Market analysis: NYC counts the costs of Covid

New York City (NYC) is virtually synonymous with commercial real estate. It’s a mega sector there, with legendary dealmakers and eye-watering costs. With an incredibly dense population and as a home to a huge number of global headquarters, the city was not only hit hard by the Covid-19 pandemic, but also responded with some of the strongest mitigation tactics seen stateside and in the world. A report from the New York State Comptroller Thomas DiNapoli (published late 2021) now shows the true costs of Covid on NYC’s iconic commercial real estate (CRE).

Setting the scene

In 2019, reads the report, the office sector in NYC employed 1.6 million people, or a third of all city jobs. In the preceding decade, office market property values and billable values (on which property taxes are levied) had “more than doubled”. Off this incredibly strong base, employment in the office sector shrunk by 5.7% in 2020 – certainly a blow, but less than the 11.1% drop in total employment.

The gap here lies in remote work as a mitigation strategy, but that resulted in reduced office space demand. “Asking rents are down 4.2% in the second quarter of 2021, while vacancy rates are at 18.3%, a level not seen in over 30 years in New York City,” according to the report.

Market values down

The result is a steep drop in the full market value of office buildings (463 million square feet of inventory), which fell $28.6 billion citywide – based on the 2022 financial year (FY) final assessment roll. This is the first decline in total office property market values since FY 2000.

In turn, Market Watch’s analysis says, the declines “cost more than $850 million in property taxes in the city’s fiscal 2022 budget.

Charting the return

What the ledger numbers don’t indicate, though, is “what next?”. Partnership for New York says that while the labor market recovery “remains sluggish”, NYC saw “strong income and sales tax revenues and pandemic-era highs in hotel occupancy and transit ridership” during Q3 2021.

The New York City Recovery Index – a joint project of Investopedia and NY1 – puts the state of the city’s recovery at a score of 85 out of 100, or “over four-fifths of the way back to early March 2020 levels”.

The CRE shakeup has also led to some much needed strategic thought and speculation about the future for NYC, including suggestions that empty office space be converted to residential to address the city’s need for affordable housing.

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Three “glass-half-full” forecasts for the new year

Despite the ongoing uncertainty of the new virulent Omicron variant of Covid-19, there are a lot of positive signs that we can expect in 2022 for commercial real estate (CRE), according to a round-up of sources.

The case for optimism

First, however, an important caveat: Of course, all of these predictions are opinion. No matter how great the historical data used to inform those opinions, they are still not to be considered “financial advice”. Having said that, after a difficult two years (for global business, not just real estate), a little optimism is a welcome break.

Survey says…

First up, Deloitte’s annual forecast report for the CRE sector is out, and generally reflects a high degree of buoyancy.

“Eighty percent of respondents [to their survey] expect their institution’s revenues in 2022 to be slightly or significantly better than 2021 levels,” writes the report’s authors.

…And so does the data

Meanwhile, Forbes real estate contributor and economic analyst Calvin Schnure has done a list of predictions for the year ahead, starting with this one: “Property transactions will rise further in 2022 as the economic recovery gains momentum, and CRE prices will maintain growth in the mid-single digits. REIT mergers and acquisitions could top 2021 as well,” writes Schnure.

How does he come to this conclusion? It’s a matter of looking at the bigger (data) picture trends, he says – plotting this graph from RCA, Bloomberg and NAREIT data.

Source: https://www.forbes.com/sites/calvinschnure/2021/12/01/top-10-things-to-watch-in-commercial-real-estate-in-2022/?sh=352375d63002

“All in alert”

Finally, in December 2021, investment and commercial analysis publication The Motley Fool issued a “rare ‘all in’ buy alert” for CRE, offering three key points of their bullish positioning:

  • “Industrial and multifamily sectors look the most promising in the new year.”
  • “Retail and office CRE should have its good performers but see more headwinds.”
  • “REITs remain a promising avenue for overall returns.”

For the nitty-gritty in how they came to this conclusion, read the full analysis by author Marc Rappaport here.

As we said above, a prediction isn’t a guarantee, a forecast isn’t fact, but we think these bold analysts make a great case for optimism and a solid-looking year ahead for commercial property and investing.

From us to you, happy new year to our CRE network and peers!

CMBS market still resilient despite office headwinds

Extended uncertainty about the anticipated return to the workplace will have ramifications in the securities markets, but commercial mortgage-backed securities (CMBS) are holding strong… for now.

CMBS 101:

Commercial mortgage-backed securities (CMBS) are a financial product, a type of bond issued in securities markets, and built on the cash flow from pooled mortgages on commercial properties. They are often grouped by region or type of property, such as office CMBS or multifamily CMBS.

Vacancy rate effect

Naturally, the health of the underlying category influences the CMBS itself, although, unlike direct investment, these have a degree of diversification built into the asset which represents a bundle of loans.

In the US, the office sector currently accounts for almost a third of the underlying value within CMBS, and this has institutional investors wary, despite the 38.6% improvement in office occupancy in late 2021, investment specialist Jen Ripper told Commercial Observer.

This means “upcoming lease rolls and loans” would be “under heavy investor scrutiny”, she added.

Trends over time

CMBSes have, however, been resilient throughout the Covid-19 pandemic. CRED iQ – a data company – told the publication that CMBS office debt has remained relatively unscathed, with only 2.89% in “either delinquency or special servicing”. In December, the delinquency rate declined made for a 17-month streak of improvement.

“By property type”, they added, “individual delinquency rates for lodging and retail exhibited modest month-over-month improvements but still remain the two most distressed sectors.

This is largely in line with the results from data provider Trepp, who found the delinquency rate across categories dropped 20 basis points from October to 4.41% in November 2021. Within Trepp’s report, though, lodging and retail “saw the biggest improvements”.

Uncovering opportunities

Beyond its relevance for investors, keeping an eye on the strength of CMBS loans can help commercial real estate (CRE) professionals in spotting opportunities and even leads – as it forms part of property debt research.

Two Tales of One City

by Alec Pacella for Properties Magazine January 2022

The dust has finally settled on 2021 and, for better or worse, it looked a lot like 2020. It’s that “better or worse” part that will be the focus of my annual wrap-up column.

I’ve used this theme a few times in past columns, sometimes I termed it “best of times, worst of times’ while other times I called it “glass half full, glass half empty.’ As has been said several times in the recent past, COVID has accelerated trends that were already present and the concept of ‘better or worse’ is no exception. To see what fared better and what fared worse, read on.

Click the link for the complete article: http://digital.propertiesmag.com/publication/?m=&l=1&i=734292&p=64&pp=2&ver=html5

Work smarter not harder: The impact of blockchain on CRE

So far in this blog series, we’ve looked at some of the most cutting-edge emerging technologies: The Internet of Things (IoT), robotics, and virtual reality. We’ve discussed the potential these developments have to revolutionize the way we do business and work in the real estate space. 

While each of those has its applications, none hold quite the same promise for changing the fundamental aspects of how we make, and document, commercial real estate (CRE) deals as blockchain. In this fourth entry in the emerging tech series, we have a look at the implications of this pivotal technology.

Blockchain basics

Nowadays, blockchain is a term everyone’s hearing with increasing regularity. To start, it’s worth having a brief recap of exactly what the tech is. At its simplest, a blockchain is a ledger – a record of information. Not all that different from the databases you’re already using to record details of properties, clients, or transactions. 

The feature that makes blockchain unique is the way that information is recorded. Each “block” can hold a certain amount of data. Once a block is full, a new block is started and the previous block forms part of an immutable chain – essentially a timeline extending outwards from the first block to the current one. 

Information on the blockchain is public and distributed across a network of computer systems – meaning that it’s very, very difficult for one person to hack or alter the information stored in the chain. 

Streamlined data

The opportunity blockchain presents for the CRE space, is the ability to streamline a lot of time-consuming tasks. Imagine having all of the paperwork for a given property digitized, accessible to everyone involved in the deal, and confirmed as accurate by multiple parties. 

Steve Weikal, MIT’s Head of Industry Relations at the Center for Real Estate, describes it like this:

“There are two areas where I think the blockchain is. There’s going to be the intersection with legal tech, so that’s land registry and recording and ownership, and all of that paperwork that exists in the system… the other is the intersection with fintech.”

Of course, an issue that comes up here is how this system can be used with potentially sensitive information – client details that shouldn’t be a matter of public record. For business networks, private blockchains can be set up to only allow access to specified parties. In this case, the identity of participants is verified in the network as well, unlike public blockchain where users can remain anonymous. Private blockchains function more like a traditional database in this sense, trading off some of the immutability of their data for privileged access. 

Sealing the smart deal

Maybe the most promising application of blockchain for CRE deals is being able to deploy “Smart Contracts” for things like tenancy agreements. Smart contracts hard code the details of an agreement on the blockchain, and are uniquely suited to real estate deals, because they can handle conditional clauses. 

As an example, startups like UK-based Midasium are already providing a prototype platform that replaces traditional landlord-tenant agreements. Using smart tenancy contracts, clauses of the agreement are automatically enforced when certain conditions are met. This can include paying rent, returning a security deposit, and directly deducting maintenance costs from the rental amount paid across to the landlord. 

It’s a system designed for transparency and rapid settlement, and the concept is gaining traction in other parts of the world. An added bonus of using smart contracts for tenancy is the possibility of building up a database of real-time data for rental prices and trends in the rental market.

A growing sector

Overall, enterprise reliance on blockchain is set for rapid acceleration. Forbes, quoting an International Data Corporation (IDC) report notes that:

“Investment in blockchain technology by businesses is forecast to reach almost $16 billion by 2023. By comparison, spending was said to be around $2.7 billion in 2019, and we will see this acceleration ramping up over the coming year.”

Blockchain adoption in CRE, however, is still in the early stages. The tech still needs to overcome a few growing pains – in terms of privacy concerns, operational complexity, and a lack of standardized processes – before we’ll necessarily see it forming the backbone of CRE transactions.

That said, it’s a space well worth keeping an eye on. There’s been growing interest, for example, in CRE tokenization –  splitting the value of a given asset into separately buyable blockchain-based tokens. What this means in practice is that instead of looking for one buyer for an expensive asset the value gets subdivided and opened to a much broader market. Which in turn may actually boost the value of the underlying asset.

There’s a lot of potential and little doubt that blockchain will make its way into CRE one way or another. But, like many things in the cryptocurrency and blockchain space, the real challenge will be separating the wheat from the chaff, the fact from the hype, and identifying functional applications of the tech rather than purely fanciful ones.