THE REAL-ESTATE DOWNTURN COMES FOR AMERICA’S PREMIER OFFICE TOWERS | Kanebridge News
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THE REAL-ESTATE DOWNTURN COMES FOR AMERICA’S PREMIER OFFICE TOWERS

Rents at highest-end buildings fall and rate of leasing slows.

By PETER GRANT
Wed, Jan 31, 2024 12:58pmGrey Clock 3 min

The highest quality office buildings have had much better success navigating the industry’s turmoil. Now, even premier towers are starting to wobble.

Rents at the highest-end buildings have been falling, while the rate of leasing has been slowing. Tenants have become more sensitive to costs in a world of higher interest rates and lingering concerns about a possible economic slowdown, market participants say.

Owners of the most elite buildings escaped this fate for a while by convincing the market they had created a new class of office tower—one that surpassed the traditional Class A building at the top of the pecking order.

These landlords persuaded blue-chip tenants that reluctant workers would return if only their offices sparkled with lush roof decks, fully loaded gyms and food prepared by Michelin-starred chefs. Owners invested heavily in these properties, which were usually new developments with the best locations, views, air quality and modern designs.

But that strategy is losing steam as more companies have accepted the reality of hybrid work schedules and, for the most part, have given up on compelling workers to be in five days a week.

“The ship has sailed on full return to the office for most companies,” said Rob Sadow, chief executive of Scoop Technologies, a software firm that developed an index that tracks workplace strategies. “They’re not going to go from three days a week to five days a week by making their space nicer.”

That is one reason why few office developers are considering new ground breakings. Current rents don’t pencil out for building expensive space. The U.S. had only 31 million square feet in office construction starts last year, the lowest level since 2010. New buildings will represent only 1% of inventory by 2027, the lowest in at least 25 years, according to CoStar.

“New starts have essentially ground to a halt,” said Dylan Burzinski, analyst at real-estate analytics firm Green Street.

Premium, amenity-rich office space has outperformed in terms of rent and occupancy throughout the pandemic. In New York, SL Green Realty opened a new office tower called One Vanderbilt across the street from Grand Central Terminal in the fall of 2020. It boasted a 4,000-square-foot terrace and cafe and a menu overseen by star chef Daniel Boulud. The 93-story building quickly filled up even though its top asking rents were near record levels at more than $300 a square foot.

That sort of exceptionalism is beginning to wane. Asking rents for prime space in 16 U.S. markets declined in the third quarter after increasing on average from about $61 a square foot in mid-2021 to close to about $70 in the second quarter of last year, according to CBRE Econometric Advisors. They were just under $69 in the fourth quarter, CBRE said.

The share of leasing activity is also falling among the premier towers. The office properties that data firm CoStar Group defines as five-star buildings accounted for 8% of the market in 2022 and 2023, down from 10% in 2019. Meanwhile, new leases in five-star buildings were on average 43% smaller than 2019, CoStar said, reflecting how companies are becoming more efficient in their space use and tolerating some degree of work from home.

In the fourth quarter, 62% of companies offered some form of remote work, up from 51% one year ago, according to Scoop. On average, those companies with hybrid strategies required workers in the office 2.5 days a week in October, Scoop said. In 2021 and 2022, many companies still expected to bring workers back five days a week and were leasing space with that in mind.

Office buildings that have opened recently have done well, but not by One Vanderbilt’s standards. In Boston, for example, Millennium Partners has leased about 60% of the 812,000 square feet of office space that hit the market last year in the new Winthrop Center project with such tenants as Cambridge Associates and consulting giant McKinsey. But rents are about 10% less than what Millennium originally forecast, said Joe Larkin, principal of MP Boston, the developer’s local arm.

Larkin said that Millennium expects to achieve its goal of taking three years to lease the building. “What we lost in the last couple of years is the hope to exceed how we planned this building,” he said.

High interest rates and concerns about a possible recession are also giving companies second thoughts about trading up to higher quality spaces. Moves are expensive especially when borrowing costs are higher than they’ve been in decades.

Cost-conscious companies are noticing that the gap between asking rents in top buildings and lower quality buildings is widening. The result: Renewals were 42% of the leasing volume last year, compared with 31% in 2018 and 2019 combined, according to CBRE.

“If companies aren’t going to have people in the office full time, maybe taking the lower-grade space might be a better economic decision,” Sadow said.



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UAE Residential Market Review Shows Strong Growth and Record Transactions in Q1 2024

The total transaction volume in Abu Dhabi for the first quarter of the year reached 2,795.

Thu, May 16, 2024 4 min

The CBRE Middle East, a global leader in commercial real estate services and investments, released its latest edition of the UAE Residential Market Review for the first quarter of 2024.

Abu Dhabi Market Overview

During the first quarter of the year, the total volume of transactions in Abu Dhabi stood at 2,795, registering a 22.6% increase compared to the year prior. This increase has been underpinned by an 18.1% rise in off-plan sales and a 34.5% rise in secondary market sales. In the year to Q1 2024, Abu Dhabi’s average apartment and villa prices increased by 4.3% and 2.3%, respectively.

Abu Dhabi’s rental market witnessed a total of 46,130 residential rental contracts in Q1 2024, registering a decline of 10.9% from the year prior. This has been due to a 15.5% decline in the number of renewed rental contracts registered and a 2.4% drop in new rental registrations over the same period. In the year to Q1 2024, average apartment and villa rents have increased by 4.5% and 1.1%, respectively. On the supply front, only 80 units have been delivered in Abu Dhabi in the first three months of the year, with all of this new stock being in Al Raha Beach. An additional 8,660 units are expected to be completed by year-end with 55.8% of this scheduled stock located in Yas Island, Al Sowwah, and Al Shamkha.

Dubai Market Insights

In Dubai, price growth has continued to accelerate during the first quarter of 2024, with average prices increasing by 20.7% in the year to March 2024. Throughout this period, average apartment and villa prices increased by 20.4% and 22.1%, respectively. Although headline average sales rates are still marginally below the 2014 highs by 0.1%, several prominent residential neighbourhoods have already surpassed their 2014 figures.

As of March 2024, average apartment prices stood at AED 1,486 per square foot, and average villa prices reached AED 1,776 per square foot. Average villa sales rates are currently above their 2014 baseline by 22.9%. Rental growth has also gained momentum in 2024, after a period of moderation in 2023. In March 2024, average residential rents registered a year-on-year increase of 21.2%, up from the 20.4% growth registered a month earlier. Over this period, average apartment and villa rental rates grew by 22.1% and 14.5%, respectively. Data from the Dubai Land Department revealed that, in the year to date to March 2024, the total number of rental registrations stood at 159,941, marking an increase of 5.8% from the previous year. As for supply, a total of 6,526 units were delivered in the first quarter of the year, with 59.7% of this supply being located in Meydan One, Jumeirah Village Circle, and Al Furjan. A further 46,086 are expected to be handed over the remainder of the year. However, given historic materialisation rates, the report expects that a limited portion of this upcoming stock will come online as planned.

Record-Breaking Transactions

March 2024 witnessed another record in Dubai’s residential market, with transaction volumes reaching the highest monthly figure on record, marking a year-on-year growth of 13.2%. Throughout this period, off-plan sales and secondary market sales increased by 20.2%, and secondary market sales increased by 2.2%.

In the first quarter of 2024, Dubai’s total transaction volumes reached 35,310. This is the highest total ever recorded in the first quarter of the year, marking an increase of 20.5% from the year prior. Over this period, off-plan transactions recorded an increase of 23.9%, and secondary market transactions rose by 15.2%.

However, in Q1 2024, the total number of sales transactions within the prime market segment registered a decline of 2.1% compared to the year prior. Throughout this period, super-prime transactions recorded a drop of 16.5% year-on-year to stand at a total of 227. These declines witnessed in both markets have been largely underpinned by significant declines in off-plan sales largely attributable to the high levels of demand for off-plan properties and the limited level of upcoming supply. In terms of performance, in the first quarter of 2024, average prime prices registered a year-on-year increase of 16.0%, standing at an average of AED 4,661 per square foot, and average super-prime prices grew by 14.8% over this period, reaching AED 4,978 per square foot.

Taimur Khan, CBRE’s Head of Research MENA in Dubai

Future Projections 

Looking ahead, CBRE expects Dubai’s residential sales market to maintain its upward trajectory. Prices in both the apartment and villa segments of the market will continue to grow, however, not at the same pace. On the rental front, we forecast that residential rents will continue to increase. That being said, the rate of growth will likely moderate.

Taimur Khan, CBRE’s Head of Research MENA in Dubai, comments: “The UAE’s residential market started the year on a relatively strong note, where the elevated demand levels continue to drive performance. The strong levels of activity and high absorption levels, which have reduced available supply, will continue to support price growth in both Abu Dhabi and Dubai over the remainder of the year. In terms of rental growth, we expect that rental rates in Abu Dhabi will continue to rise, with prime areas set to outperform the market. In Dubai, residential rents will continue to increase; however, not at the same rate that we have been seeing to date, and we expect that the rate of change will diminish in the second half of the year.”

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