November 2023

4C — November 2023 — Owners, Developers & Managers — M id A tlantic Real Estate Journal

O wners , D evelopers & M anagers

By Carlo L. Batts, MAI, Rittenhouse Appraisals Shifting expectations and realigning to new realities

C ost of capital, lack of of- fice workers, questions about property values,

$11.10 psf, above the record setting average of $9.52. Repositioning the Office Sector Per the recently published Emerging Trends in Real Estate 2024 by Urban Land Institute and PwC, long gone is five days in the office. Remote work has upended the demand for office space and altered migration patterns, the housing people want, the activity of down- towns, and more. Beyond office landlords and owners, this impacts the surrounding busi- nesses reliant on office workers. WeWork’s bankruptcy filing

adds another disruption to the troubled sector. The Biden administration just released information and resources designed to convert commercial buildings to resi- dential use, specifically afford - able housing centered around transit-oriented development. But given the innate difficul - ties in converting office to living space, and common zoning and permitting hurdles, this looks to be a well-intentioned yet significant challenge. Housing Issues Housing availability and affordability issues, es- pecially for lower-income individuals, will continue. On the multifamily side it is a positive that nationwide rent growth has been rela- tively flat since peaking in 2022, and some of this can be attributed to the more than 460,000 apartment units scheduled for 2023. However this still does not address the housing crisis for lower-income renters as, in general nationwide, 8 out of 10 new units are high-end construction. Locally multiple zip codes have seen an increase in new apartment units in the past five years per data from Rent - Cafe. King of Prussia added 1,778 units representing a 42% increase. West of downtown Philadelphia and close to Uni - versity City is 19104 which saw 1,536 new units in the past five years, representing a 26% in- crease in the zip code’s supply. A Reposition The consensus is inter- est rates will remain high throughout 2024, however not continue to increase. Per the PwC report, real estate experts do not feel transac- tion volume will increase with lowered interest rates, but rather ignite as industry professionals become more accustomed and comfortable with higher rates. Multiple challenges have changed the landscape for the coming year and some sectors will transform sig- nificantly. Commercial real estate professionals will need to adjust to these new foundations to benefit and springboard from them. Carlo L. Batts, MAI, is the principal of Rittenhouse Appraisals, a regional com- mercial real estate valuation firm based in Center City Philadelphia. MAREJ

Focus on Distressed Real Estate Private equity firms are looking at the opportunities of distressed real estate, raising funds to acquire properties at a discount, although the when and how of ROI is the ques - tion. The Wall Street Journal reported top firms doing this, including Goldman Sachs, Cohen & Steers, EQT Exeter, and BGO (formerly Bentall - GreenOak). As refinancing op - tions allude owners in trouble, this could be the way out for them, but without recouping their investment.

Contraction of Industrial The industrial sector boomed throughout the pan- demic years, with premiums on vacant land and thriving construction. But for the fifth consecutive quarter the vacan- cy rate nationwide has pushed up, per Colliers’ Industrial Market Statistics Q3 2023. Despite this, there is 16.1 mil- lion s/f under construction in Philadelphia as of September 2023 and new supply is fore- cast into 2024 until the con- struction pipeline contracts. In the region asking rent for Philadelphia industrial was

and more are the themes of 2023 and destined to c on t i nue in the new year. This will neces- sitate com- mercial real

Carlo L. Batts

estate professionals creating a strategic plan to realign with the realities of today. There are several key themes we see.


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