The Real Deal & Citrin Cooperman 2023 State of the Real Estate Market East Coast Study

2023

STATE OF THE REAL ESTATE MARKET

EAST COAST STUDY

EXECUTIVE SUMMARY

The commercial real estate industry is constantly evolving, but at no time has it faced more disruption than the past three years when the pandemic threw the world into disarray. As we begin to embrace the “new normal,” the industry continues to experience significant changes along with many opportunities that are contributing to a resurgence for the sector.

For the second year, The Real Deal and Citrin Cooperman surveyed the commercial real estate market to gain insights into the current state of multifamily, office, hotel/ hospitality, and retail submarkets throughout the east coast. In this report, we offer a snapshot of some of those expectations and share an insider’s perspective on the key issues developers and investors have been grappling with and what they foresee for 2023 while drawing select comparisons with the predictions they had for 2022.

SECTION 1: A REBOUND IN MULTIFAMILY FUELS DEMANDS

BY THE NUMBERS

The multifamily market has come roaring back as it rebounded from its pandemic-era malaise. Survey respondents had been optimistic about the market for 2022, with 61 percent of respondents expecting rents to increase and more than 40 percent indicating they believed the segment was more stable than other sectors of the industry.

2022

That confidence holds for 2023, as 48 percent of the multifamily property owners/investors expect rents to increase, and 46 percent expect the multifamily sector to be more stable than other sectors in 2023.

2023

multifamily sector will be a more stable asset class than other sectors

Given their outlook on the market, it is not surprising that more multifamily property owners/investors plan to purchase (49 percent) than sell (28 percent) a multifamily property in 2023, compared with 16 percent and 15 percent respectively in 2022.

Which of the following statements describe your expectations for the multifamily sector in your area in 2022 vs. 2021?

Which of the following statements describe your expectations for the multifamily sector in your area in 2023 vs. 2022?

A PROFESSIONAL’S TAKE

“Market rate multifamily has proven to be on solid ground, with rising rents and strong sales”, notes Bill Saya, partner in Citrin Cooperman's Real Estate Practice. Many markets have short supply, and vacancies are historically low, with the 2022 “America’s Rental Housing” report from the Joint Center for Housing Studies (JCHS) of Harvard University reporting the lowest rental vacancy rates since the mid-1980s.

Higher interest rates and decreased available housing stock have also kept more people in the rental market, with the 2022 Rental Housing study reporting that higher-income households were driving the majority of the recent growth in renters.

“Fundamentals should remain strong in 2023”, says Saya. Yet despite this overall rosy outlook, he cautions investors to monitor potential slowing demand and rent growth, along with increased vacancies – conditions he attributes in part to substantial amounts of new supply in many markets. “On the other hand, part of what’s helping the multifamily market are these struggles which are facing single-family housing,” he says, noting that Redfin predicted housing sales will sink to their lowest levels since 2011, which has been exacerbated by high interest rates.

TRENDS TO WATCH

• Will the combination of chronic inventory shortages, elevated interest rates, and other factors prove more daunting to home buyers than the obstacles confronting the multifamily market?

48%

46%

of multifamily property owners/investors expect rents to increase.

expect the multifamily sector to be more stable than other sectors in 2023.

SECTION 2: OFFICE SPACE INVESTMENTS MODERATE AS REMOTE WORK NORMALIZES

BY THE NUMBERS

When will workers flock back to offices? No one can say that companies have not urged a return, with many setting deadlines with regularity.

Have these ultimatums worked? To a degree, occupancy is creeping back, yet it is still lagging. In late January 2023, Kastle Systems, which tracks security swipes into buildings every business day, noted that office occupancy had hit 50.4 percent of early 2020 levels in 10 major U.S. cities, the first time it has topped 50 percent since March 2020.

But this languid return could be why prospective sellers of office assets in 2023 outnumber buyers, 31 percent to 19 percent, a reversal of 2022 when 27 percent reported they planned to buy and 24 percent planned to sell.

Investors in office space are not sure how much leeway they have though – while 43 percent of respondents had expected to be able to increase rents in 2022, only 16 percent believed that would be an option in 2023.

When picking tenant sectors to watch, there were some definite differences between what respondents predicted for 2022 and 2023. While health retained the top spot, some of the biggest movers included life sciences, taking the second spot up from seventh place in 2022, and law firms jumping to number three from sixth place in 2022. Tech fell from number two in 2022 to number nine at 14 percent in 2023.

50.4%

OF EARLY 2020 LEVELS IN 10 MAJOR U.S. CITIES.

2022

Please select the tenant sectors you expect to perform the best in your area/market in 2022. (Respondents were allowed to make up to five picks.)

Please select the tenant sectors you expect to perform the best in your area/market in 2023.

A PROFESSIONAL’S TAKE

“Reality is beginning to set in”, notes Mitchell Marcus, partner in Citrin Cooperman's Real Estate Practice, regarding how respondents had expected office space to perform in 2022. “I believe the market was more optimistic about people returning to work. However, the reality is that many still work from home and hybrid work models appear to be here to stay,” he says. “People are coming to grips with that, and companies are continuing to figure out their space needs. Given these factors, there is a great deal of uncertainty in the office market about the future, and it’s a difficult time to agree on property values.”

As far as the sectors facing demand, he believes the responses are an accurate reflection of current economic conditions. “Tech has fallen precipitously due to the cost-cutting and layoffs that have been prevalent in that sector recently. Many tech companies staffed up tremendously during the lead up and through the pandemic and are now pulling back,” he says.

Tech companies heavily invested in capital and growth in 2020 and 2021 as consumers turned to technology to work, shop, and socialize. There were also low interest rates and generally a strong capital raise environment.

Marcus agrees that life sciences remains a strong class of tenants in the marketplace and foresees a great deal of conversion to this sector.

TRENDS TO WATCH

• Over the past few months we have seen significant loan defaults on office properties from some of the biggest names in the industry. We will no doubt see more of this, but how much more and how significant will the fallout be?

• There is general consensus that for many struggling office properties, conversion to alternative uses is a viable option, particularly in light of the ever-present housing shortage. However, will owners, lenders and government policymakers be able to work together to further accelerate the pace at which conversions take place?

I believe the market was more optimistic about people returning to work. However, the reality is that many still work from home and hybrid work models appear to be here to stay... People are coming to grips with that, and companies are continuing to figure out their space needs. Given these factors, there is a great deal of uncertainty in the office market about the future, and it’s a difficult time to agree on property values.

– Mitchell Marcus, partner in Citrin Cooperman's Real Estate Practice

SECTION 3: HOSPITALITY CONTINUES TO PUT HEADS IN BEDS

The hospitality segment continues to improve, but according to the executives and investors surveyed, future success in this space will be contingent upon continued and sustained improvement of pandemic conditions, including no future travel restrictions and workers returning to offices on a more regular basis.

In 2022, just over one quarter (28 percent) of these hospitality owners expanded or acquired new hospitality properties. In terms of closings, 16 percent closed a property permanently and 13 percent temporarily, compared with 22 percent and 39 percent respectively in 2021. Hospitality owners have high hopes for 2023, with 59 percent predicting that occupancy rates will increase.

Increased optimism for 2023 is leading potential buyers to outnumber potential sellers in the hospitality real estate market in 2023 by a two-to-one margin, 47 percent to 22 percent, which compares with 26 percent to 21 percent in the previous report. Two-thirds (66 percent) either plan to buy or to build/develop hospitality space in 2023, up from 12 percent who had planned to do so in 2022.

Real estate investors also have different views of which sectors of the market will perform the best. Here’s what they had to say in 2022.

Which of the following hotel asset types do you expect to rebound the fastest?

were able to choose more than one type.)

And here’s what they expect to rebound the fastest in 2023.

Which of the following hotel asset types do you expect to rebound the fastest in 2023?

The two trends real estate investors are following most closely to monitor the health of the hotel/hospitality market are increases in both leisure and business travel, cited by 56 percent. Currently, only 22 percent are following the trend of workers returning to offices, compared with 41 percent in the 2022 report.

A PROFESSIONAL’S TAKE

The hospitality industry has enjoyed a rebound as consumers have been eager to travel again despite potential economic concerns. Jack Pulvirenti, partner in Citrin Cooperman's Restaurant and Hospitality Practice, believes the high demand in this sector in 2022 and early 2023 will start to dwindle, given the rising interest rates and banking turmoil evident today.

“Finding attractive deals can be challenging given today’s interest rates, and it seems buyers may be willing to wait it out until rates stabilize or potentially begin to drop at some point,” says Pulvirenti. In addition, obtaining banking commitments for new construction may prove more difficult and refinancing maturing debt may be problematic as the debt service on the new loan will most likely be much more expensive than before.

He notes that certain segments, such as extended stay and boutique/lifestyle brands, have continued to be very attractive to investors, and repositioning a property into this type of product may enhance value.

Existing hotel owners continue to face issues related to capital expenses, depending on where the hotel is located and what market it serves, Pulvirenti explains.

For example, the owner of an urban, big-box hotel that relies heavily on business and convention travel is likely seeing suppressed demand and is continuing to struggle to get back to pre-pandemic operating levels. In that case, it’s not uncommon for owners to utilize cash reserves that were initially earmarked for hotel improvements to now be repurposed to cover operating shortfalls. A hotel brand’s property improvement plan (PIP) may also have been postponed, and the funds redirected to operations, until the hotel has time to replenish the reserves.

On the opposite side of the spectrum, the owner of a leisure hotel may feel the amount of pent-up demand for travel is so great that little work is necessary since many travelers will come regardless of whether the hotel is renovated or not.

TRENDS TO WATCH

• Although many companies feel they have continued to sell effectively without traveling for face-to-face meetings, can they continue to operate in this fashion or is this a shortsighted view? Are in-person meetings a better way to foster deeper relationships and long-term growth?

• How will the interest in branded residences and hotels from lifestyle brands affect the market?

66%

of respondents plan to buy or to build/develop hospitality space in 2023 up from 12% who had planned to do so in 2022.

59%

of respondents have high hopes for 2023, predicting occupancy rates will increase.

Finding attractive deals can be challenging given today’s interest rates, and it seems buyers may be willing to wait it out until rates stabilize or potentially begin to drop at some point.

– Jack Pulvirenti, partner in Citrin Cooperman's Restaurant and Hospitality Practice

SECTION 4: RETAIL RINGS UP SUCCESS

“Cautious optimism” was the approach respondents anticipated taking in 2022 with respect to the retail segment. While more than 50 percent of the participating executives/investors expected an increase in leasing activity and asking rents in 2022, they acknowledged both were dependent on workers returning to the office and increased tourism across all east coast markets.

Yet retail has been a surprising shining star in the commercial real estate industry.

The retail real estate market is roughly balanced between potential buyers in 2023 (30 percent) and potential sellers (26 percent), compared with 2022 when 18 percent planned to buy and 17 percent planned to sell – indicating a lot more potential activity in 2023.

Much of the gains may already have been realized: Under half of retail owners/investors (44 percent) expect leasing activity to increase in 2023, and just one-fifth (20 percent) expect retail asset prices to increase. That compares with 62 percent and 34 percent who said the same in 2022.

2022

Which of the following statements describe your expectations for the overall retail sector and your business in 2022 vs. 2021?

2023

Which of the following statements describe your expectations for

A PROFESSIONAL’S TAKE

Retail fundamentals have definitely been improving, says Saya, as 2022 saw increases in rents and decreases in vacancies. However, he notes there are still challenges. “E-commerce remains a preferred channel in many retail concepts, and it’s also difficult to be too optimistic given economic conditions,” he says, citing current levels of inflation, continued supply chain issues, low consumer confidence, labor shortages and a potential recession looming.

However, Saya notes it certainly seems landlords have been increasingly focused on flexibility with respect to retail tenants and diversifying the mix of tenants. “Generally, the trend has been that consumers are preferring services over goods in retail offerings,” he says. To that end, in-demand tenants include fitness, health and beauty, quick-serve restaurants, wellness services, and urgent care.

TRENDS TO WATCH

• Will the retail recovery continue moving in a positive direction or will the economic uncertainty hamper retailers and lead to layoffs, store closings, or even bankruptcy filings?

44%

of retail owners/investors expect leasing activity to increase in 2023.

20%

of respondents expect retail asset prices to increase.

SECTION 5: MARKETS THAT MATTER – THE SOUTH SIZZLES

Based on the responses to the question about which east coast market participating executives/investors plan to invest in over the next 12 months, South Florida remains a standout, although it does not shine quite as brightly as 2022 when Florida was number one in three categories and trailed the tri-state area only slightly in the retail category. “The South Florida market should remain very attractive to investors but the high cost of land and construction costs along with high interest rates could slow development,” notes Mitchell Marcus.

However, when you combine cities that comprise the southern region (Atlanta/Charlotte/ South Florida), a clear pattern emerges, with high percentages planning to invest in all sectors:

MULTIFAMILY 60% OFFICE 81%

HOSPITALITY 81% RETAIL 61%

That compares with the following from where investors intended to invest in 2022:

ARE YOU READY TO MAKE YOUR MOVE?

The commercial real estate industry has always been a fascinating barometer of the health of the larger economy and that will continue in 2023.

LIST OF CONTRIBUTORS

• William Saya, Partner WSaya@citrincooperman.com

• Mitchell Marcus, Partner MMarcus@citrincooperman.com

• Jack Pulvirenti, Partner JPulvirenti@citrincooperman.com

CITRIN COOPERMAN DISCLAIMER:

"Citrin Cooperman" is the brand under which Citrin Cooperman & Company, LLP, a licensed independent CPA firm, and Citrin Cooperman Advisors LLC serve clients’ business needs. The two firms operate as separate legal entities in an alternative practice structure. Citrin Cooperman is an independent member of Moore North America, which is itself a regional member of Moore Global Network Limited (MN).