A weekend topic starting with Suncoast News in Florida. "More dramatic will be changes to large commercial tracts on the highway, such as the moribund Universal Plaza in Holiday, which recently showed up on a video with human excrement dotting its pavement. The property is now under contract to build a mixed-use project with two seven- to eight-story luxury apartments. In Port Richey, the former Sears building has been demolished for the construction of garden apartments, and the Dillard’s anchor at the opposite end sits empty. It’s impossible, though, to talk about development in West Pasco without acknowledging what is rapidly becoming a monster issue: the housing crisis. It’s most dramatically visible in the extremes of, on the one hand, a glut of luxury housing projects that are seemingly taking up every square foot of undeveloped land, and, on the other, the ubiquitous camps where homeless people live — 62 in the county at last count — with most of them in West Pasco."

"Less visible but every bit as disturbing is the fact that rising housing costs are forcing county residents, many of them longtime or even second or third generation, to move to Hernando or even Citrus counties. 'The average salary here is $47,000,' Engels said. 'Wages are up 18%; housing is up 63%. Most of our labor force can’t afford to live here in safe, decent housing. Forty-two percent of our workers are commuting from out of the county.' Even for people making $70,000 per year, he added, the housing situation is 'very dire.'"

The Real Deal. "Add another legal scrape to what’s been a tumultuous year for Applesway Investment Group. A group of 123 investors filed the latest on Wednesday, alleging that they paid Applesway, an investment firm led by Jay Gajavelli, $12.4 million on a deal that never happened. The investors told a Texas court that they spent the $12.4 million to acquire an apartment complex in Houston. However, Applesway allegedly spent the money on an unrelated transaction that fell apart, leaving the investors without the apartment complex they thought they were buying for their money."

"Applesway used the $12.4 million intended to purchase the Houston property in a desperate attempt to revive the other deal, offering it as a nonrefundable down payment, the lawsuit alleges. Applesway has been at the center of multiple high-profile foreclosures in recent months. The firm was the primary property owner in Arbor Realty Trust’s $229 million portfolio that foreclosed in April. Earlier this week, a foreclosure suit was filed on a $65.2 million loan tied to another one of Applesway’s multifamily properties in Houston."

Bisnow Dallas Fort Worth in Texas. "A slew of office tenants in Dallas-Fort Worth have given up hope of saving money on real estate and are taking space back after hanging their hats on subleases that never materialized. Eighteen subleases totaling 2.2M SF have been taken off the market for reasons other than a new tenant occupying the space since the first quarter of last year, according to CBRE. Others, still attempting to find subletters, are working in cavernous spaces that offer as much as 10K SF per employee on most workdays."

"Only about a dozen people are coming into the MCS headquarters on a regular basis, said CEO Craig Torrance, so a 120K SF footprint no longer makes sense. 'Everybody who comes into our building goes, ‘Wow, this is huge! But nobody’s here,' Torrance said."

Korea Economic Daily. "A private fund for US real estate managed by South Korea’s Mirae Asset Global Investments Co. has seen huge losses amid the tumble of the office market, investment banking sources said on Friday. The fund posted negative 70.2% as of May 26, according to Mirae Asset’s disclosure. Mirae Asset Global created the fund in 2015 when local institutional investors were aggressively pouring capital into the overseas real estate market. As the fund saw losses amid a downturn in the office market, Mirae Asset extended the fund's maturity in 2020 and 2022. Mirae Asset formed the fund as it acquired 1750 K Street Northwest in Washington, D.C., for $115 million."

"The US office market suffered plunging values during the pandemic, with an oversupply of properties and remote work trends. 'The investors could have recovered at least half of their principal if the fund's liquidation was executed in 2020. The value of 1750 K Street has plunged to one-fourth its purchase price,' said an IB source."

From Slate. "They call it the 'debt wall'. Specifically, it is $1.5 trillion in commercial real estate debt. The country’s downtown office buildings, as you may have heard, are in particularly dire shape. The return to office has stalled, and many once-vibrant business districts have fallen on hard times. According to the brokerage Colliers, almost all of biggest office buildings in Downtown Los Angeles are underwater on their loans—meaning, their owners owe more to the bank than the buildings are currently worth. LA’s office towers have, on average, more than $230 in debt per square foot, Bloomberg’s John Gittelson reports, and the only building to sell this year went for $154 per square foot. That’s a lot of water. The city’s biggest commercial landlord, the Canadian property giant Brookfield, has defaulted on more than a billion dollars of loans this year."

"And for residential conversion, the white whale of downtown reinvention? 'Values have to come a lot further down before a wholesale conversion starts taking place,' said Richard Barkham, global chief economist at commercial real estate giant CBRE. 'And in some cases, values might have to go negative.'"

From Bloomberg. "Office real estate investments trusts are trading at their lowest level since 2009 as the trend toward remote work leaves desks empty and economic pressures tighten corporate budgets. 'There’s two ways to lose money: You can own a boat, or you can own an office building,' Piper Sandler analyst Alexander Goldfarb said. 'At least with the boat you can take your friends out on a sunset cruise.'"

The Hoover Institute. "The former Union Bank building in the heart of San Francisco’s financial district, located at 350 California Street, was auctioned off last week. The winning bid was $65 million, roughly 75 percent less on a per-square-foot basis than comparable building sales from just before the pandemic. The glut of downtown office space, combined with San Francisco’s high housing costs, has led many to envision converting downtown commercial spaces into residential buildings, but not one residential development firm bid on this property. Tony Crossley, a San Francisco commercial broker, estimated a residential conversion cost per unit of nearly $1,000 per square foot for this property. 'It doesn’t make any economic sense,' he said. 'The math is completely upside down.'"

ABC San Francisco in California. "It was supposed to be the transit epicenter of the San Francisco Bay Area, with the $2.4 billion Salesforce Transit Center built to corral thousands of commuters and serve as the urban center of a new neighborhood South of Market. Today, the Grand Central Station of the West is a very quiet place. A near ghost town waiting for city life to return."

The New York Post. "An Old Navy store that has been in San Francisco for three decades is slated to shutter this summer — adding to the growing list of retailers closing down throughout the crime-plagued city. The Market Street location — located just three miles away from its corporate headquarters — will shut down July 1 once its lease expires, according to a company statement. The Old Navy spot is not the only longstanding Bay Area store to suffer enough losses to close down in recent weeks. At least 20 stores in the city’s Union Square area have shuttered since 2020."

Silicon Valley in California. "A San Jose site where a 132-room hotel was proposed has tumbled into a loan default and faces foreclosure, a fresh indicator of post-coronavirus economic maladies for the Bay Area lodging sector. The hotel was proposed at 1510 South De Anza Blvd. in west San Jose, very close to the Cupertino city line, according to San Jose planning documents. The four-story hotel would also have featured a ground-floor restaurant and a rooftop deck, the city documents show. This loan default represents one of the most recent known examples that suggest financial difficulties have begun to haunt sites where hotels have been proposed but have yet to be developed."

Bisnow Boston in Massachusetts. "A Faneuil Hall hotel owned by Blackstone is reportedly heading for foreclosure after negotiation attempts around its delinquent $274M loan failed. A CMBS loan backed by the 178-room Club Quarters Boston hotel and three other Blackstone-owned CQ hotels in Chicago, San Francisco and Philadelphia has been in special servicing since mid-2020, and the special servicer is now 'pursuing foreclosure,' the Boston Business Journal reported, citing a CMBS industry report."

From Globest. "Bank loan assets are finding themselves on the market, whether the FDIC expecting to sell the $60 billion worth retained from the Signature Bank closure sometime this summer, or PacWest selling 74 construction loans to Kennedy-Wilson Holdings for $2.4B, a discount of $200M. With increased pressure on CRE loans and greater numbers of assets becoming distressed in the near future, there’s no reason to think that the discounting has ended."

Blog TO in Canada. "An increasing number of Toronto companies continue to adopt hybrid work models despite lockdowns fading into the past, meaning nine-to-fivers are spending less time in the office and spaces remain largely vacant. In all cases but the four-day scenario, the report found that there will be 'millions of square feet of surplus office space until 2041' in Toronto. Even in this scenario, only 15 million square feet of new space would be required, which is about half of the pace of demand seen before lockdowns."

"'As an association representing office building interests, it is unusual for us to recommend policies that would result in less office space,' said NAIOP Greater Toronto President Christina Iacoucci. 'However, with a likely significant oversupply of office space lasting potentially for decades, governments need to respond to changing work patterns and economic priorities.'"

The Globe and Mail. "On paper, the case for converting office buildings to residential apartments is compelling. Two recent reports indicate that across Canada, scores of office buildings could be candidates for conversion. According to a report by the Canadian Urban Institute, which delves into conditions that enable conversions – such as building type, city policy and market viability – 130 buildings in 11 cities could be converted into 22,000 housing units. A broader approach by commercial brokerage Avison Young suggests about one-third of office buildings in major cities could be converted."

"On the ground, however, some of the few developers who’ve completed office building conversion are wary of how difficult and pricey the work can be. Oz Drewniak, president of Ottawa-based CLV Group Developments, has checked out more than a dozen potential building candidates in the last year and a half but each presented unsolvable problems. Most were too technically challenging or had too much occupancy, he says. Or the city’s sewer infrastructure wasn’t compatible for heavier residential use. On some sites, the environmental inspection or seismic assessment didn’t pan out."

"'We’ve learned a lot, so the next one should theoretically be easier. But it’s a challenge to find the right conditions out there,' says Mr. Drewniak. 'I know of developers who have purchased empty buildings, but they’re sitting on them because they can’t figure it out. When you start looking at the cost, it’s very expensive. Everybody thinks, ‘oh, an existing building? That’s easy. You just throw some new residential units in it.’ But it’s not like that.'"

"Mr. Drewniak says demolition and construction from scratch would have been easier – while the cost would have been 'pretty much the same.' What was saved by reusing the structure was spent on 'all the time and work just to get it ready for a new use.' For example, everything had to be ripped out, he says. 'There wasn’t one pipe left.'"

"Since offices use a higher electrical voltage, an all-new electrical system was required, and as for plumbing, a residential building requires magnitudes more load capacity for bathrooms, dishwashers and washing machines in every unit. The new systems also required 1,700 new holes drilled through eight-inch concrete. 'It was a tremendous amount of drilling,' says Mr. Drewniak. 'Weeks of drilling.'"