Commercial Real Estate: Identifying the Imminent Fate of Buildings

**Marx Realty: Adapting to Changes in the Office Sector**
Marx Realty, a prominent player in New York commercial real estate for over a century, has witnessed numerous shifts in the market. The company’s president and CEO, Craig Deitelzweig, emphasizes the challenge faced by “commodity buildings” in the office sector. In this article, we explore the meaning of commodity buildings, the evolving nature of the office sector, and the potential repercussions for property owners.

**The Concept of Commodity Buildings**
Deitelzweig describes commodity buildings as properties that lack distinct features or amenities, leading to a generic and uninspiring environment. With the current trend of hybrid work arrangements and the desire to draw employees back to the office, tenants seek offices that provide a welcoming atmosphere. Marx Realty incorporates hospitality elements into its office properties, such as outdoor spaces, lounges, cafes, and doormen. Deitelzweig asserts that these features align with current tenant preferences, allowing Marx Realty to position their properties favorably against commodity buildings.

**The Bifurcation of the Office Sector**
Due to the ongoing transition from remote work to hybrid work models, the office sector is experiencing a significant divide. To entice employees back to the office, companies must create attractive workspaces. Commodity buildings struggle to compete because their lackluster environment fails to inspire. This has led to steep discounts on sales of commodity buildings, even if they are new glass and steel structures. However, Deitelzweig notes that any asset could be at risk if the owner faces maturing debt amid rising interest rates.

**The Risk to Office Property Owners**
The tightening of credit and stricter lending standards have diminished transaction activity and made it challenging to evaluate current office property values. Property owners are hesitant to relinquish their assets to lenders, as it takes time to accept that this may be the most beneficial course of action. Experts predict an increase in delinquencies, defaults, and declining property values for commercial real estate loans with maturities during a period of higher interest rates and limited credit availability.

**The Emergence of Zombie Buildings**
Experts, including Fred Cordova of Corion Enterprises, warn that the end of an era of cheap money and changing demand has resulted in the emergence of “zombie buildings.” The CEO contemplates a slowdown in commercial real estate overall, potentially leading to a recession. He specifically highlights concerns regarding New York City’s older office buildings, which may face significant challenges in the post-pandemic world. Commodity buildings mentioned by Deitelzweig are now trading at half their purchase price or even less, while higher-quality properties also experience a decline in value.

**Opportunities for Asset Repositioning**
Despite the challenges faced by commodity buildings, there are opportunities for developers who can reposition assets to meet the expectations of modern tenants. However, some property owners find themselves returning their assets to lenders, either due to maturing debt or an inability or unwillingness to invest additional capital for repositioning purposes. These properties struggling with debt and poor performance will likely have no choice but to hand the keys back to lenders. Supply adjustments may involve transforming commodity buildings into office properties infused with hospitality elements or repurposing them as parks.

**The Viability of Converting Obsolete Offices to Housing**
Given the housing crisis in cities like New York, one might consider converting obsolete offices into residential spaces. However, Deitelzweig believes that this option often lacks economic feasibility. If an office space does not work well for its intended purpose, it is unlikely to be suitable for residential use. The economic viability of such conversions would require a significant decrease in the property’s value.

**Marx Realty’s Approach**
Deitelzweig joined Marx Realty in 2017, focusing on value-add office investments in New York City, Washington D.C., and Atlanta, with a subsequent shift towards New York City and Washington D.C. The firm believes in office repositioning and strives to meet the expectations of modern tenants. Marx Realty’s portfolio, comprising office, retail, and some residential properties, has no debt maturing in the next two years. The success of their 10 Grand Central property, which has leased more space than neighboring buildings combined, reflects their ability to cater to tenant demands.

**Navigating the Changing Landscape**
Deitelzweig recognizes that the current challenges faced by the office sector are part of a cycle. He maintains that it is healthy for the commercial real estate sector to periodically reevaluate and reimagine the product to adapt to evolving demands. Property owners facing difficulties may turn to companies like Marx Realty for assistance, as lenders seek solutions for struggling assets.

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