Category: Office

Real estate billionaire Sam Zell says office space will recover ‘much faster’ than retail

Demand for office space is likely to rebound from depressed Covid pandemic levels long before retail properties, Sam Zell told CNBC on Tuesday.

Demand for office space is likely to rebound from depressed Covid pandemic levels long before retail properties, property billionaire Sam Zell told CNBC on Tuesday.

“Everything between the top mall and the corner grocery anchor mall … [there’s] a serious question as to its viability,” Zell said in a “Squawk Box” interview. “I think retail is much more of a falling knife than office, and I think that office is likely to recover much quicker than retail.”

The Equity Group Investments founder expects the office market to rebound once Covid becomes “less of a risk,” albeit with hybrid work becoming part of the norm. The speed of recovery will depend largely on thriving industries that hire more workers to come into the office, he added. “Ultimately the amount of time people spend in the office is gonna be very much related to the demand for their time.”

However, the office market is still not without its own problems.

“Obsolescence is a big factor in the office market, and I think it’s gonna make some assets unsaleable without significant investment,” Zell predicted, saying his investment company has not been putting money in the office market.

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Year in Review: South Florida’s Top Office Leases in 2021

Newcomers got all the buzz, but locals took the most space in 2021

There’s perhaps never been a better time to be an office broker in South Florida.

While industry leaders fretted over the future of the office in the wake of the pandemic, South Florida brokers didn’t have time to sulk. “I’m the busiest I’ve ever been,” CBRE’s Kevin Gonzalez said.

Tired of high taxes and COVID-19 restrictions, high-profile companies descended south this year — and bet on offices. In 2021, new-to-market deals accounted for 22 percent of leasing across South Florida, totaling over 1 million square feet, up from just 6 percent the year prior, according to data from CBRE.

Watch out New York. Almost half of the new tenants were financial firms from the Big Apple, per CBRE.

But a billion-dollar company won’t just settle anywhere. Most zeroed in on traditional business centers, such as Miami’s Brickell or downtown West Palm Beach, the city closest to the 1 percent’s favorite island destination, Palm Beach. (Sorry Broward County, better luck next year.)

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Space to Replace: Divergent Market Fundamentals Drive Office-to-Industrial Conversions

While the industrial market has soared, the office market has softened, driving the conversion of some office product amid shifting demand. This report explores which markets are experiencing office space redevelopment and how much, and details the considerations for investors and developers exploring office-to-industrial conversion opportunities.

Unprecedented levels of industrial demand across the U.S. have left tenants with a critical shortage of space options, reflected in an all-time low industrial vacancy rate of 4.6% as of the third quarter of 2021. Comparatively, the U.S. office market is contending with uncertainty in the post-COVID-19 world, and the pandemic has only accelerated obsolescence of some older, less-amenitized product. This divergence among asset classes is increasingly driving investors and developers to consider industrial redevelopment opportunities for some unproductive office properties. Since 2018, at least 45 office properties totaling 11.3 million square feet have been redeveloped or are in the process of redevelopment into industrial use. This observed activity is predominantly concentrated in markets where density and land constraints are driving forces resulting in perennially tight industrial vacancy. While office space generally costs significantly more to build than industrial and yields higher rents when occupied, the economics supporting industrial redevelopment in these regions are buoyed by exceptionally strong market fundamentals, particularly when compared to each metro’s office market, where office vacancies are roughly 10 to 18 percentage points higher as of third-quarter 2021.

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Top 5 Markets for Office Construction Activity

More than 215 million square feet was under construction across the nation at the end of the first quarter, according to CommercialEdge data.

More than 25 million square feet of office space came online in the first quarter of 2021, with an additional 215.8 million square feet underway across the entire U.S., according to CommercialEdge data. As of March, development activity in the nation’s tech-driven hubs—Manhattan, Boston and Seattle—accounted for a third of the country’s existing inventory.

Half of the upcoming projects are expected to come online in 2021. Meanwhile, developers are reaching new milestones on the largest projects underway. Although most developments are scheduled for delivery on time, a slowdown in office construction is expected—a recent American Institute of Architects consensus forecast predicted a 9.3 percent decrease for office construction spending in 2021.

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Number of Coworking Spaces to Double or Triple Nationwide in the Next Five Years

The number of coworking and flexible workspace locations around the country is expected to double or triple within the next five years, despite a recent slowdown in growth in the market sector in the past year, according to a report from Colliers International.

Despite the recent curb in coworking companies opening locations, operators and landlords expect growth to restart in the near future, as more and more tenants look to give their employees additional options for working closer to home.

“Occupiers are largely shifting away from a traditionally fixed-portfolio composition to one that is more of a network-driven portfolio that provides workspaces to employees that span a spectrum of new settings,” said Francesco de Camilli, vice president of flexible workspace at Colliers and author of the report. “Flexible workspace is really a key component that is going to allow occupiers to unlock this strategy. It’s really costly and time-sensitive to build out traditional office space in small- to medium-sized markets, where you might have a couple of employees.”

And Colliers expects it won’t just be the major players like WeWork and Regus driving that growth. The report said it expects more and more landlords to start their own coworking platforms — which some like Tishman Speyer and the Durst Organization have already done — and the emergence of niche providers like a coworking space for cannabis companies.

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Facebook Office Outside Seattle Put Up for Sale by Developer

Block 16, a new 343,528-sq.-ft. property in Bellevue, Wash. is being marketed for sale.

(Bloomberg)—An office fully leased to Facebook Inc. in a Seattle suburb is up for sale, a sign that developers are ready to test demand after the pandemic put much of the commercial real estate market into a deep freeze.

Block 16, a new 343,528-square-foot property in Bellevue, Washington, is being marketed by Eastdil Secured, according to sales documents reviewed by Bloomberg News and two people familiar with the matter who asked not to be identified discussing the private process. The building may fetch between $325 million and $350 million, one of the people said.

Spokesmen for Wright Runstad & Co., the developer of Block 16, and Eastdil declined to comment.

The virus has put much of the commercial real estate market into a state of paralysis, with buyers and sellers unable to agree on price. Some deals have been scrapped and many potential listings have been pulled. In the second quarter, office building transactions in the U.S. plunged 71% compared with the same period a year earlier, according to data from Real Capital Analytics.

Still, some building owners are choosing to move forward with sales, betting they can generate enough buyer interest for well-located buildings with high-quality tenants. In the marketing documents, Eastdil emphasizes that Block 16 is fully leased to Facebook “through June 2033, providing 12+ years of stable, investment-grade cash flow.”

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How Will Subchapter 5 of the Bankruptcy Code Impact Landlords?

Landlords need to educate themselves about the new Subchapter 5 bankruptcy rules as a precedent-setting case plays out in Texas.

Recent revisions to the U.S. Bankruptcy Code might open the door to headaches and heartaches for landlords that rent to small businesses.

In August 2019, Congress created what’s known as Subchapter 5 of the Bankruptcy Code. Subchapter 5 is designed to streamline the Chapter 11 bankruptcy process for small businesses and slash their legal bills, according to Robert Dremluk, a partner in the New York City office of law firm Culhane Meadows Haughian & Walsh PLLC who specializes in bankruptcy cases.

Subchapter 5 went into effect this February. A month later, Congress tweaked Subchapter 5 as part of the federal CARES Act, aimed at helping the U.S. recover from the coronavirus pandemic. A major change in Subchapter 5 that will be on the books till next spring raises the cap on secured and unsecured debts for a small business to qualify for Chapter 11. The threshold jumped from a little over $2.7 million to $7.5 million. “The idea was to create an easier path for companies to reorganize,” Dremluk says.

Legal observers say the re-engineered Subchapter 5 could invite even more small businesses to file for Chapter 11 bankruptcy reorganization and, therefore, entangle more landlords in bankruptcy proceedings.

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After flocking downtown to woo millennials, offices might be moving back to the suburbs

“Is office space going the way of retail in five years? That’s what investors are really trying to understand,” said James Farrar, CEO of real estate investment trust City Office REIT.

It was 2016 when General Electric announced it was moving its global headquarters to a smaller space along the central Boston waterfront, away from the quiet suburbs of Fairfield, Connecticut.

Then McDonald’s in 2018 opened its glitzy, new worldwide headquarters in Chicago’s vibrant Loop neighborhood, moving out of a suburban office park in Oak Brook, Illinois – joining Kraft Heinz, Walgreens and other Fortune 500 businesses in a seismic shift of corporate office space to downtown.

And with each of these moves, there were perks: Millennial talent was more plentiful in these bustling districts such as the Loop in Chicago, where the nightlife and bar scene were also strong. Some companies, including GE, found tax breaks from municipalities when they positioned their offices downtown. And reliable public transit systems could seamlessly transport workers back and forth each week.

But that was before the coronavirus pandemic hit.

For weeks now, companies across the country have been adjusting to entire workforces working remotely. Many of these offices are sitting empty, if only to be frequented by janitorial staff and a skeleton crew of essential workers. Zoom video calls are replacing what would typically have been meetings in conference rooms filled with colleagues breaking bread. Recently, Jack Dorsey’s Twitter and Square tech companies both said employees can work from home “forever.” Google and Facebook, meantime, have told employees they can work from home until the end of this year. Many others are expected to follow suit.

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Workplaces will not be the same again when employees return from coronavirus lockdowns

Workplace dynamics will likely be transformed by the time everyone returns to the office again after coronavirus lockdown measures are lifted or eased, experts told CNBC.

“The office will not go away, but the need of the office space may reduce,” said Carol Wong, director and head of workplace delivery for Asia Pacific at global commercial real estate firm Cushman & Wakefield. “People will always need physical space and they always want to meet face to face.”

Still, worries over hygiene will continue to top concerns as employees return to the workplace, and companies will need to take new measures to minimize the number of hand contact surfaces. Some of these steps include the introduction of infrared temperature checks as well as the use of facial recognition for identity verification, Wong added.

Wong is currently working with clients in China to bring employees back to the office. She said about 10,000 companies and nearly a million workers have returned to the office so far. The country, where the earliest cases of coronavirus were reported, has been closely watched as the world looks for clues on what easing of lockdown measures would look like, and how the reopening of economies could be.

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Offices That Scan for Sick Workers: NC Architects Envision the Future Workplace after COVID-19

How might the pandemic change the features of the modern office building?

From antimicrobial surfaces to technology that can scan the room for workers that may be sick, the workplaces of the post-pandemic world will feature a greater focus on employee health and wellness, Triangle architects predict.

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