Live Q&A Recap with CompStak and Trepp: Upcoming Office Loan Maturities, Large Lease Expirations, and Anemic Space Demand—the Perfect Storm?

CompStak and Trepp recently published a joint report on the office sector looking at leasing trends in metropolitan statistical areas (MSAs) with sizable near-term loan maturities (through the end of 2024). We received so much exciting feedback after the initial release of our report that we hosted a live Q&A with the researchers themselves to talk about industry insights and what to expect from the office sector. 

If you missed it or want a refresher on our discussion, check out the replay below with Alie Baumann, Director of Real Estate Intelligence at CompStak, and Stephen Buschbom, Research Director at Trepp!

Take a look at the rest of the questions and answers we didn’t get to during the Q&A.

Q&A with CompStak and Trepp

Q: Do you have footnotes on which buildings have the 1 in 5 top tenants expiring in the next 2 years, or a list of the buildings surveyed?

A (Trepp): Five of the largest leases expiring in 2023 and 2024 (top 5 tenants) are Pfizer, AT&T, Equitable Financial, Invesco, and ViacomCBS. Pfizer and ViacomCBS are moving their headquarters to other buildings so these are planned/expected lease expirations. Invesco renewed/extended their lease, but cut their footprint in half. According to news sources, Equitable will be relocating their headquarters. Finally, AT&T consolidated their footprint in Atlanta back in 2018 where this large lease is located that is expiring. While their previous consolidation indicates they may renew to stay in place, it is not guaranteed.

Q: What are the trends in absorption of sublease office space?

A (CompStak): Sublease space is still at record levels and hasn’t demonstrated signs of abating. And there are still some companies that are still putting substantial blocks on the market. For example, Twitter just announced they are putting 200,000 square on the market in Midtown South Manhattan. And in the same newsweek, Salesforce also announced it would be putting 125,000 square feet of space for sublease at 415 Mission Street, its own headquarters, in San Francisco.  Since the pandemic began, there’s always been a certain amount of the space that was put on the market “opportunistically” meaning the tenant was interested in shedding it at the right price or the right deal. Sublease space also rose during and in the wake of the Great Financial Crisis, and while some was leased, a large share was withdrawn from the market when economic woes abated. That isn’t happening now. 

Traditionally, if market fundamentals were improving, the data would show that sublease rents for deals completed are stabilizing or increasing. Sublease rents for closed transactions are flat or trending down and remain below pre-pandemic levels suggesting that there isn’t any abatement there or acceleration of interest among the historic level of sublease availability. For example, in New York City, the average sublease rent is nearly $20 below the average base rent for closed direct transactions and down from 2019’s pricing.  In San Francisco, the average sublease rent is $12 per square foot below direct pricing and is 17% below 2019’s average base rent for sublease transactions. 

In a recent blog, CompStak evaluated the top 36 most valuable (total value) sublease transactions completed since the beginning of the pandemic. Not surprisingly, most of the top valued transactions were completed in New York City, San Francisco, and the Bay Area

The largest share (38.9%) of these top subleases by value came from the TAMI, but just over 27.8% of the top ranked subleases by value were absorbed by this sector. These subleases ranked high in value largely due to longer lease terms— among these top subleases the lease term averaged 118 months, which outpaced the average direct lease term for direct deals completed in NYC, San Francisco, and the Bay Area over the same period.

Q: Hartford, Connecticut has convened an ad hoc committee to address the office vacancy. Where else?

A (CompStak): It’s a long list. Many cities across the U.S. are evaluating how to address a triple threat of empty central business districts, looming budget shortfalls, and housing shortages. Recently, CompStak published a blog on several major markets’ policy proposals and the kind of stats that influence the viability of residential conversions. 

Here’s what we compiled in that blog about how major markets are tackling office vacancy through office to residential conversion policy:

Washington, D. C. has started a tax abatement fund to accelerate conversions in its Downtown

New York City is aiming to rezone swaths of Midtown and the Garment District to allow for residences and is also proposing to make more buildings eligible under zoning, bringing the date for eligibility from 1961 in Midtown Manhattan and 1977 in Downtown Manhattan to 1990 across the board

San Francisco is exploring loosening burdensome regulations to aid conversions such as removing density restrictions, streamlining project review and reducing the requirement for “Below Market Rate” housing

Chicago has started an incentive fund to accelerate conversions and plans to rezone Eastern portions of the Downtown Loop

Q: Urban vacancy remains high. What is the long term outlook for suburban professional service office space?

A (CompStak): Overall, office markets in central business districts have appeared to experience greater pain than their suburban counterparts so far. According to NCREIF’s NPI, CBD returns have fallen negative for the past three quarters, dipping to -5.5% in the fourth quarter of 2022. At the same time, suburban returns only fell negative in the fourth quarter to -3.9%, but have been tracking higher since the first quarter of 2020.  In addition, occupancy has been falling faster for CBD properties in this index as compared to suburban.

When CompStak last evaluated CBD vs suburban effective rents for across five major markets including New York City, Dallas-Fort Worth, Chicago, San Francisco/Bay Area, and Chicago last fall, we found that class A suburban was slightly outperforming CBD as far as pricing for closed transactions since 2019.

Q: What’s your outlook for WFH longer term? Fad or the future?

A (CompStak): Remote work, work from home, hybrid model. Whatever you want to call it, there is going to be a permanent structural shift in office usage but unfortunately no one can agree on just how much yet. Even if the return to office figures keep ticking up, we are likely to fall well short of pre-pandemic levels. In other words, there is likely some amount of demand that won’t come back. For example, Kastle’s data just passed the 50% mark, a post-pandemic high, but pre-pandemic occupancy was probably 85% which is a long way off. Additional information on the long-term effect of hybrid and remote work likely won’t be revealed until we start seeing significant lease rollover from large leases from major occupiers nationwide—how much additional efficiency/cost cutting will they seek in their real estate portfolio if they make a hybrid model permanent?

It’s important to evaluate what the nation’s biggest tenants are doing. Amazon is currently committed to a hybrid model, having announced 3 days a week mandatory in early February. Just a few weeks later, they announced they would be pausing construction on the second phase of their HQ headquarters in Crystal City, Arlington. Salesforce adopted a hybrid policy in late 2022, reversing policy after a previously stated  ‘work from anywhere policy’. But at the same time they are cutting space from their portfolio across the country, with the tech firm’s most recently announced plan to sublease space at their headquarters in San Francisco. Finally, Google also has a hybrid model and has announced plans to cut space, with details on exactly where and how much sparse so far. While many of these companies have also announced layoffs and may just need less space for upcoming headcount, greater efficiency in real estate may also be strongly influenced on their planning for a hybrid-only work future.

Interested in learning more about CompStak and Trepp’s partnership and the data you can find on the CompStak platform? Let’s talk!