Many of those who have made it far enough to appear in this 2024 Commercial Observer Owners Magazine are the worriers.
They’re the ones who kept their eyes on the risks that lay ahead while everyone else frolicked in the halcyon days of easy credit, cheap insurance and reasonable construction costs. But, going into 2025, practical considerations are the things that no sensible owner can simply wave away.
While many of those featured in this year’s Owners Magazine predicted a healthy amount of activity in 2025, and some will doubtlessly get lucky, we know that this will likely be a select few. Margins are probably going to be thin. Expenses matter more than ever. And, in some cases, American Express bills are going to be higher than ever.
So, what’s the expense that most owners are dreading?
“Interestingly, insurance is one of the biggest expenses,” said Larry Silverstein. “It’s going absolutely crazy, for several reasons, including the frequency and intensity of storms.”
Insurance was probably the most frequent answer among those polled.
“Insurance, hands down, is making building, owning and operating affordable housing prohibitive, and has both short- and long-term implications for our ability to address the availability and affordability of housing at all price points,” warned Will Blodgett.
“I hope it’s not litigation costs,” said a sly Keith Rubenstein before adding more seriously: “Insurance is going to be a killer.”
Doug Steiner was probably the most blunt of any of the owners: “Insurance is out of control.” Of course, it’s not the only thing.
“Return expectations,” said Hines’ Jason Alderman. “Given the New York City supply constraints, our markets have consistently outperformed on vacancy and rent growth, but so many investors don’t differentiate between our markets and other areas of the country where there is real supply risk.”
Some of the expenses are the classics that will never go out of fashion.
“Our biggest cost across our operating portfolio of office buildings is real estate taxes,” said Carr Properties’ Oliver Carr. “To date, the readjustment of real estate assessments to reflect significantly lower real estate valuations has not normalized, and that is hurting property valuations. It is also causing investors to pause when they think about allocating capital to the office sector. Many office building owners are having to pay real estate taxes on yesterday’s values, which in some cases may be more than 40 percent higher than the current value of their assets. We really need the mismatch between market values and tax-assessed values to get corrected to attract capital back to the sector. In terms of new capital spending in 2025, that will be focused on residential development.”
While there was some iffiness from the usually bullish owners about whether interest rates were finally coming down (see story on Page 31), interest rates and the cost of capital are still going to be the top consideration for Michael T. Cohen, Francis Greenburger, Don Peebles and Richard Kessler.
“We’re all hoping for rates to continue coming down, and they can’t come down fast enough,” Cohen said.
Greenburger was a little less hopeful.
“In 2025, capital is projected to be our largest expenditure,” Greenburger said.
Inflation is likewise something an owner or a developer cannot simply shrug off.
“Inflation is a concern and has been an ongoing problem,” said Gregg Schenker. “The cost of construction continues to rise, and that cost will always be our greatest single expense.”
Some expenses are worth it, though.
“Camber’s biggest expense is also its greatest asset: our team,” said Rick Gropper. Still, he added: “For our operating assets, the biggest expense across the board is insurance.”
“Labor,” agreed Meredith Marshall.
Capital improvements are going to remain significant for Scott Galin, Craig Dietelzweig and Steve Kaufman. And, then, of course, there’s the double (or triple) whammies.
“It’s probably an even split between labor, materials and land,” said Sam Charney, before adding that the rise in the cost of insurance was “wreak[ing] havoc on the industry.”
“All of the above!” declared MaryAnne Gilmartin. “But especially labor.”
Source: Commercial Observer
