Co-Working, Tech Still
Driving Office Growth
Since 2011 the co-working and creative tech
space have been driving growth in the office
sector. Now, a new JLL research note concludes that they will continue to do so over
the next few years as the traditional engines
of office growth remain in flux.
It wasn’t until recently that metro DC’s
traditional engines of office demand stop
generating significant growth. Between 2000
to 2010, they drove a majority of the 50 million square feet of occupancy gains. During
this period, JLL reports, federal government
spending increased consistently post 9/11
and during the financial crisis; defense contractors’ contract award levels rose 286% to
$28.5 billion and legal revenues rose more
than 5%—often into the double-digits—on
an annual basis pre-recession.
Since 2010, growth has been stymied by
reduce-the-footprint mandates, budget cuts,
fee compression and rightsizing, JLL said.
The federal government has reduced its footprint by three million
square feet, contractors by 2. 5 million square feet and law firms by
1. 6 million square feet.
Enter 2011 and the co-working and tech tenants. Those
cohorts have grown by 4. 4 million square feet, JLL says, with the
former comprising 75% of that growth. Their utilization rate is
close to traditional tenants: the combined federal government,
contractor and law firm sectors average 210 square feet per
employee. Meanwhile, tech’s utilization rate is right around 155
square feet and co-working hovers around 55 square feet. These
two office-using segments will continue to flourish, JLL asserts.
With the murkiness in the political and legislative environment
expected to continue over the next three years, Metro DC’s traditional drivers are not likely to contribute significantly to occupancy growth over that time frame. As a result, the overall office
market will remain more or less flat with the exception of creative, intelligence/defense and out-of-market tenants contributing to occupancy gains. —Erika Morphy
CMBS Delinquencies Steadily Falling
It’s telling that the largest new CMBS delinquency in February was
a $26.9-million loan secured by the Studio Green Apartments, a
1,074-bed student housing property in Newark, DE. And the largest
resolution was a $90-million loan on Wells Fargo Place, a
656,000-square-foot office property in St. Paul, MN.
Relatively speaking, these are small amounts. CMBS’ improving
health continued unabated in February, according to figures provided separately from Trepp and Fitch Ratings. The delinquency
rate has been on a downward, and uninterrupted, trajectory for
eight consecutive months, driven by modest resolution volume and
minimal new delinquencies, according to Fitch. Approximately
$480 million of loans were resolved last month and $138 million of
new delinquencies were added to Fitch’s delinquency index.
Loan delinquencies declined by 11 basis
points for the month to reach 3.01% from
3.12% a month earlier, according to Fitch.
Total outstanding delinquencies fell by $397
million to $11.25 billion from $11.64 billion.
Trepp’s numbers differ, though the downward slope of delinquency is the same. The
firm has the delinquency rate is at 4.51%, a
32-basis-points decrease from January’s level.
Trepp reports that almost $600 million in
loans became newly delinquent in February,
which put 13 basis points of upward pressure on the rate. More than $800 million in
notes were cured last month, reducing the
delinquency rate by 20 basis points. In addition, Trepp said, more than $700 million in
previously delinquent CMBS debt was
resolved with a loss or at par in February.
Those resolutions shaved 17 basis points off
the February reading.
“It is now possible that the rate could
break the post-crisis low from February 2016
over the next few months, which is a prediction we feel comfortable making,” Trepp
said in its monthly report.—Erika Morphy
Student Housing Caps at All-Time Lows
What are some untapped opportunities for student-housing
investors? ALM Real Estate Media executive editor Natalie Dolce
recently asked that question to Fred Pierce, founder and CEO of
Pierce Education Properties. In addition, we learn about the fact
that most reports peg total investment sales in this category to be
in the $8-billion to $9-billion range. Check out the Q&A below for
more on the subject.
Natalie Dolce: What’s the 2018 sales volume outlook for student housing?
Fred Pierce: Most reports peg total investment sales in the $8- to
$9-billion range, which would make it the second-largest volume in
industry history behind the $10-plus billion in 2016. There has
been a paradigm shift in capital flows and investment sales in student housing since 2015. The norm in the decade between the
mid-2000s and 2014 was $2 billion to $4 billion in annual invest-ment sales. Since 2015, the totals have been $5.5 billion, $10 billion
and now $8- to $9-billion in 2017. For the foreseeable future,
annual investment sales should average in excess of $8 billion.
Dolce: What are cap rates like now, and where do you see them headed?
Pierce: Cap rates are at all-time lows in student housing. For more
than a decade, they were largely in the 6s% range but now are
regularly in the 5% range. The approximately $500-million ACC
portfolio currently on the market is commanding a cap rate in
the 4s. As long as the magnitude of core capital continues to flow
into the space—which we expect it will—I would expect cap rates
to remain in their current range despite rising interest rates.
Dolce: How’s the fundamental supply and demand balance trending?
Pierce: Pre-leasing for our portfolio for 2018-19 is ahead of last
year, an indicator the markets generally are stronger this year
than last. New supply has also slowed and forecasted deliveries in
the low 40,000-bed range for fall 2018 would be the lowest since
2012. At the peak in 2013 and 2014, annual deliveries were in
Anthony Orso has joined
NKF Capital Markets as
president, capital market
strategies. He’ll initially
support the integration
of Berkeley Point Capital
with ARA, both of which
were recently acquired by
NKF Capital Markets, an
affiliate of the Newmark
Group Inc. Orso was co-founder and CEO of Cantor
Commercial Real Estate,
in which NKF Capital
Markets is an investor.