Is there a silver lining in CRE’s dark clouds?

Different week, but much of the same tune, as commercial real estate continues to get pummeled by high interest rates and increasing vacancy rates.

Goldman Sachs last week issued a warning, saying Vornado Realty Trust could come to the brink of defaulting on $2.6 billion worth of loans.

In addition to the rising interest costs and tenant departures, the REIT has a half a billion dollars in expenses tied to its massive redevelopment project surrounding Penn Station, all of which could bring Vornado’s debt coverage ratio close to its limit, the analysts wrote in a May 1 note.

Some have been a bit more optimistic about the current market conditions.

Brookfield Corporation CEO Bruce Flatt tried to reassure stressed investors about the state of the commercial real estate market in his first quarter letter, the Financial Times reported. The letter came even as Brookfield showed some of its own distress, particularly in the office market.

Flatt wrote the concerns surrounding commercial real estate are overblown. He noted much of the distress already seen revolves around old properties or ones that had already been struggling.

“Parts of the real estate market are doing very well today — including hotels, industrial properties, high-quality retail, premier office and multifamily residential,” he wrote.

Perhaps, but that hasn’t stopped others from exploring ways to adapt to the current conditions.

In Manhattan, family offices and smaller investors are moving to fill the gap, according to Bloomberg.

During the second half of last year, 11 office deals in Manhattan closed for at least $50 million. Among those, seven of them featured a family office or non-institutional investor as the buyer. In the first half of that year, those entities accounted for almost none of the purchases.

“One person’s trash is another person’s treasure,” Marisha Clinton, senior director of Northeast regional research at Savills, told Bloomberg.

Meanwhile, San Francisco officials and developers, like those in many U.S. cities, are turning to other solutions like converting unused office space into housing. The situation, however, is particularly dire in the City by the Bay, where one-third of offices are vacant and office keycard swipes are below half of pre-pandemic levels. 

But any actual conversions spurred by the high vacancies and recent push to lower zoning regulations and fees are likely years away, analysts say, and will require a collective effort from government and developers to make the projects pencil.

A major plus is the city has a lot of older, smaller office buildings that are conversion-appropriate than other markets, according to several recent studies.

Things are much sunnier in South Florida, where some of the tri-county region’s biggest employers are shedding some or all of their office space. Developers are buying those less-desirable campuses with the plan to demolish and build in-demand asset classes such as industrial and residential.