Monday, February 27, 2023

Subleases: The Rising Tide That Floods the Office Market

 By Phil Mobley Market Analyst

The onset of the COVID-19 pandemic in early 2020 plunged the U.S. office market into an extended period of stagnant demand.

Since the beginning of 2020, office tenants have given back a cumulative 115 million square, and true recovery has yet to begin, with net absorption, the difference between move-ins versus move-outs, remaining negative for an unprecedented third consecutive year in 2022, albeit only marginally so. Meanwhile, the national average vacancy rate at the end of 2022 was 12.5%, 300 basis points above where it sat at the end of 2019. Entering 2023, both office performance metrics were still trending negatively.

But these weak fundamentals are not the only sign of the pandemic’s unique impact on the office sector. A sustained surge in sublease availability may be the surest signal of a persistent pivot in the way tenants use office space—one that could still be reverberating for years to come.

A Massive Wave

The most striking aspect of the recent rise in sublease inventory is its sheer size, the impact of which loses nothing in comparison with the much smaller increase that occurred during the Great Recession. Office sublease availability started rising at the beginning of 2007, even before the recession. By mid-2009, it would grow from around 95 million square feet to just over 147 million square feet, an increase of 55%.

The sublease inventory increase in the current cycle has been far greater, exploding from 121 million square feet at the end of 2019 to 245 million at the end of 2022. This 103% increase is more than twice as large in square footage as the one during the Great Recession and has also already lasted six months longer before reaching a peak.

When tenants make space available for sublease, they are often attempting to cut their own short-term losses on space they no longer need. Thus, they are sometimes willing to offer the space at rents well below what it would cost a new tenant to acquire it directly from the landlord. In some markets, this discount can be 30% to 40% or more. Thus, while the landlord may not suffer lost revenue immediately, a large amount of sublease inventory can depress the market by holding down the price of competitive space.

Furthermore, the longer this excess inventory lingers on the market, the greater the risk that it will eventually become direct vacancy, taking income out of the landlord’s pocket. The fact that the current sublease wave does not appear to have crested means that this downward pressure on rent and net operating income could last for some time.

A Broad Landfall

The impact of the surge in office sublease space is as broad as it is deep. Only a handful of primary and secondary markets have seen anything other than a substantial increase in sublease availability since 2019. For most, the increase in the amount of sublease space has been at least 50%; for many, it has been double, triple or more.

Nationally, the sublease availability rate, or the amount of sublease space available as a percent of total inventory, reached nearly 2.5% at the end of 2022, but for some markets, it is much higher. San Francisco, which has been particularly affected by changes in office usage patterns since the pandemic, now has a sublease availability rate approaching 6%.

The sublease wave has crashed across various markets with no clear pattern as to size. While secondary markets have generally weathered the past three years better than gateway cities in terms of office vacancy and net absorption, they have not escaped this particular indicator of softening tenant demand. With a few exceptions, such as Miami, Las Vegas and California's Inland Empire, sublease levels have been meaningful enough in most markets to weigh on rental growth, even as they portend a higher ceiling on vacancy.

Surging Across Both Downtowns and Suburbs

Just as markets of all sizes have generally seen similarly large increases in office sublease inventory, so too have downtown and suburban areas—at least in the aggregate. Central business districts and other urban areas have historically seen a higher sublease availability rate, which stands to reason as they also tend to have a greater share of large blocks of market-leading space. For this and similar reasons, urban core areas bore the brunt as tenants vacated space in 2020 and 2021, while the suburbs initially proved more resilient.

But the spring tide of sublease inventory has flooded into the suburbs as well, signifying a general decline in demand that appears to reflect more than a changing preference for location. Suburban offices, too, find themselves in a new competitive environment.

New Buildings Not Immune

One recessionary trend that has proven reliable in the post-pandemic era is the flight to quality. This is clearly visible in the stability of demand for space at newer-vintage buildings. While tenants have fled more than 300 million square feet in older-vintage buildings since 2019, net absorption has been positive in each of the past three years at buildings delivered in 2015 or later.

Yet the post-COVID sublease surge shows that even newer, high-quality office buildings are far from bulletproof. Among four- and five-star buildings—those at the top of the quality scale—sublease availability is now well over 4% at both newer- and older-vintage properties. Furthermore, it has increased at a similar rate for both.

This is a pointed reminder that the long-term implications of the pandemic are still playing out, even as the prospect of a new recession clouds the horizon. Such a recession could alter the balance of power in the labor market, and it is possible that this could lead to increased office utilization by motivating employees to come in more frequently.

But any impact on office demand would take time to occur, and the associated job losses from a recession would do little to stimulate office demand in the short term. With a tidal wave of sublease inventory already washing through the market, the bottom may be further out than it appeared a year ago. In any case, the office sector looks to be facing a slow road to recovery.

Commercial Real Estate Construction Outlook (Video)

Could more than 1B square feet of US office space become obsolete?

 Ashley Fahey Editor, The National Observer: Real Estate Edition

As much as 1.4 billion square feet of U.S. office space could become functionally obsolete by the end of the decade.

That's according to a new analysis by Cushman & Wakefield PLC (NYSE: CWK), which examined which categories of office space could become outdated in the coming years. When factoring in the national office market's natural vacancy — 13% before the pandemic — the decade could end with 330 million square feet of excessive vacant office space, according to Cushman.

Unsurprisingly, it's expected obsolete space will be largely contained within older office buildings that aren't renovated, sustainable or in desirable locations for today's office tenants.

Another analysis by CoStar Group Inc. (Nasdaq: CSGP), per a request by The Business Journals, found about 20,000 office buildings completed before 2014 are at least 25% vacant and comprise about 1.1 billion square feet, or about 13.4%, of total inventory nationally. That type of space accounts for 54.2% of the 580 million-plus square feet currently vacant nationally, signaling it's fallen out of favor with tenants making real estate decisions in the wake of pandemic-induced hybrid work trends and a rockier economy.

Abby Corbett, global head of investor insights at Cushman, said despite the growing obsolescence of some office space, there's potential opportunity for office buildings at risk of becoming irrelevant to be reimagined once the economy strengthens.

"The relationship between office employment growth and office demand is going to re-solidify and strengthen in the coming era," Corbett said. "It's going to get worse before it gets better."

While conversions into residential, medical office or labs have become a trendy solution to deal with the growing glut of office space nationally, it's a challenging design, engineering and financial feat to get those projects across the finish line.

Full story:

Tuesday, February 21, 2023

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South Jersey shopping center sells for $36.5M; developer buys Fishtown site with plans for 7-story project

Paul Schwedelson Reporter - Philadelphia Business Journal

The View at Marlton, a shopping center in Marlton, New Jersey, sold for $36.5 million.

A roundup of recent real estate transactions across the Philadelphia region:

$36.5 million

A Philadelphia-based partnership between Abrams Realty & Development and Lazgor Co. sold The View at Marlton for $36.5 million to Lakewood, New Jersey-based Paramount Realty Services as part of a 1031 exchange.

The 91,000-square-foot Marlton, New Jersey shopping center was built in 2017 and is 98% occupied. Tenants include LA Fitness, AAA, Truist Financial Corp., Dunkin’ Donuts, several beauty tenants and more.

$4.6 million

Lifelong Commercial Real Estate bought a 4,460-square-foot Wawa store at 949 Montgomery Ave. in Narberth from a national real estate investment trust for $4.6 million. The property is near the intersection of Montgomery Avenue and Old Gulph Road.

$4.2 million

Velocity Venture Partners sold a 48,000-square-foot industrial building at 436 Commerce Lane in West Berlin, New Jersey, to an undisclosed buyer for $4.2 million. Velocity bought the property in August 2020 for $2.7 million.

The building is fully occupied by site investigation contractor Conetec, drywall contractor P&B Partitions, Walmart, and Closet & Storage Concepts.

$2.175 million

A private group sold the property at 130 W. Girard Ave. in Fishtown for $2.175 million to Philadelphia-based High Top Development, which plans to build a seven-story, 84-unit building on the site.

The triangular-shaped property is on the southwest corner of West Girard Avenue and North Howard Street on the border of Fishtown and Northern Liberties. It was previously a Truist bank branch and was marketed as a development opportunity.

Friday, February 17, 2023

Innovative Commercial Real Estate Trends (Video)

Court Street Ventures Completes Last-Mile Delivery Facility in Philadelphia's I-95 Corridor

 By Taylor Collins CoStar Research

Court Street Ventures, a New Jersey real estate firm founded in 2020 by Evan Kleppe, has completed construction on a new 381,200-square-foot, last-mile urban distribution center on the site of the former Crown Cork & Seal manufacturing site in Philadelphia at 956 E. Erie Ave.

Developed as a joint venture between Court Street Ventures and Walton Street Capital, a Chicago-based real estate investment firm, the Crown 95 Logistics Center includes 3.5 acres of secure, off-street parking, 36' clear ceiling heights and parking for 199 cars and 104 trailers located less than 1.5 miles from I-95 within a Keystone Opportunity Zone, offering tax incentives through 2028.

Tuesday, February 14, 2023

PREIT sells Plymouth Meeting Whole Foods site for $27 million

 Paul Schwedelson Reporter - Philadelphia Business Journal

The Whole Foods Market at Plymouth Meeting Mall.

PREIT has sold a Whole Foods-leased parcel at Plymouth Meeting Mall for $27 million, part of the Philadelphia real estate investment trust's ongoing plan to raise capital.

The buyer was Agree Realty (NYSE: ADC), a REIT based in Bloomfield Hills, Michigan.

Since the beginning of 2022, PREIT has sold assets generating $141 million. Asset sales and excess cash from operations went toward paying down $184 million in debt in 2022.

Philadelphia-based PREIT (OTCMKTS: PRET) reported a net loss of $71.3 million in the third quarter of 2022 and was delisted from the New York Stock Exchange in December. The company has said it will explore its options, including positioning itself to become more attractive to another company for a potential merger.

The 65,000-square-foot Whole Foods at the Plymouth Meeting Mall opened in 2010 and the grocer has a long-term lease on the property. PREIT will continue to own the rest of the mall outside of the Whole Foods site at 500 W. Germantonwn Pike.

Agree Realty owns and operates 1,839 properties in all 48 states, containing about 38 million square feet of gross leasable space, as of December. Agree owns more than 50 properties in New Jersey and about 75 properties in Pennsylvania. The properties include a variety of retail stores like Dollar General, Home Depot, AutoZone and stores with smaller footprints like CVS and Wawa.

Full story:

Thursday, February 9, 2023

Rockefeller Group Trades South New Jersey Warehouse for $83 Million to Expanding Food Firm

 By Linda Moss CoStar News

Rockefeller Group has sold a recently completed 345,600-square-foot distribution center in the southern part of New Jersey for $83 million, as industrial projects continue to make their way out of the densely developed northern area of the Garden State.

New York-based Rockefeller on Wednesday said Glendale Warehouse and Distribution Corp. had acquired the Rockefeller Group Logistics Center at 2575 Route 206 in Eastampton. The industrial facility is located on roughly 28 acres about 8 miles from Exit 7 of the New Jersey Turnpike. Rockefeller Group purchased the property in September 2021. The buyer, a growing company, is consolidating some of its operations from Edison, New Jersey.

The new Class A distribution center is in one of New Jersey’s fastest-growing industrial markets, Burlington County, according to Zac Csik, vice president of Rockefeller New Jersey-Pennsylvania development. The complex "drew significant interest from both local and national users during the construction of the core and shell," he said in a statement.

New Jersey is one of the most in-demand markets for industrial users, because of its proximity to major airports and seaports and its location in a highly populated region. But industrial space is extremely tight in North Jersey, with record-low vacancy rates and little open land left to build on. So for several years now real estate firms have increasingly been buying parcels and building warehouse father and farther south. They have clustered those distribution centers along the turnpike.

Glendale will use its newly acquired warehouse to distribute spices and other food products, according to Rockefeller. The distribution center includes 96 trailer spaces, 384 auto-parking spaces and a 185-foot truck court with a 60-foot concrete apron. The property also features 54 dock doors with two drive-in doors, 36-foot-clear ceiling heights, 4,000 square feet of speculative office space and 3,000 amps of power.

Glendale is expanding its business in New Jersey, according to the company's president, Frank Collette.

“With this new facility, developed by a terrific partner in Rockefeller Group, we are consolidating operations from multiple buildings in Edison to this larger building and will be able to better serve our customers and utilize multiple ports of entry for our imported products,” he said in a statement.

Glendale will employ about 30 workers at the new facility, many of whom are coming over from its sites in Edison, according to Rockefeller.

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Thursday, February 2, 2023

Jefferson Apartment Group & CP Capital Purchase 14-acres in Fort Washington, PA

 By David Hoffman

Jefferson Apartment Group (JAG) and equity partner CP Capital have purchased 14-acres in Fort Washington, PA, a suburb of Philadelphia, to build a luxury apartment complex.

The community, located at 1125 Virginia Drive, will be comprised of 310 units across three five-story mid-rise buildings. A pedestrian promenade will connect the buildings, which will be situated among eight acres of open space. The promenade will also connect directly to Fort Washington walking and biking trails and provide access to adjacent retail.

The project will have 12,000 square feet of interior amenity space including a grand clubroom with a bar, lounge and double-sided fireplace; game area with billiards, shuffleboard, and pinball; poker room; leading-edge fitness center; resident movie theater; private dining room; and co-working area with micro-offices.

In addition, outdoor amenities will feature a resort-style courtyard area with swimming pool, grilling stations, fire pits, and abundant lounge areas. JAG is also debuting its first pickleball courts at this new community. There are also plans for a large dog park, along with two pocket parks across the property. The site will feature surface parking, garage parking options, and EV charging stations.

The project is expected to break ground in February 2023 with delivery in late 2024.