What's Trending in Real Estate, May 2023

Navigating interest rate disruption in CRE, bank and hospitality execs on the state of lending, Trepp’s April CMBS report, and office buildings are ripe for multifamily conversion

Navigating Interest Rate Disruption in Commercial Real Estate

The inflation rate has cooled some as mid-2023 approaches, allowing the Fed to slow the pace of its rate hikes. But for many, the damage is done, with the fallout still reverberating, especially in commercial real estate (CRE).

An ebook from PwC—“Navigating interest rate disruption: How real-time data can facilitate better CRE decisions amid volatility”—provides an overview of the CRE market and some advice on how to manage through.

The report looks into a combination of factors, including economic and geopolitical forces, the ripple effects of Covid, increased construction costs, inflation, and more. Sections of the 9-page report (with excerpts) include:

• Workforce trends and logistics push companies to curb spending—“Remote work, inventory logistics, and labor shortages are forcing businesses to tighten their budgets and reevaluate their real estate footprints. In fact, 45% of businesses are planning real estate reductions.”
• Managing inflation-related challenges—“Higher capital costs—rising interest rates—are widening the bid-ask pricing gap for buyers and sellers, signaling a weakening economy.”
• Weathering an uncertain cash flow storm—“Soaring costs have led to a slowdown in the pace of construction since cost instability combined with rising labor costs make it challenging for businesses to bid on projects.”
• A proactive path forward—“To remain adaptable and competitive, commercial real estate professionals need access to relevant, tech-enabled, real-time data.”

Editor: Although this report is from 2022, most, if not all, of it is still relevant in 2023.

Six Bank and Hospitality Executives Discuss the State of Lending Amid Bank Failures

Lenders and hospitality executives at the 2023 Meet the Money national hotel finance and investment conference commented on the current state of the banking crisis. Six of their comments were published in Hotel News Now: Ash Patel, president and CEO, Commercial Bank of California; Alan Reay, president, Atlas Hospitality Group; Matt Mitchell, vice president, Hall Structured Finance; Bruce Lowrey, managing director of investments, CIM Group; Matt Bailly, vice president of real estate, Prospera Hotels; and Keegan Bisch, vice president of originations, Stonehill. Read their comments here.

For more from the conference, see this article from CoStar: “Five Key Takeaways on Hotel Investment from Meet the Money Conference.”

For more on how bank failures could make hotel financing harder to find, click here.

CMBS Delinquency Rate Holds Steady in April, But Office Rate Continues to Rise

This is an excerpt from Trepp’s Delinquency Report (May 3). To access the full report, click here.

“The Trepp CMBS Delinquency Rate held steady, but the segment that everyone continues to watch closely saw its rate move higher again in April 2023. The Trepp delinquency rate was unchanged in April at 3.09%. Declines in the retail, lodging, and multifamily rates offset a small increase in industrial loans and a bigger increase for offices.

“Office remains the most heavily watched part of the market as firms look to aggressively reduce space. Sublease space is at or near record highs in many markets as demand from big tech firms has eroded sharply. In addition, many companies are letting leases expire or are renewing for smaller footprints.

“Last week, Microsoft announced it would offer up several hundred thousand square feet in Seattle. The tech bellwether has already announced plans to relinquish more than two million square feet in that city."

For additional information on Trepp’s products and services, email info@trepp.com or call 212-754-1010.

One in Three Office Buildings in Major North American Cities Could Be Ripe for Multifamily Conversion

The combination of 1) companies (especially tech firms) continuing to lay off people by the tens of thousands, 2) the ongoing shift to working from home, and 3) the current U.S. housing shortage has caused landlords across the country to seek innovative ways to fill their millions of square feet of empty space.

“Up to 34% of office buildings in 14 major North American markets could be potential candidates for adaptive reuse. Looking at more than 26,000 buildings, office to residential conversions could open the door to potential housing for thousands of families in as many as 8,996 properties,” according to global commercial real estate advisor firm Avison Young.

“Adaptive reuse is an important conversation we are having around the art of the possible, to demonstrate how this potential solution contributes to placemaking and to the revitalization and vibrancy of our neighborhoods—particularly our downtown cores,” said Sheila Botting, Principal and President, Professional Services, Americas at Avison Young. “We must reimagine how we want to live, work and play. Adaptive reuse is one of the key components of how we do that as a community.”

For more, click here.