CCP Commercial Office Digest

Commercial Office Digest

Callahan Capital Partners is a real estate private equity firm and operator focused exclusively on the origination, acquisition and management of high quality office assets in select urban markets throughout the United States.

“Tenant experience doesn’t just begin once the lease is signed, it starts at the inquiry and ends the day that the lease (hopefully never!) expires. From the moment a tenant walks in the door on their first tour, we want them to get the sense that this is different, that we're bringing true hospitality to their day. We’re constantly raising the bar on what that means, practically, by truly listening to our tenant executives to give them the tools to engage all their employees, be more productive and efficient so they want to come into the office.”

Callahan’s very own Sara Spicklemire, SVP of Leasing and Tenant Experience, sat down with VTS to explain how Callahan leans into “commute worthy experiences” to operate office assets. Read more here.

“More than half of U.S. employees expressed interest in working in-office four to five days a week, while less than 20 percent expressed interest in working fully remote.”

A study by Lincoln Property Company found that there is a strong preference of working in office vs. remote. With regard to important factors for return to work, proximity to transportation (reduction of commute time) and dedicated work space were the two items that emerged as most important to employees.

“In 94 percent of top office deals in H1 (2024), occupiers took the same amount or more space and only 6 percent reduced their footprint. This is a shift from about a year or less ago when companies were downsizing their lease space.”

In this Commercial Property Executive article, Savills notes that many of their clients in top office assets originally rightsized their space post pandemic due to the implementation of a hybrid work model, but are now realizing they overcompensated in space reduction and have more employees desiring to be in the office that they need to accommodate for. The firm also comments on the intense quality bifurcation in the North American commercial real estate market. “Prime” buildings are seeing intense occupier demand due to limited stock of this quality of asset despite high overall availability in Class A buildings. Savills also notes two key trends: “Flight to Quality” and “Flight to Capital”. While Flight to Quality has become a ubiquitous phrase, Flight to Capital speaks to the desire of tenants to understand the ownership of the assets and ensure the asset is positioned with capital to maintain relevance.

“Banks and other lenders are seizing control of distressed commercial properties at the highest rate in nearly a decade, a sign that the sector’s punishing downturn is entering its next phase and approaching a bottom.”

While lenders have been lenient through debt maturities given challenges to office assets triggered by the pandemic, the Wall Street Journal reports the ability of lenders to continue practicing patience is changing. In Q2 2024, the volume of office property seized in foreclosures and other actions was up ~$5 billion from Q2 of 2023. As the frequency of foreclosures picks up, it’s challenging for the market not to re-evaluate valuations. In some markets, such as Washington, D.C., office assets have sold at steeply discounted prices which makes it hard for lenders with outstanding loans to keep distressed loans on their books without adjusting values.

Charts We Are Talking About

The VTS Office Demand Index (VODI) is a commercial real estate index produced by VTS which tracks new tenant tour requests for office properties in major U.S. markets. Per the latest VODI report in June, office demand stood at 62% of the 2018-2019 average, which is a 17% increase YOY. While office leasing demand bottomed out in late 2022, with remote and hybrid work patterns more stable, demand is now thawing and positive momentum is gradually beginning to build. Since late 2022 the annual changes in the VODI have gradually risen from negative to positive.

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