New Trends in US Office Leasing

Good morning,

New trends in US office leasing, and mortgage REITs pull back on lending. Let’s delve into today’s topics.

📈 Market Update

🏢 New Trends in US Office Leasing

Office leasing in the US saw its biggest quarterly increase in two years during Q2 2023, but the average size of new leases is shrinking. After rising vacancy rates, tenants are opting to “move and shrink” into smaller spaces when renewing or signing new leases.

Impact on the Office Market:
While the overall amount of leased SF jumped in Q2, it remains 13% below pre-pandemic levels due to smaller lease sizes. The average US office lease was ~3,250 SF in Q2 2023, compared to 4,050 SF average from 2015-2019. Record high vacancy rates have led tenants to return over 40M SF of office space so far this year. These trends highlight the ongoing evolution of office space needs.

🏦 Mortgage REITs Pull Back on Lending

Major CRE lenders like Blackstone Mortgage Trust and KKR Real Estate Finance Trust have stopped issuing new loans; neither company originated a new loan in H1 2023. Other mortgage REITs have also slowed lending significantly as the market deteriorates. These firms are trying to protect their balance sheets amid rising default rates and recession expectations.

Credit Crunch!
Total commercial and multifamily mortgage lending is expected to fall to $504B this year, a 38% decline from 2022. The lending pullback has made refinancing much harder for owners, increasing the chance of defaults. Capital calls will become increasingly necessary as renewing loans mature.

Cautious Stance, But Eyeing Future:
Mortgage REITs are being cautious as their focus is staying financially stable through a potential downturn. However, BX and Starwood have mentioned they are ready to capitalize on opportunities when the market stabilizes. For now, the tap is turned off on new lending.

✍️ Further Reading

• Industrial Space Shortage in Laredo, TX, Intensifies as Imports from Mexico Swell (CS)

• Alabama’s ‘Rocket City’ Tops List of North America’s 25 Tech Markets for Growth Potential (CS)

• Compass Says its Cash Flow Positive (RD)

• We Will Soon See an Uptick in Repurposing Commercial RE (CNBC)

• Black Knight: Housing Affordability Hits 38 Year Low (CNBC)

• New York State Agency Inks HQ Lease in Manhattan (CPE)

📊 Chart of The Day