COMPANIES SHEDDING OFFICE SPACE AT RECORD RATE. As we had forecast when the COVID War began, the economic shutdown will hit commercial real estate hard.
Beginning with Silicon Valley last February, they were the first to tell their employees to work from home.
And what a boost it was for them, as the tech-heavy NASDAQ spiked nearly 44 percent last year while brick and mortar sectors crumbled.
Now companies are exiting their office spaces at a pace that exceeds during the dot-com bust and the Great Recession, many brokers have told the Financial Times.
Real estate analysts and professionals expect the exit to continue, if not accelerate, this year. Indeed, even after COVID Fears dissipate in the coming years, the major elements of the work-at-home trend will persist.
“You have a company every other week saying how successful work-from-home has been for them, and their plans to reduce… their total office space needs,” analyst Daniel Ismail at Green Street Advisors, told the FT.
He predicts occupancy rates will fall by as much as 15 percent. Again, we stick by our forecast that demand for conventional office space will be permanently reduced.
In San Francisco, available subleases have zoomed 148 percent in 2020 through September; in August, tech giant Pinterest wiggled out of a lease there for 490,000 square feet, paying $89.5 million to be excused from the contract.
As of November, New York City saw about 18 million square feet of office space available for sublease, surpassing 2009’s record of 16.3 million, according to Cushman & Wakefield. The amount in November 2019 was about 11 million.
SL Green, which recently opened its new, $3-billion One Vanderbilt tower in Manhattan, reports having to reduce asking rents by 10 to 15 percent and make unexpected concessions to prospective tenants, such as paying remodeling costs.
Nationally, rents could fall an average of 8 percent this year, according to real estate services firm CBRE.
Property owners hope workers will flock back to their cubicles once COVID vaccines have been adopted and the U.S. population reaches “herd immunity,” which requires 60 to 90 percent of Americans be vaccinated, according to various experts.
Surveys show, however, that more than 40 percent of U.S. residents are unlikely to volunteer to take the injections.
TRENDPOST: Workers began returning to office buildings this past summer as COVID Fears declined. But with the media and politicians ramping up second wave fears and governments imposing new lockdown rules, the trend has slowed.
Only 22.9 percent of office workers in ten major cities were in their offices during the week of 16 December, according to Kastle Systems, which tallies access card swipes. The highest rate was 27.4 percent, reached in October, the firm said.
Among the hardest to be hit in the coming years are co-working spaces such as WeWork, which was sinking in profits and occupancy before the COVID War began.
VULTURE FIRMS ON THE HUNT FOR AILING PROPERTIES. Real estate investment firms are stockpiling cash in anticipation of scooping up ailing office buildings and other commercial properties, the Wall Street Journal reports.
Florida-based Blumberg Capital Partners is raising $1 billion to buy “high-quality” office buildings in low-tax states such as Texas and Florida, where living costs are lower than in the Northeast, or along the West Coast.
The fund to snap up distressed properties is the company’s first in a decade, founder Philip Blumberg told the Journal.
“In this market, we expect discounts of up to 35 percent,” he said. “It will be the best buying opportunity since 2010.”
Blumberg’s strategy is to buy properties valued at more than $50 million but are priced below the cost of replacing them.
Kayne Anderson Real Estate, KKR & Co., and Terra Capital Partners are among other major players raising funds to go shopping. Brookfield Asset Management and Starwood Capital Group reportedly already have billions of dollars in cash and commitments for the purpose.
Sales have been few so far, but during the Great Recession, distressed properties were not unloaded in large numbers until a year into the crisis and peaked in 2010, according to Real Capital Analytics.
Signs indicate the same pattern will pertain now.
In November, 8.2 percent of commercial real estate loans that have been bundled into mortgage-backed securities were delinquent, compared to 2.3 percent a year before, data firm Trepp reported.
“Thirty percent of lodging loans are now in categories which have risk ratings indicating that banks expect some level of loss,” Trepp executive Russell Hughes said to the Journal.
TREND FORECAST: History is repeating itself. Just as what transpired during the Panic of ’08, when the Bigs bought out failing companies across the industrial/retail/real estate spectrum, so, too, with their buying up failing firms during the COVID War.
The result: The Bigs get bigger and the rich get richer as inequality spreads further across the globe.
It will not be a happy ending. The one, big message 2011’s Occupy Wall Street protests brought to light was income inequality: how the 1 percent owns so much and how the rest of civilization owns so little.
Our “OFF WITH THEIR HEADS 2.0” trend from December 2019, forecasting the global rise in anger directed at the 1 percent, was already spreading globally prior the 2020 COVID War.
The great wealth gap followed by the destruction of small businesses by politicians who launched the COVID War while allowing the Bigs to get bigger will be a key platform in the formation of new political parties across the globe. As the gap between the rich and poor widens, so, too, will the animosity between the “haves” and “have nots.”
Gated communities will increase in popularity, and more private security will be hired by the haves who will be gangland targets.
COMMERCIAL CONSTRUCTION INDUSTRY STILL SHRINKING. In November, public and private spending on nonresidential construction slid 0.6 percent from October’s level and 4.7 percent below the amount a year earlier.
Commercial construction marked a fifth consecutive month of shrinking spending, slipping 0.8 percent from October and falling 9.5 percent behind the level in November 2019.
Building in the health care sector dropped most, with a 1.4-percent decline, followed by a 0.9-percent dip in construction in the power industry. Farm, retail, and warehouse construction slipped 0.3 percent.
Manufacturing construction edged up 0.1 percent and the building of office space rose 1.3 percent. The rise in construction spending on office buildings likely represents projects being completed, the new project starts are few while existing office space sees lower rents and rising vacancy rates.
Public-sector construction spending declined 0.2 percent in November but still rose 3.1 percent against November 2019’s total. Road-building expenses rose1.8 percent from October; educational construction gained 0.3 percent.
Nonresidential construction spending is likely to languish for most of this year, the Associated General Contractors of America has predicted. The association has urged Congress to invest more in public infrastructure projects.
TREND FORECAST: Commercial construction will continue to lag as the work-at-home trend becomes the new normal, crime rises in cities, and hi-tech and big box stores take more businesses from brick and mortar competitors.
HOME BUILDERS RUNNING SHORT OF LAND. Amid a home-building boom, first western wildfires left builders short of timber; now land also is in short supply.
Rock-bottom interest rates and a shortage of existing homes for sale have sent buyers to builders in droves; in 2020 through November, sales of new homes rose 19.1 percent above 2019’s level, according to the U.S. commerce department.
However, developing home sites takes time: permits must be applied for, water supplies must be secured, streets and sewer systems are planned. Homebuilders often need a year or more to prep land for building.
The building boom caught developers by surprise, without enough land in inventory and under development.
In 2020’s third quarter, the inventory of finished building lots dropped 9 percent to a five-year low, according to Zonda, a housing market research firm. At the same time, the average price of a readied building lot rose 11 percent, the firm said.
The tightest U.S. land markets are in Boise, Las Vegas, Nashville, San Diego, and Seattle, Zonda reported.
“The competition for land is extremely high as demand grows,” Phillippe Lord, CEO of builder Meritage Homes said to the Wall Street Journal. “You can’t just pour more beans into the top of the funnel and make more coffee.”
TREND FORECAST: We forecast the real estate boom, which had millions leaving large cities to safer suburban and ex-urban areas, will moderate and then decline in the coming years as the “Greatest Depression” worsens.
