INTRODUCTION Contributed by: John Sullivan and Matt Alshouse, DLA Piper LLP
ties in lending books was the biggest hurdle to the resumption of business as usual. How much property would banks be taking back? How much debt could be restructured? How long would it take to redeploy? As the year wore on, the markets started to address this issue. While many owners entered 2023 in “wait and see” mode, hoping that inter - est rates would come down and drive cap rates down with them, or attempted to restructure their debt and hang on a bit longer, eventual - ly time ran out for some as lenders started to move on collateral. According to real estate data source ATTOM, commercial foreclosures began climbing in the US market in the second quarter of 2023, and by January of this year reached 635 new filings, the highest level since 2015. For many who avoided turning their properties over to their lender, 2023 saw more owners com - ing to grips with writing down the value of their investments. JLL reported second quarter year- to-year value drops in 2023 of 19% in the US and 21% in Europe (29% and 31%, respectively, in the office sector). Given the higher cost of debt, in most cases, prices will have to come down in order for trans - action volume to increase. In this regard, the so-called “wall of maturities” is a double-edged sword. In the US alone, there is an estimated USD1 trillion of commercial real estate debt coming due before the end of 2025, according to data and analytics provider Trepp. The com - bination of declining values and higher interest rates will mean that many owners will not be able to – or will elect not to – refinance their exist - ing debt. Although this is bad news for owners who cannot refinance their loans, many lenders prefer not to own these assets, and so they will
price them to sell, which should result in buying opportunities and increased transaction volume. The dynamic of markets establishing new pricing in order to move forward can be seen in some recent transactions featuring prominent proper - ties in Western markets. Just a few examples: • Two towers at Detroit’s Renaissance Center, totalling close to 700,000 square feet of office space, traded earlier this year for a measly USD15 million. That is a per-square-foot price closer to the average yearly rental rate in the Detroit market. • The Aon Center in downtown Los Angeles was sold at the end of 2023 for a little over half what it previously traded for, in 2014. • 5 Churchill Place in London’s Canary Wharf moved into receivership last year and has now sold at a 60% discount. There are other signs of life emerging, as well. Along with uncertainty in the debt markets, the long-term effects of the COVID-inspired “work from home” movement have been hampering rental markets, as corporate tenants struggle to determine how much space they really need going forward. Some normalisation has started to occur, however: return-to-office mandates have taken hold at an 85% clip in Asia and 75% in Europe, according to JLL’s 2024 Global Real Estate Outlook. The US is lagging here, with just 55% of employers having taken affirmative steps to bring people back to the office, but this is widely expected to increase throughout 2024. The result is some hopeful signs starting to appear in the office leasing submarket. In the final quarter of 2023, global office leasing vol - ume was up 13%, as strong as it had been in almost two years. Logistics leasing was another bright spot towards the end of 2023. US volume,
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