March 2023 Real Estate Market Trends: Insights and Analysis

As the business landscape continues to evolve rapidly, it's important for entrepreneurs and investors alike to stay up-to-date on the latest developments in the market.

In this post, we'll explore the current trends that are driving growth and innovation across various industries.

Pimco-Owned Office Landlord Defaults on $1.7 Billion Mortgage

Columbia Property Trust, an office landlord owned by Pacific Investment Management Co. (Pimco), has defaulted on approximately $1.7 billion of mortgage notes on seven buildings located in San Francisco, New York, Boston, and Jersey City.

The properties were acquired by Pimco-managed funds in 2021 for $3.9 billion. The mortgages have floating-rate debt, which led to rising monthly payments as interest rates soared last year.

Office properties, especially older buildings with fewer amenities, have been struggling in recent years with the rise of remote work during the pandemic and recent layoffs.

Property values of such buildings have fallen 20% since the onset of the pandemic in March 2020, according to Green Street. Landlords, including Brookfield Corp., have defaulted on office mortgage payments. In some cases, owners have considered walking away from the properties rather than continuing to pour money into them.

The seven buildings owned by Columbia Property Trust were appraised at $2.27 billion in 2021, according to loan documents on a $485 million CMBS that financed part of the debt. The portfolio includes the most valuable property in the portfolio, a San Francisco building at 650 California St. valued at $479 million in 2021, as well as buildings in Manhattan, Jersey City, and Boston.

Columbia Property Trust is engaging with its lenders on a restructuring of its loan on seven properties within its larger national portfolio. Justina Lombardo, a spokesperson for the company, said in an email statement, “We, like most office owners, are addressing the unique and unprecedented challenges currently facing our asset class and customer base.

We look forward to a collaborative process yielding thoughtful solutions that reflect current market conditions and best serve the interests of all stakeholders.”

Despite the current industry pain, the delinquency rate for commercial mortgage-backed securities for offices is still relatively low, at just 1.83% in January, according to Trepp.

Global Real Estate Market in a $175 Billion Debt Spiral, Threatening Widespread Credit Turmoil: Bloomberg Report

The slump in the world's biggest asset class has spread from the housing market to commercial real estate, threatening to unleash waves of credit turmoil across the economy. Bloomberg compiled data that revealed almost $175 billion of real estate credit is already distressed, about four times more than the next biggest industry. Distress levels in European real estate are at the highest in a decade, in part because of a decline in liquidity.

In the US, the drop was about 9%, according to Green Street. Commercial property is more sensitive to economic conditions than other asset classes, and in the past, when the bubble burst, it was related to commercial real estate.

The abrupt halt to more than a decade of easy money has been made worse for property companies by a pandemic that has changed the way people work and live, leaving many commercial real estate owners high and dry. As the toll from higher interest rates and the end of easy money mounts, many real estate markets are almost frozen, with some lenders telling borrowers to sell assets or risk foreclosure amid demands for additional capital from landlords.

This year, about one in 10 corporate loans in Europe is already underperforming and showing increased credit risk, according to JLL.

Swedish household appliance manufacturer Electrolux AB announced plans to cut as many as 4,000 workers last year, many of them in North America. Distress levels are forcing many developers to put their assets on the market, which leads to "fire sales."

Several US banks predict that credit losses will grow this year. In its fourth-quarter results, Bank of America Corp. flagged an additional $1 billion of office property loans with an elevated risk of default or missed payments, while Wells Fargo & Co. expects more stress to emerge in that market as demand weakens.

The turnaround has been so swift that some private credit lenders are already struggling with liquidity.

US Unemployment Claims Drop to Lowest Level in Three Weeks: What It Means for the Labor Market

The latest data from the US Labor Department shows that the number of people applying for unemployment benefits fell unexpectedly last week to 192,000 - the lowest level in three weeks. This is a positive sign for the labor market, indicating that it remains tight. The drop of 3,000 claims was a surprise to economists, who had predicted an increase to 200,000.

The number of continuing claims, which includes those who have already received unemployment benefits for a week or more, also decreased by 37,000 to 1.65 million in the week ended Feb. 11. This is the biggest drop since December.

Despite mounting economic uncertainty, labor hoarding by businesses has kept claims historically low. This means that companies are holding onto workers given recent hiring challenges, according to the minutes of the Federal Reserve's gathering earlier this month.

The labor market remains tight by many measures, including low unemployment, robust job creation, and millions of open positions. However, the strength of the labor market has been a key concern for the Federal Reserve, as policymakers see it as a factor that’s keeping inflation elevated.

One ominous sign in the labor market is layoffs on the rise. Meta Platforms Inc. is preparing for another round of job cuts that could affect thousands of workers, and advisory firm McKinsey & Co. plans to eliminate about 2,000 jobs.

Overall, the tightness in the labor market is a positive sign for the US economy. The data shows that businesses are holding onto workers, even amid economic uncertainty.

However, the rise in layoffs is a cause for concern and will need to be monitored in the coming months. The data supports the need for continued rate hikes beyond the March Federal Open Market Committee meeting, according to Eliza Winger, economist at Bloomberg Economics.

Defaults Escalate for Office Landlords: Is Remote Work Here to Stay?

According to a report by WSJ, office landlords are increasingly defaulting on their loans, indicating that more developers believe that remote and hybrid work habits have permanently impaired the office market.

Brookfield Asset Management defaulted on over $750 million in debt for a pair of 52-story towers in Los Angeles, while real estate firm RXR is restructuring debt on a 34-story tower in Manhattan's financial district. In addition, a venture of an investment manager affiliated with Related Cos. and BentallGreenOak is in debt-restructuring talks over a $150 million warehouse-to-office conversion project in Long Island City, N.Y. due to low occupancy levels.

The delinquency rate for office loans that back commercial-mortgage-backed securities is rising, with loans backed by office buildings in Philadelphia, Denver, and Charlotte either transferred to special servicers or downgraded by credit-rating firms.

Although the delinquency rate remains low, it rose by a quarter of a percentage point to 1.83%, its largest increase since December 2021, according to Trepp.

The weak return-to-office rate has led to soaring vacancy levels in many cities, with the number of employees returning to the office plateauing at around half the level it was before the pandemic.

Cutbacks in the tech sector are adding to property owner woes. Commercial real estate services firm Cushman & Wakefield PLC is projecting that the U.S. will end the decade with a record 1.1 billion square feet of vacant space, compared with 688 million square feet in 2019.

Although landlords are taking some comfort that the highest quality office space in good locations still attracts demand, most believe that office usage will not return to its prepandemic rate. In fact, some predict that an economic downturn would empower managers to insist that employees work in the office. For most landlords, losing buildings to creditors after a default would be painful but not devastating.

However, about $1.2 trillion of debt was backed by office buildings at the end of the third quarter last year, according to Trepp. Banks are bracing for more troubled loans, with Wells Fargo & Co. reporting in January that its nonaccrual loans backed by office buildings increased to $186 million in the fourth quarter, up 8% from the third quarter.

Manhattan's Biggest Office-to-Condo Conversion Prepares to Open

One Wall Street is a 566-unit luxury residential tower located in Manhattan’s Financial District that was created by Harry Macklowe’s Macklowe Properties. This is the largest office-to-condo conversion in the history of New York City.

The former Irving Trust headquarters, constructed in 1931, was transformed into a fully-furnished luxury residential tower with 566 units that is scheduled to open in early March 2023.

The building features a 75-foot indoor pool, a residents-only restaurant, a fitness center, and coworking space. The units range in price from $1.1 million to $12.75 million, with the sellout projected to be just under $1.7 billion.

About 50% of the units have already sold, with some buyers being from the local area looking to upgrade to a more modern building, some being parents purchasing for young adults, and some being international investors.

Macklowe Properties spent five years renovating the tower, taking out all the infrastructure to create a modern shell while keeping the landmarked exterior intact. This was the first major conversion to open amid a push by Mayor Eric Adams for changes to city and state policies that would clear the way for more such projects.

Despite the fact that this is a primarily commercial neighborhood, the building features 200 unique floor plans, each with a different kitchen layout and unique vistas, from views of the New York Stock Exchange to the Statue of Liberty.

The building has a very modern sensibility with nods to Art Deco, and even the lowest-priced units have materials featured in the firm's most expensive homes, such as white Calacatta marble and custom cabinets from the same Italian suppliers used at 432 Park Ave.

This luxury residential tower is opening in a city where the housing shortage has worsened, and office occupancy rates are still well below pre-pandemic levels. Nevertheless, the Financial District is still busy on weekdays, thanks in part to the Whole Foods Market at the base of One Wall Street. The building is a “mini Rockefeller Center” with all the basic amenities of daily life available inside.