Big Tech layoffs aren't helping commercial real estate demand, says Evercore's Steve Sakwa

Keep hearing that there is sort of a richer and poorer story in C in commercial real estate and an office, particularly the newest kind of Class A is still filling up nicely, but the older stuff not getting as much demand. Is that so, yeah, thanks, Sean. Yeah, that is true. We are seeing a real bifurcation in quality really across all the cities and newer products are certainly leasing up much better. They’re certainly holding their rental rates much better and tenants and and companies want to bring their employees back into, you know, highly amenitized space in new buildings really across the country. So then what happens to the old stuff? Well, that’s a really good question. Some of it’s, you know, going to get repurposed into other types of real estate. In some cases it may be able to get converted into residential that’s starting, but it’s going very slow. In other cases it may get completely knocked down and repurposed into two other things, could be hotels, could be retail, but you know in some cases it’s just not going to function as as office space going forward. How long does that take to play out given that capital continues to be expensive and higher for longer means it’s probably going to be expensive for longer. Is it? Is it? Does it get easier for potential investors to pencil out exactly how much those expensive conversions are are worth spending on how long it’s going to take for them to make money? It’s going to take a while. So this is a a long process and the cost basis for the new buyers has to be cheap enough where they can, you know, buy a building, get the right basis, then invest a fair amount of capital and then get an appropriate return. And to your point about higher interest rates and and higher cost, the investors have to make an adequate return on that investment. And so either rents have to go up on the other things that they’re trying to convert it into or the cost basis of that building has to come down to make it cheap enough for them to get in to make the adequate return. So one way or another, you know the returns have to pencil for the new investors and you know that’s just a slow process and then you’ve also got regulation in in different cities about time to convert and and the process to convert. So it’s happening, but it’s happening very slowly. Are we yet seeing that real capitulation on price these older buildings that somebody have been concerned about and concerned that some of that’s going to hit regional banks, right, we’ve got some of these loans on their books. Have we yet seen that since that’s sort of what it might take to help with the cost basis on these conversions but it would cause some pain for the people who were in them before. Yeah. So you are starting and you have seen the banks taking more you know charge offs and write downs for their commercial real estate book and that’s certainly been a concern in the marketplace really for the better part of a year now certainly since Silicon Valley Bank had their problems you know over a year ago we’ve we’ve seen increasing charge offs and write offs from the bank. So you know that’s happening and in some cases they are foreclosing on assets from you know from from borrowers who you know can’t make that service and they’re taking those back and then you know they’re having to turn around and remarket them and sell them. So as I said it, it’s an ongoing process. It’s not one that’s going to happen, I would say very quickly, but we’re probably looking at at another 12/18/24 months of of this, you know taking place in order to to kind of right size some of these problems. What’s big tech doing? We’ve been hearing layoff headlines out of big tech for a while and then there’s the whole hybrid remote work thing that was going on there. But then certain cities seem to be coming back somewhat, Seattle when Amazon said everybody back in the office, you really saw a small business around downtown pickup. Are those things balancing out or is it still a major drag in the areas where tech had really pushed into office over the past 5-10 years? Well look, tech was the huge driver of office demand going back several years and whether it was in Seattle, San Francisco, New York, Austin, TX, you know, big tech was clearly leading the charge on on office usage and and leasing activity. And you know they were in in effect pre committing to hires that ultimately did not get hired. And so they found themselves long too much space and they’re putting some of that space back on the sublease market. But I think the return to office is really unfolding and I think today you know there’s less talk about just pure hybrid work or you know people working fully remote and they are back in the office certainly more. You’ve seen that come down from big tech over the last six to nine months and that’s certainly good for small businesses in and around the office buildings. I think today the bigger issue on the leasing front, there’s really the economic uncertainty and the fact that interest rates have been extremely volatile and you know C suites in large companies can’t really make decisions about where the economy setting and I think ultimately that’s probably a bigger factor today than the return to office discussion.