We've got John Rosenberg in the house.
Hi!
Good to be here.
John's with LavRose, which is a company that specializes in office buildings.
And we were having a conversation
and he had a different perspective on office buildings
because it's in the news right now everywhere, right?
Yeah, it's all over.
I mean, you're seeing
lot of what you're seeing,
of course, of the big office buildings and the big tenants in the big tech firms.
So you're seeing that in the national news tells you that office is dead or dying.
Yeah.
And in those big spaces, there's going to be a lot of challenges.
what I first wanted to start with is, you know, I looked at vacancy for office
for the United States is over 20% in the first time ever, right?
Yeah. Yeah.
That's a it's an interesting number because that includes a lot of it.
And you have to look at what does that include is
include sublease space are not include supply space, it includes sublease space,
sublease space that sublease space is still paying rent.
Those tenants are still paying rent.
So it's not necessarily vacant space, but it's so let's explain what sublease is.
So if a building's 50% vacant and an owner has 20 or 30% sub
leased through someone else, it actually could be vacant but sublease, Right?
Right.
So a tenant may have know, we just saw something about a tenant and
Scottsdale that that is downsizing out of their 40,000 square foot office space.
They don't need it anymore, but they still have a lease probably.
I don't know what their lease term is, but maybe, let's say another five years.
So now what they're going to do is put it on the market
to try to find somebody to replace them to take over their lease.
So is that technically vacant then?
So why is a building actually vacant?
Because because that's really the big topic.
You know, there's a lot of people
with the work from home and they're downsizing team.
So what was kind of a phantom vacancy? Okay. Right.
I mean you have you have to account for it because the reality is, let's say
they have five years left on their lease.
They're not going to renew. Right. So we know that.
So now the question is, you know, how much term do they have left on their lease
and will they stay or does a sub tenant come in, take over and continue to write?
So these landlords must be sweating because, you know,
they have people that have moved out. Yeah.
Or who are saying we're not going to renew.
Yeah. They're still paying. Yeah. Right.
And then at some point they're going to hit a term.
Yeah. Yeah. The end of their term. Yeah. Yeah they are.
And then they've got so you've got to look at you.
Average lease term is 5 to 7 years.
So as you,
as you look at that means 20% APR will turn every year.
Right.
And I think I think statistically and this is mostly large bases
but but a lot of the office spaces
on the net about two thirds of them are going to term out in the next five years.
That's what I was going to ask.
So so two thirds of all of your space is going to term out in the next five?
Yep. Yeah, yeah. So that that's a that's a big number.
So you've got it, you've got to put that on the,
you know, in front of you and make sure you have that in your scope.
If you're a landlord and look at your tenants and look at your leases.
But more importantly, if you're an investor
that's going to buy a building and there's a bunch of tenants
they're terming in the next few years, how are you going to do that?
So when they say that office is in a in trouble, like is that all office?
I mean I you know, the office is a big category, right?
Like the, you know, floor in downtown Manhattan,
you know, a skyscraper is an office building. Right.
But so is a, you know, ten, you know, office space in Scottsdale.
Yeah, That's a it's a it's a great point.
It's it's so different, the high rise.
So it's not just it's there's geographically we've got big differences.
So you're right.
I mean, Manhattan, Chicago, San Francisco, those properties, those high rise
buildings, they're struggling,
especially if you look in Silicon Valley with the tech firms that are
downsizing, just like we even the places we're seeing here in call centers,
they're there.
That's a big part of that 20% that can mentioned at the beginning,
the small offices. And we're seeing it.
And I was telling Ken earlier,
my small my little firm that does a lot of office leasing.
We did a 229 office leases.
That's a lot of yeah in fairness and that's it and they're
mostly under those were mostly under 5000 square feet
so and this year year to date we're on track with last year.
So what we're seeing is a lot of those smaller spaces, 1000
to 5000 square foot spaces, they're flying off the shelf.
You cannot who are those people?
So that's the thing.
Like, yeah, I agree with you because, you know,
we own an office building, as you know, and it's it's smaller.
It's like three and 4000 square footers and we're full. Yeah.
So then you see these big stories.
So, you know, are they people that are downsizing or are they startups
or, you know, what's going on? Yeah, it's all the above.
There's a lot of downsizing.
So it makes it, you know, back to what you're saying,
if you got those big floor play tenants that are 50,000,
they're going to downsize to, let's say, 20 or 30.
Well, the 20 or thirties may downsize to ten in the tens, may downsize to five.
Got it. So they're filling up all these little spaces.
And then in the same token, you've got a lot of service.
You know, you saw the May jobs report came out and there's all these
hundreds of thousands of new jobs.
A lot of them are in business and professional services, medical,
legal things like that that are that
that are taking smaller office spaces, probably some 5000 square foot spaces.
So those are leasing
those are the businesses that people want to be in the office still.
And again, geographically specific where we touched on the beginning,
if you're in a place, say, like Phenix,
your commute easy.
I drove over here today, I parked right outside your door and I walked in.
If I'm in New York or Chicago or San Francisco,
you've got mass transit That makes a huge you don't want to go.
And I thought about that commute.
Yeah, well, the commute and the parking.
Yes. And the parking lot.
That really struck me because I know, you know, I'll when I go to book something
like a doctor's appointment or whatever, if it's if I realize it's in downtown
Phenix and I may have to park in a parking garage
unless I have to go there, I'm really trying not to because that's a pain.
Yeah, it is. It is. And a lot of people are avoiding that.
when you do have a large office building like some of our maybe with that
we see in downtown X or maybe Manhattan or any of those places
what what are things that can be done with that space that people
don't want to rent that? Yeah, Yeah.
I mean, we were talking earlier about, you know, do you retrofit it?
There's there are there are municipalities now that are starting to look at tax
incentives in an effort to help retrofit some of those buildings to to residential.
But Ken and I were talking earlier the doesn't always make a lot of sense.
This John had a great point on this, you know because the big topic
is office to residential comes up all the time.
But people just naturally say,
oh, right, 50,000 square foot office building is a big office building.
Right. And if the average
unit size for an apartment is a thousand, which is well, right.
Maybe might be a little smaller, let's say that's only 50 units
and that's that's a that that's no hallways or anything else.
All right.
you have to have a massive,
massive office building to be able to have the number of units there to.
What do you feel like? 50 is not enough?
Not even.
No. We don't do anything under 200 units.
Okay. Yeah.
And and the municipalities need we as we know,
there's a shortage in areas like here of housing.
It doesn't even scratch the surface of what's needed.
It's not a bad start.
It it will it will help in some of these cases.
But the cost of retrofitting in a lot of cases,
especially with construction costs, I mean, you know better than anybody
being where they are, it's not going to be an easy.
other thing that I wanted to ask you was,
you know, I know that's a national number, the 20% vacant,
but when you have debt
plus equity and 20% vacancy,
you're pretty close to real, a real problem, in other words.
Yeah. You know, you there may be no cash flow.
Yeah.
In fact, it might be negative cash flow.
And so you have that problem,
you know, not not
everywhere, of course, but then the other problem
is that cap rates have gone up because interest rates have gone up.
So the so the values of these properties are 20,
30, 40, 50, 60% less and they're not cash flowing.
So there's there's really it looks to me like there's
there's going to be some some blood in the water
with the banking system because a lot of people may not
may or may not know the commercial debt is typically five years.
It could be ten.
70% of the commercial office debt are small and regional bank.
Mm hmm.
though, they're going to be massive write offs at the bank level. Right?
What is that what you see coming?
Yeah.
Banks are going to probably have to get empathetic
in some
cases and potentially extend and pretend, you know, maybe work with work
with the borrowers if they can, and extend their loan terms.
Well, John, this been fantastic. Thank you for your knowledge.
I can't wait to have you back on soon.
It's been about a year. Yeah, I think.
And there's going to be a lot
that's going to happen here in the next six or eight months.
So let's get you back on. Yeah. Yeah.
And if anybody needs us, you know, LevRose.com is our web site
or just email me directly JRosenberg@levrose.com
I'm happy to and "JRosenberg" Is that ERG?
"ERG" jrosenberg@lavrose.com