Austrian court rules Signa Holding has to sell its stake in skyscraper
The fate of New York City's Chrysler Building is uncertain due to the meltdown of Austrian property giant Signa Holding. Signa owns a 50% stake in the 77-story art deco tower, while New York developer RFR Holding owns the other half. The sale of Signa's stake could complicate the owners' efforts to renegotiate the property's expensive ground lease or modernize the nearly century-old office tower. The Chrysler Building's owners are dealing with one of the worst office markets since World War II, with office leasing activity in Midtown Manhattan down 26% from the same time last year. The complex property ownership structure, which carves the office tower into a building piece and a land piece, has led to escalating rent costs. The office building sales market is currently terrible due to rising vacancy and high interest rates, with investors purchasing only $43.6 billion worth of U.S. office buildings this year compared to $117 billion in 2022.
Office building owners are losing hope that occupancy rates will rebound soon
Office building owners struggled in 2023 due to falling demand and high interest rates. Many landlords have been able to extend their loans, but many are now expiring, leaving them losing hope for occupancy rates to rebound. This means more landlords will be forced to pay off their mortgages, sell their properties at a steep discount, or hand their buildings over to creditors. In 2024, it's game time for owners and lenders to come to terms on values, debt needs, and right-sizing capital structures. Office demand shows no sign of returning to pre-pandemic levels, and return-to-office rates have stalled for most of 2023. The U.S. office vacancy rate stands at a record 13.6%, up from 9.4% at the end of 2019. The Federal Reserve is likely to ease interest rates in 2024, but landlords still face a financial squeeze. Demand is still strong for the highest quality and best-located space.
Pandemic-era upsurge slows thanks to higher interest rates, lower demand
Higher interest rates are choking off the construction of warehouses that feed America's growing e-commerce appetite, putting an end to a building boom that remade vast swaths of the country. Industrial property construction starts tumbled 48% in the first nine months of the year compared with the same period in 2022, according to data company CoStar. This was the largest drop for that period since 2009. The dollar volume of industrial real estate sales fell by 45% in the third quarter from a year earlier, according to MSCI Real Assets.
Higher debt costs and slowing leasing demand are the main culprits, with rates on commercial mortgages roughly doubling over the past year and land prices not falling enough to make it harder to pay for construction. Steeper interest rates have also pushed down property values, with Green Street estimates that industrial real-estate prices are down 16% from their peak. E-commerce activity continues to grow, and the industry could thrive again if interest rates continue their recent decline.
Institutional buyers are snapping up grocery stores, pharmacies and other recession-resilient stores
Retail real estate is gaining traction as institutional buyers are buying recession-resilient stores like grocery stores and pharmacies. The sector's strong performance in recent years has increased its appeal as remote work depresses demand for office buildings. Private-equity funds are showing more interest in retail as industrial and multifamily real estate has become more expensive. Commercial-property sales, including retail, have slowed significantly since the Federal Reserve began increasing rates last year.
Family offices, wealthy individuals, and small private-investment firms are still dominating acquisitions, with these private investors snapping up $1 billion more retail assets than they sold in the third quarter. Institutional investors and real-estate investment trusts (REITs) are still net sellers of retail, but the pace of dispositions has slowed over the past year. Retail owners and analysts expect more institutional capital flowing to the sector in 2024, especially amid expectations that the Fed will begin lowering rates next year.
The office market turmoil is putting banks at risk as loan defaults threaten billions of dollars in losses. Owners at 44% of office properties are underwater on their loans, indicating property values are less than outstanding loan balances. A 10% default rate on all commercial real estate loans could result in a potential $80B in losses. Commercial real estate loans account for about $2.7T in aggregate bank assets. The rising cost of debt means that about a third of all CRE loans and the majority of office loans will have trouble refinancing when debt matures. If the average CRE loan originated at an interest rate of 3.97% were to refinance today, more than 17% of all CRE loans and 24.3% of office loans would fail to pay down their debt. The Federal Reserve has hinted at three rate cuts in 2024, which could curtail distress, but the exposure of banks to CRE distress puts their survival at serious risk.
Boeing is requiring its employees to return to a pre-pandemic schedule of five days a week, with no set timetable for the shift. Executive Vice President Stan Deal has instructed managers to require full-time on-site attendance. Boeing has transitioned more employees to work in the office over the past two years, and is asking all Boeing Commercial Airplane employees to return to their pre-pandemic policy. The company employs over 156,000 people worldwide, with the largest concentration in Washington, where over 60,000 Boeing workers are based. If implemented, this would represent a 180-degree policy reversal for Boeing, where hybrid schedules have been the norm since the beginning of the pandemic. However, forcing a full return to office has been a tough slog for employers, as employees who have grown fond of hybrid schedules have pushed back against it. The move comes at a time when more workers are back in the office than at any time since the pandemic began, according to the Kastle Back to Work Barometer.
Bankrupt co-working firm argued disclosure could be weaponized with “unimaginable precision”
WeWork has secured a deal with the Department of Justice to protect its 600,000 customers' names and addresses from the public eye. The deal requires WeWork to provide an unredacted copy of the customer list to the Justice Department trustee monitoring the case. The deal aims to prevent rival companies from weaponizing the information to poach tenants. WeWork's bankruptcy filing allows it to escape leases without paying termination fees and reduce debts. However, landlords have objected to WeWork's debtor-in-possession financing and restructuring plan. Striking a balance between reducing rent obligations and maintaining good relationships with landlords is crucial for the company's survival.