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Weekly Market Report - February 13, 2024


Rents at highest-end buildings fall and rate of leasing slows

High-quality office buildings have had better success navigating the industry's turmoil, but even premier towers are starting to wobble. Rents at the highest-end buildings have been falling, and the rate of leasing has been slowing. Tenants have become more sensitive to costs in a world of higher interest rates and lingering concerns about a possible economic slowdown. Owners of the most elite buildings escaped this fate by convincing the market they had created a new class of office tower, which they persuaded blue-chip tenants would return if only their offices sparkled with lush roof decks, fully loaded gyms, and food prepared by Michelin-starred chefs. However, this strategy is losing steam as more companies have accepted the reality of hybrid work schedules and have given up on compelling workers to be in the office five days a week.

New starts for office construction in the U.S. have essentially ground to a halt, and the share of leasing activity is also falling among the premier towers. The share of leasing activity is also falling among the premier towers, with new leases in five-star buildings being on average 43% smaller than 2019, reflecting how companies are becoming more efficient in their space use and tolerating some degree of work from home.

We do not believe this article this correct. We are finding the high-end is leasing and the landlords are getting the premium rents. They are larger concession packages that are being negotiated but the top buildings in the best location are 95% rented.


With many owners unable to extend their loans, investors are starting to pounce on these properties

Commercial real estate is experiencing turbulence, with investors stockpiling funds to buy distressed properties. Lenders are increasing pressure on owners of office buildings, hotels, and apartment buildings due to soaring interest rates. Property owners struggling to afford higher debt-service costs are buying distressed properties or providing rescue capital in exchange for preferred returns. Global real-estate funds operated by private-equity firms were sitting on $544 billion in cash as of the second quarter of last year, a record level and up from $457 billion at the end of 2022. As of the end of 2023, commercial property distress totaled $85.8 billion, up from $56.9 billion at the end of 2022 and the highest level since the third quarter of 2013. Analysts expect distress to continue rising in the years ahead as more owners need to refinance.


JPMorgan Chase plans to open at least 500 new branches in the next three years, a move that reverses a decade-long industry trend where banks like JPMorgan and Bank of America have closed branches due to fewer Americans needing to cash paychecks or withdraw money from ATMs. The new branches will be primarily located in cities like Boston, Charlotte, Washington, D.C., Philadelphia, and Minneapolis, which are dominated by other big banks. Chase says the multibillion dollar expansion will create 3,500 new jobs in these markets. The bank's CEO of consumer and community banking, Marianne Lake, believes that opening branches is not only about investing in residents' financial health but also the health and vitality of the entire community.


RXR, Artemis, SL Green among those deploying dry powder, rescue capital

Investors are acquiring distressed properties at discounts or providing rescue capital to owners for preferred returns, taking advantage of a high interest rate cycle. Regional banks are pulling back from lending, and opportunistic funds targeting distress opportunities are gaining momentum. As of last year's second quarter, global real estate funds operated by private equity firms had $544 billion in cash, marking a record level. Major firms like Goldman Sachs, Cohen & Steers, EQT Exeter, and BGO are raising funds to acquire distressed properties, anticipating long-term opportunities in a market with plummeting values.


The tri-state insurance companies were mentioned in a recent DOJ fraud suit

Some sellers and servicers have halted business with Madison and Riverside, two of New York's largest title insurers, following an email from a lawyer at Troutman Pepper. Madison ranked fifth on The Real Deal's 2018 list of New York's largest title insurance companies with $2.3 billion in transaction volume, while Riverside ranked 10th with $1.56 billion in volume. The pause comes after the two were mentioned in a Department of Justice investigation into real estate investor Boruch Drillman, who pleaded guilty to one count of conspiracy to commit wire fraud. Drillman and his partner allegedly used a stolen identity to convince lenders and Fannie Mae that the purchase contract was actually $96 million. Madison and Riverside did not respond to requests for comment. Troutman Pepper apologized for the public dissemination of confidential emails about Madison and Riverside.


Chinese investors and their creditors are selling real estate holdings worldwide to raise cash amid a deepening property crisis at home. The worldwide slump triggered by borrowing-cost hikes has already wiped more than $1 trillion off office property values alone. However, the total damage is still unknown because so few assets have been sold, leaving appraisers with little recent data. Completed commercial property deals globally sank to the lowest level in a decade last year, with owners unwilling to sell buildings at steep discounts.

Regulators and the market are nervous that this logjam could be concealing large, unrealized losses, spelling trouble for banks and asset owners. As a result, the market freeze could thaw, improving transparency and price discovery. The volume of Chinese-owned sales in Europe is starting to grow again, with distressed assets coming to market. The wider impact of such disposals will be determined by how seriously the market takes the results.


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