Commercial Property - Same, same but different ……really?
I’ve been back from the USA almost 6 months and waiting to see what the consequences of 18 months of dire commercial real estate outcomes would bring to Australia. So far, the tone here is quiet. Overall, it’s a bullish view of a tough market framed around likenesses of the past to reassure the less certain that it will be OK.
Effectively it’s the opposite in America where failures and mass loss have come home to roost destroying office and retail values, many regional banks as well as investor confidence.
New York - 135 West 50th Street was $332m in 2006 now $8.5m
San Francisco - WeWork 995 Market Street was $62m in 2016 now $6.5m
It's a graveyard only occupied by wealthy vultures.
At the same time, it almost immediately created real opportunity for private credit and wealthy private investors who have long term horizons and property skills. You must admire a country where failure and success occur so fast. It’s a real time market which draws from its past Wild West adventures. In the USA there are winners and losers in the investment markets, but progress always marches onwards.
Meanwhile back in Australia, by March 2025 we will have lived with COVID conditions and the aftermath for 5 years. That’s a good test of where things sit and the likelihood of office workers returning to work in an office 5 days a week is now unrealistic. I believe workers have adapted to the 2-3 day in the office solution and so now we must live with the reality that we have way too much office space, and that retailing can only rely on patronage from about half the workers it used to and on half the days. Once we understand that scenario everyone needs to start planning a different city environment otherwise, we’ll be living with an old legacy model which could quickly become a millstone.
"So now we have to live with the reality that we have way too much office space and that retailing can only rely on patronage from about half the workers it used to and on half the days."
I’m getting tired of people telling me that staff must return to the office because they need mentoring and to collaborate. It was my friend and colleague, Andrea Arata, head of research at Newmark in San Francisco, who said to me “people are returning to the office because they miss socialising”. I know how true that is, so I plan my week to work and socialise in business carefully. As for mentoring and collaborating younger workers do it just differently to the old face to face model I’m more at ease with. That doesn't mean though that my way is better.
If we were in the US, the market would have adjusted, and property owners would have suffered in possibly the worst market I’ve seen. However, we live in Australia and that means that property owners are stuck with the problem. It’s not just a case of kicking the can down the road, it’s also about silencing those who question the unusual fundamentals. But the truth is that commercial property is affected and those with their money in it will find it hard to get it out. We are about to find out why real estate is an asset class, but not one investors would ever describe as liquid.
"We are about to find out why real estate is an asset class, but not one investors would ever describe as liquid."
We spend way too much time obtaining valuations of property assets and relying on those opinions. As a valuer knows the only true test of market value is to find buyers and most owners today are not brave enough to take that chance. Who would? Knowing the answer to a question you fear isn’t much fun. That’s precisely where I find myself in the market having to navigate pathways for my clients. I represent buyers, sellers, landlords and tenants. I see markets from all sides, and it is far from fun. I have a view of the markets and agree that sectors and locations are acting very differently. For instance, Perth office space is almost unaffected by COVID whereas Sydney, Melbourne and to a lesser extent Brisbane are hugely impacted. Luxury retail is in high demand, although plateauing whereas food and beverage, once the go to solution is really struggling.
Fortunately, my world is the world of business and investment so there comes a point where business will surrender to the market and I’m seeing that situation now. Even the hottest ticket in town, Industrial has turned the corner. Older private investors are beginning to leave, especially if a large capital requirement is likely required up ahead. We’ll see more old sheds hit the market as those owners’ bail realising that late 2021 was probably the high point of this extraordinarily long purple patch for a normally, unappealing asset class.
We are about to enter an interesting phase, and I suspect it will be “Death by 1,000 cuts”. Things have turned and at some point, the real owners of real estate, not the fund managers will need to get their money out. Until then we will witness one fund manager selling assets to another fund manager at a discount depending on who needs cash. In America those fund managers were not so lucky, and they sold assets at tiny fractions of their previous valuations. I saw massive funds sell out simply to say they had no exposure to the office or retail sectors.
"Things have turned and at some point, the real owners of real estate, not the fund managers will need to get their money out."
I am standing by my beliefs that many markets are not correctly valued, that incentives have shifted to unhealthily high levels simply to support outrageously high valuations. I believe that we need a correction just so that business can recognise value and start to look forward with excitement as opposed to trepidation. I can’t wait for the day that we can look forward to knowing that rents are real and that tenants can make money occupying space from a particular building or location. Likewise, investors need to believe that their asset is not just income producing but also able to produce capital gains.
Until then let’s just pretend that everything is like it was just not quite as good. Maybe we can even argue that it's fun.