic. This acquisition aligns with other recent office investments by firms like Orion, Elliott Advisors, and L&G. (Source: Green Street, 2024)

North Docks, Dublin, sold around €85 million, well below the €120 million loan from Pimco

·Blackstone secures £2.6bn refinancing for iQ Student Accommodation. In one of the largest UK real estate deals of 2024, Blackstone refinanced its iQ Student Accommodation platform with a £2.6 billion loan. This new financing replaces a maturing loan and involves over 10 major lenders, including Citi, Bank of China, and Morgan Stanley, reflecting strong demand due to iQ’s solid operational performance. The refinancing supports Blackstone’s continued expansion of the iQ platform, which now includes 35,000 student beds and an additional 3,000 in development. Since acquiring iQ in 2020, Blackstone has invested £280 million in capital expenditures to grow the business, focusing heavily on high-demand student areas, particularly in Russell Group locations. This refinancing follows several other large-scale deals by Blackstone, including the recent £520 million refinancing of its coworking venture, Fora. The company continues to actively restructure debt across its European platforms, capitalizing on favourable market conditions. (Source: Green Street, 2024)

Altus House, Leeds (part of iQ Student Accomodation portfolio)

·Starwood agrees £673.5 million takeover of UK Balanced Commercial Property Trust. Starwood Capital, through its Starlight Bidco vehicle, has agreed to a £673.5 million cash offer for the Balanced Commercial Property Trust (BCPT). This offer represents an 8.7% discount to BCPT’s net asset value as of June 2024, with the deal supported by over 10 lenders. BCPT, managed by Columbia Threadneedle, owns a diverse portfolio valued at £1.01 billion, including major assets like St Christopher’s Place in London. The BCPT board unanimously supports the takeover, citing challenges from a difficult economic environment and high interest rates. Starwood plans to take the company private, believing it can unlock greater value for the portfolio. Columbia Threadneedle expressed disappointment, believing there is still substantial upside potential in BCPT's assets for long-term shareholders. (CoStar, 2024)

St Christopher’s Place, crown jewel in the BCPT portfolio

·Blackstone acquires 80% stake in Burstone’s €1 billion European logistics portfolio. Blackstone has purchased an 80% stake in Burstone's €1.022 billion European logistics portfolio, leaving Burstone with a 20% share. The deal, reflecting an 11.7% discount to the portfolio’s net asset value and a valuation yield of 5.6%, provides Burstone with €250 million in cash and reduces its debt, offering room for growth. Due to differing valuations on some properties, Burstone has agreed to cover up to €60 million in potential losses, securing €28 million in escrow and pledging the rest through shares in a special purpose vehicle. The portfolio consists of 32 properties spread across Germany, France, and the Netherlands, covering 1.2 million square meters. Blackstone continues to increase its exposure to the logistics sector, with 60% of its European real estate equity invested there. Burstone will manage the portfolio for an initial period, after which Blackstone may internalize the management. (Source: CoStar, 2024)