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For the first time in more than a year, sales of commercial real estate in April fell, year over year.
The value of sales for the month fell 16 percent, year over year, to $39.4 billion, MSCI Real Assets reported, an abrupt reversal of March’s 57-percent annual gain.
Before April, sales values had risen for 13 consecutive months.
In some cases, buyers who had signed letters of intent to bid have canceled their plans, The Wall Street Journal reported.
The widening economic slowdown also is weighing on property sales, as is the U.S. Federal Reserve’s rising interest rate.
Innovo Property Group walked away from its agreement to pay $855 million for a Manhattan office tower after higher interest rates made it harder to secure a mortgage, according to people familiar, even though it meant the company surrendered its $35-million deposit.
Investors who bought properties using the Fed’s COVID-era cheap money “have been some of the first to fall out of the market,” the WSJ noted.
Those that remain in the market are finding bargains.
Apollo Global Management and Investor Newbound Holdings recently snapped up Hilton’s Times Square hotel for $85 million; the property changed hands in 2006 for $242.5 million.
After crashing at the onset of the COVID War as hotels and stores shut down, the commercial property market perked up in late 2020 as investors grabbed cheap properties, expecting the economy to bounce back.
Those sales buoyed the commercial property market against the still-languishing sale of office buildings, which continue to suffer from the ground shift to remote work, which we reported in “Mass Expiration of Office Leases Threatens Landlords” (22 Apr 2022) and other articles.
Sales of hotels, industrial spaces, and senior housing all sagged in April, the WSJ said.
Retail spaces continued to attract buyers as consumer spending continued strong and apartment buildings fetched premium prices as demand for flats remains at a fever pitch, allowing landlords to boost rents.
TRENDPOST: Our long-standing forecast when the COVID War began, is reality: office towers are becoming problem properties with few prospects in the new world of remote work. And, as it becomes more expensive to drive to work, fewer employees will be willing do to so without compensation for the extra cost to fill the tank.
TREND FORECAST: Although more people are returning to city centers to live, as we reported in “USA: Can’t Afford to Buy a Home, Can’t Pay the Rent” (15 Mar 2022), that will not be enough to fully restore the commercial ecosystem of restaurants, shops, and entertainment venues that grew up to serve a full complement of daily commuters.
As a result, downtown commercial centers in traditional office hubs such as New York City and San Francisco will not return to their pre-COVID size or vitality. We have detailed this trend in articles such as “Retail Chains Abandon Manhattan” (18 Aug 2020) and “Manhattan’s Commercial Real Estate Crash” (21 Sep 2021).
Landlords and investors have been contemplating turning empty office spaces into condos and apartments. However, a similar move to convert derelict hotels into residences has been snarled in regulations, which we detailed in “Plan to Turn New York’s Vacant Hotels Into Housing Not Working” (5 Apr 2022).
Denver has become another city attempting to turn a portion of the 40 percent of office spaces vacant downtown into apartments. However, retrofitting the buildings for airflow, sunlight, and noise control is proving to be prohibitively expensive in many cases.
Meanwhile, landlords will be squeezed and many without deep pockets will sell out at fire-sale prices or face foreclosure.
At the bottom of this spiral are municipal governments that depend on property taxes to support public services.
As buildings lose their value, tax revenues will shrink, reducing services and the quality of life in many cities, driving out even more residents, as we have long warned in articles such as “New York Office Vacancies Set Record” (13 Jul 2021) and “Return to Offices Postponed: Commercial Real Estate Bust?” (14 Sep 2021).