2Q23 U.S. Sales Volume Drops 50% YoY, Says Green Street Report

Second-quarter commercial real estate (CRE) sales volumes decreased by 50% compared to the same period last year. However, they remained stable from the previous quarter, according to Green Street.

Macro challenges: Daniel Ismail from Green Street highlighted that the broader macro conditions currently do not favor CRE transactions. Several factors have contributed to this: tightened credit availability, increased interest costs, persistent wide bid-ask spreads, and a lack of forced sellers, which altogether hinder deal progress.

Sector-specific insights: The office sector, especially in cities like Houston, New York, and Atlanta, underwent the most significant reductions relative to market value predictions. Both multifamily and strip centers also witnessed pronounced year-over-year volume drops. However, the volume of net lease deals showed a more favorable trend.

Absence of forced sellers: The lack of forced sellers is another significant factor impacting CRE transaction activity. Without the urgency to sell, owners are less motivated to engage in transactions, further contributing to the decline in deal volume. A persistently wide bid-ask spread doesn’t help the situation.

➥ THE TAKEAWAY

Zoom out: In the third quarter, REIT M&A activity increased, providing optimism despite market difficulties. San Diego and NYC experienced smaller declines in commercial real estate transactions (around 37-38%) compared to cities like Atlanta, Philadelphia, and Washington, D.C. (with an 86% decline). This suggests potential investment opportunities at attractive prices, highlighting varied effects of economic issues on city markets and sectors.

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San Francisco's Office Market Shows Promising Signs with Rising Sales and Leases

After being one of the hardest-hit office markets in the U.S. since 2020, San Francisco's office market is showing promising signs of revival.

Impact of the pandemic: The tech industry's swift pivot to remote work, amplified by rising crime rates and deteriorating quality of life, nearly hollowed out SF’s business heart. With soaring vacancy rates, property valuations took a sharp dive. Yet, tides have begun to turn, and there's now a revival in the city's office landscape.

Signs of life: The appetite for office spaces is reaching its highest in years, driven significantly by the burgeoning AI sector. This trend reinforces San Francisco's appeal as a tech hub. Additionally, as property owners recalibrate price expectations, sales momentum is building, making 2023 the most active year for sales transactions since 2019.

Market reset is here: Sellers are finally adjusting their expectations, accepting prices significantly lower than those from four years ago. A notable example is the sale of 350 California Street at $61 million, a fraction of its pre-pandemic valuation. Many other properties are selling at half or even less of their former worth. While such deals are a blow to the original asking price and affect the overall property value in San Francisco, many believe that such adjustments are crucial for the rebound of a plummeting real estate market.

Revised valuations are reshaping office rents: For instance, Swig Co. and SKS Partners now offer spaces at 350 California Street for $50-$70 per SF, down from the pre-pandemic rate of $90. Moreover, investors like K. Cyrus Sanandaji of Presidio Bay Ventures are leveraging these lowered prices to enhance properties. Sanandaji bought 60 Spear Street at a 62% discount from its 2014 price, enabling the addition of amenities like a rooftop eatery and fitness center.

➥ THE TAKEAWAY

Path to recovery: While San Francisco's office market isn't fully back on its feet with a vacancy rate of over 25%, there's a silver lining. The combination of reduced rents, adaptive strategies from property owners, and heightened interest from investors suggests that the city's office sector is gradually finding its new equilibrium in a post-pandemic world.

📖 Read: While big-name office owners like Brookfield can absorb losses and re-invest elsewhere, smaller Class-B and C office owners sitting on over 2.1BSF of older properties don’t have that luxury. Here’s why.

▶️ Watch: Here are 5 reasons that retail real estate is more valuable than you might think, according to Karly Iacono and Chris Ressa, in this episode of What’s in Store from the CRE Fast Five.

🎧 Listen: Bill Gross, known as the 'Bond King' from his prosperous stint at Pimco during the bond bull market era, discusses the current market and the viability of purchasing bonds in a bearish bond climate.

Multifamily Contractors Bullish Despite Luxury Market Oversupply

Many multifamily contractors are optimistic about multifamily demand, particularly in the luxury and high-end market. However, a potential luxury oversupply problem needs to be considered.

By the numbers: The aftermath of the Great Recession saw a decline in rental vacancy rates, leading to a rebound in multifamily starts built for rental purposes. This trend continued until the end of 2019, with sustained levels of around 80–90K units per quarter. Post-COVID quarters saw a full percentage point decrease in vacancy rates, resulting in a 60% increase in multifamily starts. In 3Q22, multifamily rental starts surpassed 140K units quarterly.

Equilibrium concerns: With an influx of contractors adding supply to the market, some are concerned about the supply and demand equilibrium. Will there be enough renters to fill all the new construction and achieve the expected return on investment? Additionally, an oversupply of luxury units could impact the mid-priced market if luxury rental prices decline.

Impact of single-family market: The rental market dynamics will also be influenced by changes and shocks in the single-family market. Single-family homes are historically unaffordable, leading potential renters to consider luxury units. However, expectations of falling mortgage rates in the coming years could result in a recovery in the volume of existing single-family homes on the market, potentially diverting luxury unit renters back to the single-family market.

➥ THE TAKEAWAY

Considerations for contractors: Contractors should be cautious about the potential oversupply risk in the multifamily market, especially in the luxury and high-end segment. With many participants making similar bets, greater supply hangovers and profitability pressures may occur in highly desired geographies. Contractors may want to explore second-tier geographies that have attracted less attention from developers as potentially more promising bets.

Newest Vegas Resort a $3.7B Palace 23 Years in the Making

Real estate mogul Jeffrey Soffer has finally realized his 23-year dream of opening the Fontainebleau Las Vegas resort.

Cutting the ribbon: With a price tag of $3.7B, the 67-story resort (now the tallest hotel in Nevada) boasts 7 pools, 36 restaurants and bars, and a private club on the top floor with breathtaking skyline views. The long-awaited project suffered numerous setbacks from 2008–2009 and underwent many ownership changes before Soffer regained control and completed construction in 2021.

An epic journey: The Fontainebleau Las Vegas is the culmination of an incredible journey spanning over two decades. Acquiring the land in 2000, Soffer faced significant challenges during the Great Financial Crisis. Ultimately, he successfully reacquired the unfinished building in 2021 at a fraction of its original cost. This long-awaited opening marks a significant milestone for Soffer and his storied real estate career.

Tribute to Miami Beach: Soffer drew inspiration from his family's successful Fontainebleau resort in Miami Beach, one of the most profitable non-casino hotels in the country. Like its Miami Beach counterpart, the Fontainebleau Las Vegas features bowtie-shaped accents, a distinct blue and coral pink color scheme, and French midcentury modern-styled furniture in the rooms.

Overcoming challenges: One of the major challenges for Fontainebleau Las Vegas is its location, far from established properties that offer easy access between casinos. However, Soffer believes that investments in renovations and new properties in the area will eventually attract more visitors, creating more traffic on the North Strip.

➥ THE TAKEAWAY

Luxury on his mind: As the long-awaited Fontainebleau Las Vegas opens its doors, it signifies the remarkable completion of a project that took 23 years to complete. Despite challenges and ownership changes, Jeffrey Soffer's vision has become a reality with a $3.7B palace offering visitors a luxurious North Strip escape. Drawing inspiration from the family's successful Miami Beach resort, Soffer aims to bring the same level of luxury and opulence to Las Vegas.

Analyzing Real Estate Trends in Commodity Cities

12-month real estate returns have been less sensitive to commodity prices since the pandemic compared to prior decades and downturns. Notably, global returns are nearly 5x higher than in 2009–2010 despite much higher commodity prices.

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