Moody’s Reports Office Vacancies Near 20% in Q1

U.S. office vacancy rates are nearing a record 20%, slashing its record set just a quarter ago.

Moody's Reports Office Vacancies Near 20% in Q1

U.S. office vacancy rates are nearing a record 20%, slashing its record set just a quarter ago.

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Good morning. U.S. office vacancy rates are nearing a record 20%, slashing its record set just a quarter ago. Plus, Centerbridge and Suntex are teaming up to acquire over $1.25 billion in marina properties.

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PROPERTY REPORT

Moody’s: Office Vacancies Near 20%, Set New Record

office vacancies soared to a record

U.S. office vacancy rates reached a new high of 19.8% in Q1 2024, according to a preliminary report by Moody's Analytics.

Record-breaking: The office market continues to grapple with vacancy challenges, now surpassing previous peaks seen in the economic downturns of the mid-1980s and early 1990s. Despite positive trends in employment and GDP, the shift towards remote and flexible work continues to spell trouble for office owners, moving the sector 20 bps closer to the 20% vacancy mark.

By the numbers: As the vacancy rate climbs, effective rents have slightly declined by 0.04% in Q1 2024, even as asking rents saw a marginal increase of 0.14%. The discrepancy suggests tenants are leveraging market conditions to secure better deals despite overall stagnant or slightly negative rent growth.

What they are saying: Thomas LaSalvia of Moody's suggests the office sector's troubles aren't over yet but points out that positive economic signs are mitigating a total downturn. Unlike the quick surge in vacancies during the financial crisis due to abrupt economic stress, the current decline in office demand is more gradual, he explained in a recent interview.

➥ THE TAKEAWAY 

Looking ahead: Despite a gradual rise in vacancies, many companies are still committed to office spaces, countering the worst-case forecasts. Physical presence is important for culture and collaboration. But demand is shifting. U.S. downtown developments of sleek office towers have attracted tenants from older buildings, yet the shift to premium spaces hasn't spurred equivalent new supply. And with the uncertain timing of lease renewals and variable interest rates, predictions on when vacancies might peak remain to be determined.

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✍️ Editor’s Picks

  • Dividend dilemma: Blackstone Real Estate Income Trust (BREIT) failed to cover its dividend, generating $2.7B in cash but paying out $2.8B.

  • Branded different: Two-thirds of U.S. hotels are branded, yet major companies like Marriott (MAR), Hilton (HLT), Hyatt (H) don't own 99% of them.

  • Desert dwellers: In Phoenix, Arizona, a battleground state, a couple earning $3,500 a month is struggling with recently doubled rents.

  • Debt digest: Cushman & Wakefield (CWK) reports financial market improvement due to the Fed's dovish messaging shift in December.

  • Bally's battle: Investors challenge Chairman Soo Kim's low bid to privatize Bally’s (BALY), warning of financial risks for the $1.7B Chicago casino.

🏘️ MULTIFAMILY

  • Developing dreams: Patrick McAnaney explores the math behind building affordable housing in DC for a family of four earning 50% AMI.

  • Senior housing surge: Ventas owns 1,400 properties, 800 in senior housing, and plans a $300M investment in more senior housing by mid-2024.

  • Foreclosure frenzy: Arbor Realty (ABR) to foreclose on a $60M loan delinquency at Westchase multifamily complex, part of a larger $100M deal.

🏭 Industrial

  • Trouble in paradise: Vertically integrated IKEA, long seen as near-invincible in its niche, will permanently close a 646KSF Napa County logistics center.

  • Leasing trends: The industrial market is seeing increased supply, leading to favorable leasing terms for tenants, even as new construction drops over 70%.

  • Getting it done: Alliance HP just paid $23.1M for a Montgomery County office and industrial buildings at 1 Innovation Drive in Plymouth Meeting, totalling 220KSF.

🏬 RETAIL

  • A gem of a move: Bulgari plans to move to Grosvenor's 200 Grant Ave from One Union Square, leasing over 9KSF and strengthening the luxury corner.

  • Revamping retail: Ashkenazy plans a 2.4MSF Hechinger Mall revamp, adding multifamily units in Washington, DC, amid legal disputes.

  • PREIT rises again: PREIT emerged from a second Chapter 11 bankruptcy, cutting $835M in debt, appointing a new CEO, and going private.

  • Luxury expansion: Hilton (HLT) acquired a majority stake in Sydell Group to expand its NoMad luxury brand globally, aiming to develop 100 more hotels.

🏢 OFFICE

  • Out with the old: In a sign of the times, an older, 12-story downtown DC office building built in 1978 was sold at a steep discount for under $27M. 

  • Skyscraper success: JMB Realty secures a $575M loan for a  37-story LA office tower, pre-leased to major tenants, with completion expected in 2026.

🏨 Hospitality

  • Renovating Montauk: The Sands Motel in Montauk was purchased by Enduring Hospitality after being listed last summer for $28M.

  • RevPAR resurgence: In 2023, the global hotel industry achieved essentially a full recovery, with RevPAR surpassing 2019 levels and APAC expected to follow in 2024.

  • Realistic refi: Valencia Hotel Group secured a $19.5M, 5-year fixed-rate loan at 7.74% for the Texican Court boutique hotel in Irving, DFW.

MARINA MANIA

Centerbridge JV Eyes $1.25B in Marina Deals, Boat Storage Space

Centerbridge Joint Venture Eyes $1.25 Billion in Marina Deals

Homes near Castle Harbor Marina in Stevensville, Maryland. Photographer: Jim Watson/AFP/Getty Images

Centerbridge Partners is joining forces with Suntex Marina Investors, aiming to scoop up over $1.25 billion in marina properties.

Deal details: This strategic partnership includes not just Suntex, but also other institutional investors. Suntex is set to inject capital and, in return, will earn management fees. To fuel their acquisition spree, they've secured a revolving credit line of up to $600 million, spearheaded by Wells Fargo & Co.

Some background: Centerbridge's involvement with Suntex dates back to 2021, when it played a pivotal role in the company's recapitalization amidst a surge in leisure spending due to the pandemic. Although an IPO seemed on the horizon in 2022 with Suntex potentially valued at over $3 billion, the plan shifted towards private capital fundraising amid a cool down in the IPO market.

Between the lines: Since 2021, Suntex has expanded its marina operations, enhancing storage and hospitality and benefiting local communities. "We're eager to extend our successful partnership, spreading Suntex's high-quality model further across the U.S.," said Matt Dabrowski of Centerbridge Partners.

➥ THE TAKEAWAY 

Investment strategy: Despite a downturn in new boat sales post-Covid, attributed largely to rising interest rates, the demand for marinas outstrips supply. Centerbridge views this imbalance as an opportunity for Suntex to lead the charge in consolidating the fragmented marina industry. Suntex's acquisition of Westrec in 2022 and Almar earlier this year, boosting its portfolio to 88 properties, underlines this strategy.

📈 CHART OF THE DAY

As of the fourth quarter of 2023, multifamily loans stood out for having the lowest rate of non-performing loans across all banking categories. This performance is especially notable against the backdrop of last year's concerns. As banks prepare to release their Q1 2024 data, this statistic will be particularly intriguing, especially since federal regulators grouped multifamily loans with office properties in a December letter, indicating a sector to watch closely.

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