Professor Glenn A. Okun
Office tenants have been dieting faithfully throughout last year. The growing inventory of vacant office space has been the resulting casualty. The commercial real estate (“CRE”) debt maturity problem has been exacerbated as a result.
The Rabid Capitalist previously warned its subscribers that the CRE debt maturity paywall would pose a threat to regional and small banks (see https://therabidcapitalist.com/2024/01/16/office-we-dont-need-an-office/ and https://therabidcapitalist.com/2024/02/07/the-debt-maturity-paywall-damage-assessment-the-good-the-bad-and-the-ugly/). The underlying trends toward hybrid work cause tenants to reduce their space needs, decreasing their real estate costs.
This reduction in office space needs has been reflected in recent leasing activity. According to CBRE, 58% of the 100 largest office leases by square footage in 2023 were renewals. This was a major change from 2019, when 68% of the largest office leases were for new space.
Overall office requirements have declined. The 100 largest leases covered 26.8 million square feet in 2023, a ten percent decline from 30.4 square feet in 2022.
Tenants have been favoring class A offices in top locations over lower cost and quality offerings. Seventy five percent of the top one hundred leases of 2023 were signed in top tier buildings.
These effects have been confined largely to lower grade, older office properties to date. Unfortunately, hybrid work trends may reach trophy office real estate as well, threatening owners and lenders alike.
The office REITs and regional banks do not reflect these forces in their valuations. The Rabid Capitalist advises its subscribers to avoid these sectors.
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