Top Office Owners Don’t Want to Own Only Office Buildings Anymore
Apartment-building acquisitions spur quick returns, require ‘minimal capital expenditure’
Apartment-building acquisitions spur quick returns, require ‘minimal capital expenditure’
Many of the most prominent office developers in the U.S. are shifting gears, looking to buy or build real estate that isn’t office.
Boston Properties Inc. is planning to develop 2,000 residential units up and down the East Coast. The firm, which owns more U.S. office space than any other publicly traded company, also is developing millions of square feet of lab and life-science space.
New York office owner SL Green Realty Corp is teaming up with Caesars Entertainment Inc. in a bid to convert a Times Square office tower into a casino.
Even the companies behind some of the world’s most glamorous skyscrapers are seeking out other types of real estate. Empire State Realty Trust, owner of the Empire State Building and other office towers, late in 2021 started adding multifamily properties to its portfolio for the first time. Silverstein Properties, best known for developing the World Trade Center in lower Manhattan, is raising a $1.5 billion fund for converting obsolete office buildings into apartments.
The efforts come as the Covid-19 pandemic and rise of remote work have reordered American habits around the workplace, dimming the importance of office towers that populate city business districts. Shares of publicly traded office owners have broadly declined as investors and analysts worry that the companies’ growth prospects have been hurt by the likelihood of a long-term decline in office demand.
The U.S. office vacancy rate was 12.3% at the end of the third quarter, about where it was at its peak during the global financial crisis, according to data firm CoStar Group Inc. The rates in some major metro areas—including New York, Washington, D.C. and San Francisco—are at the highest levels that CoStar has recorded in more than two decades of tracking this data.
Corporate tenants are flooding the sublease market with office space, the main way to reduce their footprint before their leases expire. About 211.8 million square feet of sublease space is now available, nearly double the amount available compared with the end of 2019, and the highest ever recorded for major office markets, CoStar said.
Companies are also putting off searches for new space as they brace themselves for a possible economic downturn in 2023. New business searches for office space fell in 2022 to 44% of what they were in 2018 and 2019, according to VTS, a firm that operates a data platform that tracks tenant demand.
Other real-estate sectors, especially residential, seem to offer more promise.
“Office is in a state of flux these days,” said Rich Gottlieb, president of Keystone Development + Investment, a West Conshohocken, Pa.-based developer specialising in offices that has four residential projects in the pipeline in South Florida and the Philadelphia region. “But there’s still a housing shortage out there.”
Office developers pivoting toward residential or other property types say they remain bullish on the office business. Many have predicted throughout the pandemic that businesses will return in greater numbers because, they have said, the best collaboration requires face-to-face meetings in a workspace—not over Zoom.
And more recently, office owners can point to encouraging signs, including the growing number of employers who are ordering workers back to the offices and the strong demand for space with the best facilities and locations.
But developing state-of-the art office space requires an enormous capital investment to meet workers’ desire for the highest possible air quality, energy efficiency and amenities.
The economics of the residential business are currently more compelling, said Tony Malkin, chief executive of Empire State Realty Trust. He would still buy office buildings at the right price. But apartment-building acquisitions produce an immediate return and require “minimal capital expenditure,” he added.
An office landlord known as New York City REIT, whose share price has fallen below $2 during the city’s recent office slump, said it was moving beyond a focus on New York office buildings, according to a December filing with the Securities and Exchange Commission. The company said it would seek to acquire hotels and parking lots, among other non-office investments.
The shift away from new office development already is having a moderating impact on new construction. About 153 million square feet of office construction was under way in the third quarter of 2022, down from 184 million in the first quarter of 2020, according to CoStar.
Meanwhile the popularity of residential projects is having the opposite effect on the apartment pipeline. Close to 500,000 units—the most since 1986—are expected to be completed in 2023, according to a CoStar estimate. That is up from 368,000 in 2019, the firm said.
Some office developers began expanding into residential projects in the years leading up to the pandemic. AmTrust Realty Corp., which has a portfolio of about 12 million square feet of office space in Chicago, New York, Toledo, Ohio and other markets, completed its first residential development in 2020, a 270-unit project in Brooklyn.
The pandemic intensified AmTrust’s appetite to do more residential investment, said Jonathan Bennett, president of the family-controlled business. As one example, he noted that AmTrust has owned for years an office building in Tarrytown, N.Y., on a 7-acre site facing the Hudson River.
AmTrust has long considered the building a good candidate for residential conversion. Now, with the Tarrytown building’s vacancy rate high, the company is moving ahead with planning and obtaining local-government approvals for a development with scores of apartments.
“There was so much vacancy in the building, I said to my board, there will be no better time for us to put forward this plan,” Mr. Bennett said. “If this is what you want to do, this is the time to do it.”
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
Property values have fallen hard and fast in this popular city, but it’s done little to dent pandemic rises
Highest property values, biggest dip the next. That’s the outcome for Australia’s northernmost capital on the east coast, with Brisbane property values recording their largest and fastest decline, data from Corelogic reveals.
The fall comes just seven months after values hit their peak after a population surge driven by the pandemic saw an increase of 43 percent. Home values hit a record high on June 19, 2022 but have since declined 10.9 percent, in parallel with eight consecutive interest rate rises since April last year.
Historically, peak-to-trough declines in Brisbane have lasted 14 months and have ranged from value drops of -2.9 percent to -10.8 percent. While the new record is just -0.1 percent compared with previous figures, that fall came over 21 months between April 2010 and January 2012. The latest decline was a much swifter seven month drop.
CoreLogic head of research Eliza Owen said it is worth putting the Brisbane figures into context with the rest of Australia’s capital cities, as well as considering the significant rise in property values in the Queensland capital over the pandemic.
“Brisbane now stands out as one of two capital city markets with record declines, the other being Hobart,” Ms Owen said. “Sydney continues to have the largest peak-to-trough falls of the capital city markets (currently at -13.8 percent), while peak-to-tough falls remain mild in some cities (such as Perth, where values are down just -1.0 percent from a recent peak in August 2022).”
“The record fall in Brisbane home values has not made much of a dent in the gains made during the upswing. The fall in the Brisbane daily HVI follows an upswing of 43.5 percent between August 2020 and 19 June 2022, which was the fastest trajectory of rising values on record. This leaves home values across Brisbane 27.9 percent higher than at the previous trough in August 2020.”
The median dwelling value in Brisbane jumped from $506,553 at the start of the pandemic in March 2020 to $707,658 by the end of last year, Ms Owen said.
“Despite the large decline from peak, Brisbane maintains the third highest gain in value of the capital cities since the start of the pandemic,” she said.
“Only Adelaide and Darwin, which are 42.8 percent and 29.6 percent higher respectively than at the onset of the pandemic, have performed stronger.
“For this reason, there is marginal risk of negative equity for Brisbane homeowners, with the exception of very recent buyers, who purchased around the peak in June 2022 with less than a 20 percent deposit.”
However, there are signs of resilience in the market. Brisbane remains a more affordable option compared with the other east coast capitals, Ms Owen said.
Although housing values remain higher than pre-COVID levels, Brisbane retains a lower price point than Sydney, with a $435,170 difference in median house values and $280,749 difference in median unit values,” she said.
“The gap between Brisbane and Melbourne housing values is also significant, with a $119,697 gap between median house values and $97,692 difference in median unit values.
“This could encourage ongoing housing demand from those willing to migrate to the state, or own an interstate investment.”
The coastal area southeast of Melbourne is providing a permanent escape as the pandemic endures.