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Weekly Market Report - March 27, 2023


Companies trying to run leaner and more efficiently in a cooling economy are deploying familiar strategies from past downturns. (See ya, catered lunches.) Some are also taking new aim at their employees’ work-from-home arrangements. The latest back-to-office push reflects bosses’ renewed sense of control and their concern that employees’ at-home productivity is falling to unaffordable levels. Mr. Jones says he and most executives in his professional network have concluded that the initial success of remote work is unsustainable. Facing a global crisis that threatened to drive companies out of business and often did—a lot of employees cranked up their effort. They worked well on Zoom and Slack with colleagues they already knew. Sure, there were a few distractions in the house, but no one was sneaking off for a round of golf or a leisurely lunch at a restaurant during the workday because everything was closed.

A couple of years on, things are different—and less efficient in the eyes of managers like Mr. Jones. He says he recently told his roughly 175-person staff that he’s tempted to require five in-person days a week but will preserve two remote days and add a third in the summer if the team’s output doesn’t lag behind. So far, it doesn’t look great. Alone in the office when we spoke by video, he picked up his phone to check how many clients were signing up for Bambee’s HR software and management service. He didn’t say how long he would give his team to close the gap before mandating more office time, but some companies, even in the ostensibly remote-friendly tech sector, are running out of patience in the face of a potential recession.

Three days in the office is now the standard at cybersecurity firm Rapid7 Inc., which until a few months ago didn’t have set requirements. The company says it studied employees’ in-person and at-home performance to arrive at that number. LinkedIn reports that about 12% of job listings on its platform are for remote positions, down from 20% around this time last year. Postings for independent-contractor roles are growing four times as fast as full-time openings on LinkedIn, as businesses continue to need labor but balk at commitment.

Andra Capital, a Silicon Valley venture firm, is pushing portfolio companies to require at least three office days a week. Mr. Hackert is convening teams at offices in Phoenix, and Alberta, Canada, more frequently these days, though not on a rigid schedule. People are good at what he calls hands-to-keyboard tasks when they’re at home, but he says employees collaborate better in person. Time wasted in clumsy virtual brainstorming sessions (“You’re on mute!”) was tolerable when money was flowing, but suddenly seems unaffordable.


Apple will reportedly monitor employee attendance to make sure they are complying with a company requirement that they report to the office at least three days a week.The iPhone maker — which has always touted its strict privacy rules — will review badge records to track attendance at its corporate offices in an effort to crack down on workers who ignore the back-to-work mandate. Employees who fail to return to their desks three days a week could be fired, though it is unclear if the company has adopted that as official policy. Apple’s monitoring of employees’ badge information appears to contradict the firm’s claim to be conscious of protecting users’ privacy and data. Apple employees have chafed at management’s return-to-office edict, which was announced last year following the lifting of coronavirus lockdown measures and the mass-vaccination campaign nationwide.

The Cupertino, Calif.-based tech giant had delayed its plans to bring its employees back to the office several times throughout the pandemic due to surges in COVID cases driven by the spread of new variants. In August, more than 1,200 Apple employees signed a petition denouncing the company’s return-to-office order, which was implemented on Labor Day. Last spring, several Apple employees took to social media platforms, including Blind, to vent about the company’s demands for in-office work. Some employees even threatened to quit over the issue. One of those employees who brought in Musk's call, Esther Crawford, was fired despite the fact that she was photographed sleeping on the office floor after her new boss took over the company.

Tech companies were among the first to allow their employees to work from home when the COVID pandemic began. But adverse macroeconomic conditions as well as the lifting of lockdowns have changed the calculus and forced companies to rethink their strategies. While Apple, Amazon, Disney, Google, and Meta have called their employees back to the office for most of the week. But other tech outliers such as Yelp, Spotify, Coinbase, and Dropbox have allowed their employees to continue working remotely full time.


Defaults and vacancies are on the rise at high-end office buildings, in the latest sign that remote work and rising interest rates are spreading pain to more corners of the commercial real-estate market. For much of the pandemic, buildings in central locations that feature modern amenities fared better than their less-pricey peers. Some even were able to increase rents while older, cheaper buildings saw surging vacancy rates and plummeting values. Now, these so-called class-A properties, whose rents generally fall into a city’s top quartile, are increasingly coming under pressure. The amount of U.S. class-A office space in central business districts that is leased fell in the fourth quarter of last year for the first time since 2021.

The owners of a number of high-end properties recently defaulted on their mortgages, highlighting the financial strain from rising interest rates and vacancies. Some office landlords invested heavily in their buildings in recent years, adding spas, gyms, restaurants and modern elevators. The hope was that by modernizing their properties, these owners could benefit from a flight to quality as more tenants seek environmentally friendly buildings with plenty of amenities and natural light.

This strategy has worked for some buildings, especially those developed in the past decade. Some new buildings like One Vanderbilt in Manhattan managed to add tenants at high rents. But new leasing data and recent defaults indicate that many of these high-end properties aren’t immune to the office market’s crisis. In New York, new developments like One Vanderbilt and Hudson Yards have lured tenants from Park Avenue towers while pushing up Manhattan’s overall vacancy by adding new supply. Close to 19% of all high-end office space in Manhattan was available for lease in the fourth quarter of 2022. Rising interest rates have hit the entire commercial real-estate sector hard. Higher mortgage costs eat into landlords’ earnings and make it harder to refinance expiring loans. Rising yields on bonds and other securities also make real estate look less profitable in comparison, making buyers more reluctant to pay high prices and pushing down property values.

Real estate analytics firm Green Street recently estimated that U.S. property values are down 15% since March 2022. Pressure on office occupancy is expected to continue for much of 2023. Weakening demand during the pandemic era initially came from companies cutting back on space by letting employees work from home part of the week. Now demand also is tumbling because big technology companies are hunkering down and cutting expenses for fear of a possible economic downturn. Landlords who benefited from long-term leases are becoming more vulnerable as leases signed before the pandemic expire. Law firms advised on their real estate often look to cut their space by around 30% when their leases expire. And unlike in 2021, more companies are worried about a recession and looking to cut costs.


The relationship between banking and real estate may be about to take a toxic turn. The collapse of Silicon Valley Bank and Signature Bank will likely ripple through the mortgage market to commercial landlords. Signature Bank was one of the top commercial real-estate lenders in the U.S., especially in New York, where it had a 12% market share. Alternative lenders such as specialist real-estate debt funds may step in to fill the hole, but they charge higher interest rates. Banks are also likely to ask more for loans as they compete for a dwindling pot of U.S. deposits. One way or another, the cost of borrowing will rise.

Commercial property values were already under pressure from rising interest rates. More expensive debt means potential buyers can’t make an acceptable return on their investment except by paying lower prices for buildings. According to an index of U.S. commercial property prices compiled by real-estate research firm Green Street, average prices have dropped 15% from peaks last March. Offices have been particularly hard hit, with falls of 25% over the period. Stricter lending to real estate could in turn come back to haunt banks. For now, the existing property loans on bank balance sheets look surprisingly healthy, considering how disruptive the past few years have been for landlords. The delinquency rate on loans secured by real estate at commercial U.S. banks was 1.21% in the fourth quarter of last year, according to data from the Federal Reserve Bank of St. Louis. That number peaked at around 10% in early 2010 and has been falling ever since.

As property values fall and landlords’ equity dwindles, borrowers have less incentive to make debt repayments. Big office owners have already defaulted on some mortgages. This trend is likely to pick up as loans mature and need to be refinanced at higher rates. A new credit crunch shouldn’t be as severe as the 2008 financial crisis. Banks are better capitalized and have reduced their share of real-estate debt, and loan-to-value ratios are more conservative. Only 4% of larger banks—those with more than $50 billion in total assets—have exposure to real-estate loans above what regulators recommend, compared with 15% back in 2008. Smaller players with total assets of $1 billion to $10 billion look riskier: 29% have more real-estate exposure than deemed healthy by authorities. Landlords who loaded up on cheap debt in recent years were feeling the pinch even before vulnerabilities in the U.S. banking system came to light last week. Just how tough conditions now become depends in large part on the U.S. Federal Reserve’s response to the current turmoil. If it hits the brake on interest-rate increases, it would be a powerful countervailing force.


The Flatiron Building sold for $190M at an auction in front of a Manhattan courthouse on Wednesday, bringing to a close a years-long dispute and putting the iconic building under new ownership. A judge approved a partition sale earlier this year of the storied property — the first skyscraper built north of 14th Street — after GFP Real Estate, ABS Real Estate Partners and Sorgente Group, which collectively own 75% of the property, took legal action against the other partial owner, attorney Nathan Silverstein, in 2019. At the sale, Abraham Trust, a firm led by Washington, D.C.-based investor Jacob Garlick, secured the property for $190M.

GFP Chairman Jeff Gural was the favorite to win the auction because owners can put up their stakes as a “credit bid” when a partial auction is taking place. But ultimately the bidding got beyond what the Manhattan property tycoon was willing to pay. He said the bidding opened at $50M, and the auction “dragged” toward the end as the auctioneer increased the bids by $500K increments, putting Gural’s final bid at $189.5M. His family has had an ownership stake in the 22-story building at 175 Fifth Ave. since the 1970s. Gural said because of the need to renovate, the new owner is committing to spend nearly $300M — or about $1,500 per SF for the 204K SF landmark. Garlick could not be reached by press time, nor could Mannion Auctions, the auctioneer.

Friction between the now-former owners reportedly began six years ago, when anchor tenant MacMillan Publishers said it was planning to vacate its lease of the entire 21 floors of the property. Under the ownership terms, each owner had a say over what could happen next, and no agreement could be reached. Silverstein had proposed dividing the building up, an idea which Gural said in a court filing “boggles the mind." He also claimed Silverstein wanted to put in a new tenant without doing legally required upgrades. Gural’s plan was to win the property back and get rid of Silverstein, who inherited the stake in the property from his father.


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