1. The Resilient Grip of FOMO
In this unpredictable economic tapestry, the specter of missing out looms larger than the fear of missteps, as articulated by Michael Van Konynenburg, president of Eastdil Secured. Following an intense phase of Federal Reserve tightening stretching over two and a half years, interest rates have reached a zenith, spreads have tightened, and signs of rejuvenation can be detected within the CMBS market. Despite a deceleration in economic activity, employment trends and consumer confidence display remarkable fortitude. Core capital remains scarce, yet as appraisals begin to reflect values that instill investor reassurance, a significant influx of core capital could very well be on the horizon.
2. Lowering Interest Rates: The Catalyst for Development in 2025
“To catalyze development in the forthcoming year, reigning in costs is crucial,” emphasizes Charlie Foushée, executive vice president for Skanska USA. As treasury rates hover above five percent, executing real estate transactions grows increasingly arduous. The dynamics will shift, however, when rates, cap rates, and borrowing costs decline, subsequently spawning higher proceeds. A revival of major tech players is also essential to alleviate the overabundance of supply, particularly on the West Coast.
3. The 2024 Electoral Crossroads
With the federal election casting shadows over the impending months, the fourth quarter could bear witness to heightened volatility and hints of recession. Owen Thomas, chairman & CEO of BXP, keeps a watchful eye on local election outcomes, pondering the nature of the victors: Are they overly progressive? Pragmatic problem solvers? In San Francisco, the potential emergence of a moderate Board of Supervisors paired with a moderate mayor prompts optimism from BXP’s Aaron Fenton, senior vice president for West Coast development; a change that may herald a beneficial shift for real estate.
4. Analyzing the Office Sector: Cyclical or Secular Shift?
In the post-pandemic landscape, a profound inquiry emerges regarding the nature of transformations in the office sector: are they cyclical or secular? Eliott Trencher, chief investment officer at Kilroy Realty Corporation, argues that adopting a more cyclical mindset could prove advantageous. “Armed with four years of performance data, shedding unnecessary concerns about secular changes may help us realize that offices aren’t destined for oblivion; people will return to utilize these spaces once again.”
5. Market Rankings: Who Reigns Supreme?
New York retains its crown as the premier market, buoyed by a vibrant in-person work culture and robust exposure to both financial and business services. Boston occupies the runner-up position, trailed by Washington, D.C. Among West Coast markets, the Bay Area stands out, followed closely by Seattle and Los Angeles. Nonetheless, a noticeable gap in leasing persists, particularly among tech and life science clients—markets heavily tethered to these sectors may falter. Angela Aman, CEO of Kilroy Realty Corporation, notes, “Our San Diego market demonstrates commendable activity, boasting return-to-office metrics that rival New York, setting it apart from other West Coast locales.”
6. The Case for Re-entitling to Address Supply Challenges
Today’s development landscape is anything but uniform. “Office development, in its current state, simply doesn’t pencil,” states Owen Thomas. “Rents will need substantial upward adjustments to underpin any new ventures, and such a shift will materialize over time.” Communities currently face mounting pressure to expedite housing projects and curb costs. The most effective strategy? Increasing supply, which has prompted the re-entitling of land earmarked for office use into housing developments.
7. The Return of Leverage: A Beacon for Recovery
Lenders, rigorously stress-testing borrowers against credit quality refinance risks, have encountered varying degrees of value erosion within portfolios. For Andrew Mullin, managing director of Deutsche Bank’s Global Commercial Real Estate Group, “Should lenders embrace the necessary measures to address troubled credits and recalibrate balance sheets, capital can once again flow into the market.” Interest in sectors like office, industrial, and artificial intelligence shines brightly, making the CMBS market a standout performer this year.
8. Lightning Round: One Key to Boosting Leasing
Christopher Roeder, executive managing director at JLL, advocates for government mandates on five-day work weeks as a pivotal improvement for leasing. In the same vein, BXP’s Rod Diehl emphasizes the paramount importance of public safety in all West Coast markets. “Safety and security,” concurs David Abbott, executive vice president at CBRE, must be prioritized to revitalize downtown areas as desirable places to live and work. Alongside lower interest rates, both Robert Paratte, chief leasing officer for Kilroy Realty Corporation, and Gregg Walker, president of DivcoWest Real Estate Asset Management, assert that enhanced access to capital for life science enterprises and burgeoning companies through public markets will be instrumental as well.
9. A New Era for Acquisitions?
Reflecting on market fundamentals, Eliott Trencher observes, “Leasing activity is progressing steadily, on course for the strongest year since the pandemic.” While we haven’t yet reached the stage where earnings or same-store sales are on a growth trajectory, encouraging signs are emerging in capital markets. “We’ve selectively identified portions of our portfolio ripe for igniting competition, hence we are cautiously wading into potential investment opportunities.”
10. Direct Market Engagement with Note Sales
Kevin Shannon, co-head of U.S. Capital Markets at Newmark, notes, “The debt market has significantly improved since our last discussion, particularly for sectors like industrial and multifamily, showcasing enhanced liquidity.” Here, debt continues to take precedence over equity strategies. In the realm of office, the most favorable lenders are already in the trenches, lending at a market’s nadir where leverage ratios remain low and loans are more securely grounded. Capital is increasingly gravitating towards distressed debt acquisition, with investors poised to engage directly with notes rather than the properties themselves, eliminating the need for borrower negotiations or concessions.
