There have been several excellent articles recently about whether the glass representing the future of New York and urban America is half empty or half full. We don’t yet know in a metaphorical sense. However, we do know that offices are literally half full with 49.6% employee attendance in New York City and 49.0% nationwide. As a practical matter, there has been little change since a modest surge after Labor Day.
However, looking at the commercial real estate industry from 30,000 feet, one has the distinct sense that the dominoes are starting to fall as more leases come off the books in 2023. Consider the following data points:
1. We caution against reading too much into a one-month trend, but new leasing in Manhattan fell 7 % in November to just 1.48 million square feet. That total was also down more than 50% from the total square footage leased in November 2021.
2. Meta is cutting the size of its Hudson Yards offices by 250,000 square feet as part of its strategy to spend at least $2.9 billion to reduce office space around the country. That is in addition to the $413 million charge revealed in a recent earnings call to get out of its 200,000 square-foot lease at 225 Park Avenue. Other technology firms which have been a pillar of the NYC office market will look for similar ways to conserve expenses while at the same time shedding jobs. Fortunately, New York has a diverse economy, but this won’t help matters.
3. Securitized commercial mortgage loans (known as CMBS) are coming under pressure, particularly in the office sector. According to creditIQ, there are approximately $6.3 billion in loans secured by office properties scheduled to mature next year, accounting for 22% of the total 2023 CMBS conduit maturities, and the special servicer rate for office loans has increased for three consecutive months from July through October 2022.
4. Several major REITS including Blackstone and Starwood took steps to limit redemptions of their shares as repurchase requests, exceeded their rules. In a recent interview on CNBC, Barry Sternlicht of Starwood somewhat defensively explained the rationale for limiting redemptions, making the obvious point that Starwood was not FTX as its assets consisted of real estate holdings that could not be sold quickly and the Starwood dividend was being maintained. He was of course right, but the fact that he even had to make such a statement is a bit alarming.
Unlike other financial sectors, trends in real estate take a long time to play out. That is because real estate is relatively illiquid, as noted above, especially when compared to the stock or bond markets where a new direction can take shape in as little time as one day. Trends that would normally take months in other financial markets are measured in years in commercial real estate, and years are measured in decades. In other words, it is the opposite of dog years. As I always say, disdain the conventional wisdom and expect the unexpected, and you won’t be surprised.