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Office space in the US is experiencing a decline for the first time in history, with less than 5 million square feet of new office space being built this year and 14.7 million square feet being removed, often for other uses. This marks the first net decline in data since 2000. The decline is likely due to the lack of new construction and the aging office space being repurposed or destroyed. The rise of technology has reduced the need for big offices, and the early pandemic lockdowns have further exacerbated the issue. Office owners are struggling with a pullback in tenant demand, and soaring borrowing costs are causing more office delinquencies and falling prices. Wall Street landlords like Blackstone and Brookfield Asset Management Ltd. have halted payments for money-losing properties. The glut of offices presents an opportunity for developers to add to the US housing stock, which faces a long-term shortage. About 45,000 apartments are currently being converted from their former office space.
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WeWork, once the leading coworking office space provider in New York City, has experienced a drastic shift in its trajectory. The company's stock value has dropped 97% since its 2021 listing, and CEO Sandeep Mathrani's unexpected exit has left the company on a slippery slope. WeWork's growth strategy was fueled by its charismatic founders, Adam Neumann and Miguel McKelvey, but the company's flawed business model and exorbitant lease agreements led to concerns about its financial health and corporate practices. The company's 2019 IPO prospectus exposed staggering losses, with a disconnect between exorbitant expenses and meager revenues. Neumann's departure sparked backlash, and the company's valuation plummeted, presenting SoftBank, its primary backer, with a complex predicament. The company's new CEO, Sandeep Mathrani, marked a new era of profitability and steady recovery. The current landscape of WeWork's situation is a mix of investor skepticism and the SPAC listing, with the company's future uncertain.
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The vacant 1.2 million square-foot tower at the corner of South Street, owned by Nightingale Properties and Intervest Capital Partners, is now facing foreclosure action by mezzanine lender Oaktree Capital Management. The tower's leasing agent, is scheduled for an auction on September 19th. The owners invested nearly a half-billion dollars in the 1960s property and modernized it with modern infrastructure but faced the worst office-leasing market in decades. The redevelopment project is still not finished, with some new curtain-wall glass and interior work still unfinished. The added cost may reduce the amount a buyer is willing to pay for the tower. Another nearby tower, 60 Wall Street, is nearly twice as large as 111 Wall and is owned by Paramount Group, a global operator. Paramount is in talks with potential tenants . Everyone hopes for the success of 60 Wall and a brighter future for 111 Wall. Gov. Kathy Hochul has struck a deal to build Five World Trade Center, which will include 1,200 apartments earmarked for low-and moderate-income New Yorkers, 9/11 survivors, and first responders. The resolution, which includes $65 million in state subsidies, is more than welcome. Activists had hoped to make the 900-foot-tall skyscraper 100% affordable.
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Acumen Fund, a nonprofit investing in low-income enterprises, has signed an 11-year extension of its lease at 40 Worth Street with GFP Real Estate. The 22-year-old charitable investment fund has been working out of its third-floor suite in the Tribeca building since 2015, but wanted to lock in a lower price for its 11,743-square-foot office well beyond its current lease, which was set to expire in 2026. The landlord was amenable to doing it, and Acumen thought it was an opportune time to extend its lease to take advantage of the soft environment. GFP has purposely sought to fill its 16 floors with a mix of government agencies and nonprofits that aren't going to go out of business due to Wall Street's fluctuations.
The Worth Street tower, built in 1929 and designed by Jardine, Hill & Murdock, has attracted a myriad of medical offices and criminal justice groups. The building is home to the civil legal assistance office Legal Services and a satellite of the Manhattan District Attorney, which Gural called a "one-stop shop" for the city's legal community. Despite nonprofits embracing hybrid office arrangements allowing workers to stay home for part of the week, the Worth Street tower has remained nearly full. The building's lively location and the in-person demands of legal and medical work have encouraged tenants to come into the office more frequently.
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Office real estate is facing a significant shift in lease negotiations, with tenants demanding landlords to reveal financial backers and assure them of their ability to meet lease terms and hold onto buildings. This shift is affecting big-name landlords, as the market is becoming more distressed, with the US office real estate market experiencing a $24.8 billion distress rate at the end of the second quarter. This is the most distressed commercial real estate asset type since 2018, surpassing retail and hotels, which have recovered more quickly from the pandemic. Tenants are now asking landlords about the debt on the building and specific terms embedded in the loans, which are happening on the first space tour rather than during the final stretch of lease negotiations. Nationally, office leasing rose by 11.6% in the second quarter, the biggest quarterly increase since Q2 2021. Tenants are also being extra careful about their tenant improvement allowances, which have been one of landlords' top incentives to land deals in this market.
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International investors feel bullish on Japan’s economy, with the stock market trading near a 33-year high, as a weak yen sweetens the pot
Office building investors are retreating from most U.S. cities, finding a haven in Japan, where workers have returned to the office and banks are eager to lend. Foreign investors, including LaSalle Investment Management, M&G, and Keppel, are buying Japanese office buildings due to the market's stability. Investment in Japanese office real estate reached over $4 billion in the first quarter of this year, more than double the figure a year earlier. In the U.S., pension funds and property developers are selling off their office holdings at a discount. Office vacancy rates are surging in major cities, with 16% in Manhattan and 32% in San Francisco in the second quarter. Vacancy rates in Tokyo's central business districts have stabilized around 6%. The office sector often acts as a proxy for a country's economy, and international investors like Invesco are feeling bullish on Japan. The generous spread between rent yield on office buildings and the cost of borrowing to acquire the buildings is low due to the Bank of Japan's near-zero interest rates.