Office conversion projects surge in 2023; Marriott outlines 3-year growth path

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The troubled US office sector saw a surge in conversion projects in 2023, a trend that could reinvigorate office districts affected by the rise of hybrid work, according to real estate services company CBRE.

About 100 office conversion projects are expected to complete in 2023, compared with the annual average of 41 from 2016 to 2022.

Office conversion to multifamily projects comprises almost half of the ongoing conversions, followed by office to life sciences projects at 19%.

Of the total US office inventory, 1.4% or 60 million square feet of space are being or will be converted.

"Cities that have financial incentive plans to transition obsolete buildings into newer and better uses will help transform older office districts into vibrant mixed-use centers that occupiers and consumers desire," CBRE said.

The real estate services company added that fewer projects will get going as long as interest rates remain high.

CHART OF THE WEEK: REIT M&A activity slows in 2023

⮞ The number of mergers and acquisitions involving public US equity real estate investment trusts so far in 2023 stood at six, compared with 10 transactions in the same period the previous year.

⮞ The most recent transaction was Kimco Realty Corp.'s approximately $2.00 billion acquisition of RPT Realty in an all-stock transaction.

⮞ Public REIT privatizations also slowed in 2023 year over year, with only two agreed upon so far, from four privatizations in the first three quarters of 2022.

Path forward

– Marriott International Inc. said it plans to add 230,000 to 270,000 net rooms over three years, reflecting a three-year compound annual growth rate for net rooms of 5% to 5.5%, to achieve nearly 1.8 million rooms by year-end 2025. The company expects global revenue per available room growth at a two-year CAGR of 3% to 6% from 2023 to 2025, after rising 12% to 14% this year.

– Diversified Healthcare Trust tapped B. Riley Securities as its financial adviser to help it evaluate options, such as raising new capital from investors and selling assets, to address near-term capital needs, including upcoming debt maturities. The company disclosed $700 million worth of debt maturing in the first half of 2024.

Office bets

– Wells Fargo & Co. will acquire an approximately 400,000-square-foot space that used to be occupied by Neiman Marcus at 20 Hudson Yards in Manhattan, NY, Bloomberg News reported, citing people with knowledge of the deal. The deal is estimated to be about $550 million. The bank plans to convert the space into offices, which it will occupy, according to the report. The Related Cos. LP and Oxford Properties Group Inc., which developed the property, are the sellers.

– Monarch Alternative Capital LP and Tourmaline Capital Partners entered an agreement to buy the 801 Brickell office tower in Miami for about $250 million, a potential record office investment in South Florida for 2023, The Real Deal reported. Nuveen Real Estate is selling the 28-story building and the deal is expected to close soon.

Industrial portfolio deals

– BGO Industrial Real Estate Income Trust Inc. acquired an indirect 34.2% ownership interest in a portfolio of industrial assets located in the US Midwestern region. The purchase price was nearly $130 million. The portfolio, which contains 29 assets spanning over 9.4 million square feet, was valued at approximately $948 million as of March 31.

– Investcorp Holdings BSC paid $216 million for an industrial portfolio totaling about 1.6 million square feet across the US, The National News reported. The portfolio comprises 31 properties with an occupancy rate of 94%.

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