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11 Midweek Must Reads for Real Estate Investors (July 26, 2023)

Rising interest rates and office property losses led to falling returns on their real estate investments for pension funds over the past fiscal year, reported The Wall Street Journal. San Francisco is seeing rising demand for office space from AI-focused firms, according to Bloomberg. These are among the must reads from around the commercial real estate industry.

  1. CMBS Realized Losses Climb in June “CMBS transactions incurred approximately $41 million in realized losses during June via the workouts of distressed assets. CRED iQ identified 14 workouts classified as dispositions, liquidations, or discounted payoffs in June. Of the 14 workouts, five were resolved without a principal loss. Of the nine workouts resulting in losses, severities for the month of June ranged from 1 percent to 90 percent, based on outstanding balances at disposition.” (Commercial Observer)
  2. A Winning Bet for Pension Funds Goes Cold “The California Public Employees’ Retirement System, the nation’s largest pension fund, said last week that both private equity and so-called real assets such as real estate lost money during its latest fiscal year. The declines come as companies are under pressure from rising rates and losses on office properties are dragging down real-estate returns. ‘It’s been a tough 12 to 15 months’ for private equity and real estate, said Rebecca Sielman, principal and consulting actuary at pension consultant Milliman.” (The Wall Street Journal)
  3. Biggest Warehouse Space Renters? Brick-and-Mortar Retailers. “Million-sq.-ft. warehouse lease signings declined in the first half of this year after new construction ramped up in 2022, but national retail chains remained the most active renters. The average size of the top 100 industrial lease transactions in 2023 was 789,471 sq. ft.--well below last year’s 926,683 average, according to CBRE’s H1 industrial leasing report. The reason, said analysts at the global real estate services company, was that economic uncertainty led more and more occupiers to renew current leases rather than signing new ones.” (Chain Store Age)
  4. Americans Are Moving to At-Risk Climate Areas for Cheaper Housing “More Americans are moving toward the triple threats of fire, flood and heat than away from them, according to a report from real estate listings and research site Redfin. In the last two years, areas at risk of extreme weather events have seen net migration of 1.5 million people, amid larger migration trends fueled by the pandemic, remote work and runaway housing prices.” (Commercial Observer)
  5. San Francisco’s Office Demand Surges, Likely Thanks to AI Companies “The worst of San Francisco’s office pain is showing signs of letting up. In the second quarter, demand for offices in the California city grew about 10% from the previous three-month period, according to a report from commercial real estate technology firm VTS. The company tracks demand by measuring tenants touring office properties and looking for space in key US markets.” (Bloomberg)
  6. Amazon’s Return-to-Office Push Now Includes Moving Employees to its Largest Urban Hubs “Amazon is stepping up its campaign to emphasize in-person work once again. The tech giant informed employees working remotely or in cities with smaller offices that they may have to relocate to its largest corporate employment centers, The Wall Street Journal reports. Amazon's largest corporate offices — what it calls "main hubs" — include its headquarters in the Seattle area, its HQ2 campus in Arlington, Virginia, and locations in New York, San Francisco and Nashville.” (Bisnow)
  7. Tech Firms Once Powered New York’s Economy. Now They Are Scaling Back. “For much of the last two decades, including during the pandemic, technology companies were a bright spot in New York’s economy, adding thousands of high-paying jobs and expanding into millions of square feet of office space. Their growth buoyed tax revenue, set up New York as a credible rival to the San Francisco Bay Area — and provided jobs that helped the city absorb layoffs in other sectors during the pandemic and the 2008 financial crisis.” (The New York Times)
  8. Remote Employees Work Longer and Harder, Studies Show “Remote work became possible long before the pandemic. Many employers resisted it on a hunch that employees working from home might spend too much of their workday watching Oprah and shopping on eBay. Then came COVID-19, which launched a vast, forced experiment in telework. The results are in: As it turns out, most remote workers are not incurable slackers. Several studies suggest remote and hybrid employees actually work slightly longer hours than their office-bound colleagues, findings echoed by an avalanche of anecdotal evidence gathered from millions of teleworkers in the past three years.” (The Hill)
  9. Office-to-Warehouse Conversions Inflame Suburbia “Coming soon to a suburb near you: the battle over converting empty office parks to warehouses. Amid record high office vacancy and demand for workspace that may have weakened for good, proposals are popping up across the Chicago area to replace underused office buildings with distribution hubs for the booming online retail sector.” (Crain’s Chicago Business)
  10. In Remote Work Era, Hotel Operators Make a Bet on Longer Stays “As a road warrior for 35 years, Tanna Pearman has crisscrossed the country, staying at luxury hotels and roadside motels. Her least favorite are boxy convention hotels with cavernous lobbies that are easy to get lost in. But at the top of her list is extended-stay lodging. With guest rooms big enough for both working and unwinding, extended-stay hotels make it easy to combine business calls and sightseeing tours, said Ms. Pearman, a broker for Meetings Made Easy, a meeting planning company based in Las Vegas.” (The New York Times)
  11. Fulton Market Landlord Sues Upstart Developer Over Botched Sale “A property near the heart of the Fulton Market District is back on the market after an upstart developer's plan to buy it and build a $170 million, 17-story office building on the site fell through, according to a recent lawsuit over the scuttled deal. A venture that owns the property at 415-417 North Sangamon Street alleged in a lawsuit earlier this month that an entity led by Chicago commercial leasing broker Joy Jordan defaulted on a purchase agreement for the site by failing to complete the deal after multiple extensions of the closing date.” (Crain’s Chicago Business)
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