Hey, everybody, so today we're going to talk about the death of the office market.
Now this is something that I've been to watch it a lot.
As you know, the real estate market is many, many things.
It's office, it's multifamily, it's industrial,
it's retail, it's small, it's residential.
And even in residential, it could be condo.
High end residential.
There's all kinds of things that make up the real estate market
and be sure to wait to the end because I'm going to talk to you
about my predictions for 2022 on what I think's going to happen here.
So let's first talk about what an office market is.
So a lot of you might work in real estate just like this.
This is the high rise market in some city somewhere.
It doesn't even matter where,
but the fact is that people come and go to these places every single day.
And as you all know, that's changed.
So as you guys know, I love to follow the stuff,
and what's happening right now is these are global issues.
Most of you guys are looking at, where are my investments and where am I
now? But I love to look at this on a global scale.
And as you can see on this chart just here, this is deal volume change.
You've got San Francisco, Paris, Shanghai, London
globally and you can see things are happening all over.
So work from home is not just the United States.
So now a little closer to home, this is the United States.
These are just some markets Atlanta, Boston, Chicago, L.A., Manhattan,
San Francisco and Washington, D.C.
The purple represents 2019.
The teal represents 2020 and the orange represents 2021.
This is net absorption, which means things are going backwards
if it's on this side.
And as you can see, and should be no surprise to anyone.
Every single market is negative, San Francisco being the most negative of all.
Now, before we go much deeper, there are a few things
that I want you to know about office markets.
one leases are typically three to five years.
They can also be shorter, but they can also be longer.
But generally, they're about three to five years.
As you know, we're now in the third year of the pandemic.
And so that's why this is going to become very, very important.
The second one is most leases have what CAM charges are common area
maintenance charges inside of the lease, which means
that the landlord does not pay for things like lighting, things
like hallways, things like elevators, things like snow removal, landscaping.
All those kinds of things get transferred onto the lease
of the individual tenants through what's called a cab charge.
The third thing is the CPI, or the consumer price index,
which is, of course, an inflation factor which we talk a lot about.
And as you know, the CPI charges as things go up
for the landlord, they also go up for the tenant.
Therefore, the conclusion is that these leases are going to soon expire.
These landlords are going to be transferring higher costs and operating
to the tenants, and tenants are going to now make decisions.
Now let's talk about what you all know is what I call
the office market's new normal one flexibility.
Employees are looking for work from home and flexibility from their employers,
which is drastically affecting the amount of space that the tenant needs
and the employee needs.
Number two, the office experience itself is changing, as you guys know.
So think about a AI technology, think about common areas,
think about shared workspaces, think about lockers,
think about more concentrated team meetings around people's schedules.
Of course.
Number three, health and safety continues to be a major factor in this market.
These sell health and safety issue will continue to drive
more and more people away from the office experience.
So now let's talk about the 2022 predictions for the office markets
and the reason why I think this is important
because a lot of things happen around the office markets.
People pour out of their offices and go to lunch.
People pour out of their offices and they go get a beer after work
or meet for happy hour.
All kinds of things happened before, during and after work in these
officers has a ripple effect across every municipality there is.
So the first one right now, national vacancy
for office is 18.1%.
This isn't good, guys.
Multifamily is less than 5%.
Industrial is less than 5%.
Retail is getting beat up a little bit, but not as much as office.
And as I just told you, a lot of these people are still tied to their leases.
My prediction is that vacancy is going to continue to go up
because as people start to renew their leases, they're either going to downsize
or eliminate them altogether
as they allow for their own people to be able to work from home .
They are not going to need the amount of space they have.
The second is renewals and leases.
So as people's leases renew, you can expect it's already happening.
They're downsizing or eliminating,
and the new leases are now looking for new technology.
Smaller floor plates and for the landlord to put more money in around
all of those things, other employees can work from home
and have more of a collaborative work environment.
And of course, we have all the health and safety issues
that the tenants are now requiring that the landlords must put in.
So three, I predict that asking rents are going to continue to go down.
Now this is a basic supply and demand issue.
The more supply you have, the higher vacancy you have,
the more competitive it is
and the more leverage a new tenant has over the landlord.
So I predict that these asking rents are going to go down in many,
many markets over the next couple of years. four.
This is a positive.
There will not be a lot of new supply because one banks
are looking at this 18% vacancy rate number one.
But two, the cost to build something right now is crazy
due to all these supply chain issues.
So just trying to build something new drives the cost way up,
which means that they have to get higher rent
and five were still in the middle of this pandemic.
We're having new variants pop up, and there's a lot of uncertainty for
everyone right now on the future of people just getting together.
So if you're an investor or you're looking at buying one of these
and putting a group together, be very, very careful
because I believe that expenses are going up and incomes going down.
And you want to be careful that you're not catching a falling knife.
Well, thanks for watching.