MESSAGE
| DATE | 2020-11-10 |
| FROM | Ruben Safir
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| SUBJECT | Subject: [Hangout - NYLXS] Ripping up the economy and the shake out..
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Corporate Tenants Dump Excess Office Space, Sending Shivers Through the
Market
Peter Grant
7-9 minutes
More companies are looking to dump excess office space by renting it out
to new tenants, flooding the market with additional supply that could
depress U.S. office rents.
With many employees planning to keep working from home for the
foreseeable future, big corporate tenants in city centers say they have
a surplus of office space. Most of those companies are locked into long
leases of as long as 20 years and have little opportunity to get out of
these agreements.
That is leading companies from Airbnb Inc. and Twitter Inc. in San
Francisco to Expedia Group in Austin, Texas, to try to unload their
overflow by subletting unwanted office space.
Corporate tenants put a record 42 million square feet of space on the
office market in the second and third quarters, according to data firm
CoStar Group Inc. That increased the total sublease space in the U.S. to
roughly 157 million square feet, or 1.7% of the total office inventory.
It is the highest rate since CoStar began measuring it in 2005.
New reports of a vaccine trial proving better than expected at
protecting people from Covid-19, the illness caused by the new
coronavirus, helped unleash a huge Monday rally in office and other
real-estate stocks, easing some of the most dire concerns for the sector.
But some still fear the overhang is likely going to get worse before it
gets better, especially with the recent rise in Covid-19 cases and as
more employers view work from home as an alternative even after the
coronavirus pandemic comes under control.
The office market has held up much better this year than lodging or
retail real estate. Hotel guests and conference organizers canceled
trips and events after the pandemic hit. Many retail tenants have
withheld rent. But most office tenants have been paying. Average office
asking rents have barely fallen this year, according to Ian Anderson,
senior research director of CBRE Group Inc.
Those metrics, however, mask how much supply is actually available after
factoring in the tens of millions of square feet coming up for sublease.
As more leases come up for renewal, the additional sublease supply is
expected to pressure office rents, property analysts say.
It is made worse because corporate tenants are often more willing to
offer their space at lower rents just to get some cash for it, said
Jonathan Adelsberg, a partner and chair of the leasing department at law
firm Herrick Feinstein LLP.
“There will be cases where tenants and landlords are going to be
competing for the same business,” Mr. Adelsberg said.
The Park Avenue building where C.V. Starr is listing sublet space is
owned by Boston Properties, a major office owner.
Photo: GABBY JONES for The Wall Street Journal
The sublease discount historically has been around 20% below market
rate, he added, “but given the plethora of space on the market today, we
expect to see discounts greater than that.”
Office owners have largely made good on their debt payments during the
pandemic. As of mid-October, only 2.5% of office mortgages that were
converted into mortgage-backed securities were more than 30 days
delinquent, said data firm Trepp LLC. That compares with rates of 14.3%
for retail real estate and 19.4% for lodging.
But the office space starting to glut the market now could shave tens of
billions of dollars of value off office buildings, creating big losses
and the prospect of more defaults, analysts say.
“The heightened amount of sublease space suggests that tenants’
positions are more precarious than the vacancy rate would suggest right
now,” said Nancy Muscatello, a CoStar senior analyst.
It isn’t unusual for businesses to put sublease space on the market
during economic downturns. Companies typically contract or pull back
from expansion plans only to resume their space consumption once
recoveries begin.
The Office Redesign Has Only Just Begun
0:00 / 8:29
3:28
The Office Redesign Has Only Just Begun
The Office Redesign Has Only Just Begun
Plexiglass dividers and floor decals might not be permanent, but the
pandemic is likely to bring lasting change to offices. Experts from the
architecture and real-estate industries share how they are getting back
to work and what offices might look like in the future. Photo: Cesare
Salerno for The Wall Street Journal
Some brokers and landlords predict that office demand after the current
recession and pandemic will follow a similar pattern. Douglas Linde,
president of the big office owner Boston Properties Inc., said many
tenants around San Francisco making office space available are in
businesses such as retail and transportation that are “bearing the
brunt” of the downturn.
“The bulk of sublease space is coming from the [Covid-19] recession and
not a structural change in the way that people work,” he said.
But others say the current downturn looks different because of the mix
of recession, pandemic, work-from-home and technological changes in the
workplace. Businesses might be jettisoning space with no intention of
leasing it back if they are adopting new workplace strategies.
The “unique factor” in this downturn is that “people are realizing that
remote work is working better than they imagined and saying: ‘You know
what? Let’s get rid of some of our space,’ ” said Mr. Anderson of CBRE.
Tech-heavy San Francisco has the largest sublease glut with 5.6% of its
total office inventory available, according to CoStar. Austin, the
Dallas-Fort Worth region and northern New Jersey across the river from
Manhattan also had sublease surpluses of more than 2%.
Boston Properties owns office buildings in Boston, Los Angeles, San
Francisco, Washington, D.C. and New York, including a 41-story Park
Avenue tower where Maurice Greenberg’s C.V. Starr is putting close to
200,000 square feet of sublet space on the market. CV Starr is an
insurance company with roots going back to a company formed in Shanghai.
Mr. Greenberg formed American International Group in 1967 as a
subsidiary of Starr.
Write to Peter Grant at peter.grant-at-wsj.com
--
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