May 2024

• The last few years have been difficult on not just traditional office space, but office share also.
• But with downsizing and remote work, office shares may be an ideal, flexible option for many companies.
• And that may provide real estate investors and opportunity on which to capitalize.

We know the office market is in major turmoil. We have talked about that a lot both in this blog and on the streets. And in all my conversations, I have found that – while everyone has an opinion (including me), nobody really knows where office is headed. But lately I have been talking with a lot of folks about office share. We all remember the dramatic fall of WeWork, the once-high-flying office share giant. Its 2023 bankruptcy filing sent shockwaves through the industry, leaving many wondering about the future of collaborative workspaces. Well they are now about to emerge from that bankruptcy. And, of course, they are not the only game in town. 

So what does that mean for the future of office share? Lets talk about it.

Look to the Past to See the Future

Before we talk about the future, it makes sense to look back a little bit. WeWork seemed like it was the model for office sharing. So what happened to it?

WeWork’s ambitions were as big as Texas itself, but its foundation wasn’t as sturdy. Its focus on rapid expansion over profitability proved unsustainable. It never made any money and its path to profitability was not clear. It took on a lot of large debt to expand its real estate. And then COVID hit and work from home hurt WeWork a lot as it had long, expensive leases but nobody was coming to the office. But, WeWork is about to emerge from bankruptcy and could be back to be a major player in the office share market. And, of course, WeWork is not the only player in the game. 

Here in Texas, there are still several office share providers, from established players like Regus and Common Desk to innovative startups catering to specific industries. These companies can offer a great alternative to traditional office space – focusing on flexibility, affordability, and fostering a sense of community. But is that what people want now?

Work From Home: Boon or Bust for Office Share?

Look, the rise of remote work is undeniable, especially in the wake of the pandemic. Here in Texas, many companies have embraced a hybrid model, allowing employees to split their time between home and the office. This has definitely hurt the office market. But what about office share?

Working from your kitchen table gets old fast. Coffee shops are noisy, and home distractions abound. Office share offers a professional environment for those who crave structure and separation. Plus, it fosters collaboration and networking – things that can be hard to come by in the virtual world. Of course, this argument is the same for traditional office. And we know how that is doing.

On top of this, of course, companies are downsizing right now – especially in the tech industry. And that also affects the demand for office space. But the uncertainty may motivate companies to forego traditional, multi-year leases on sprawling offices, and instead turn to flexible office share solutions. This allows them to scale their workspace up or down as needed, saving money while maintaining a professional presence.

The Opportunity in the Office Share Market

So, what’s the future hold for office share in Texas? Ultimately, I am just spit-balling here. But through an educated guess it does not seem all doom and gloom. The market is evolving, adapting to the changing needs of businesses and workers. Here’s what I think we can expect:

• A focus on flexibility: Expect short-term leases, hot desking options, and the ability to scale workspace according to needs.
• Community-driven spaces: Look for office share providers that offer events, networking opportunities, and build a sense of belonging.
• Tech-enabled experiences: Expect seamless booking systems, mobile apps for access control, and integrated office management tools.
• Industry-specific spaces: We might see office share providers cater to specific industries like tech startups,healthcare companies, or creative agencies.

The office share market in Texas might have hit a few bumps in the road, but it is not going away. By offering flexibility, fostering community, and adapting to the changing work landscape, Texas office share providers are poised to thrive. So, if you’re looking for a professional workspace that reflects the Texas spirit, keep an eye out for innovative office share solutions that’ll help your business grow and connect. 

• There is a looming wave of refinancing coming for commercial real estate property owners. 
• Because of rising interest rates and scarcity of debt, it may be very difficult for a property owner to refinance. 
• That may present an opportunity for you and your lawyer to renegotiate your existing mortgage with your lender.

The commercial real estate market is interesting right now. We talk about it here almost every week. And its about to get even more interesting as a significant challenge is approaching for many property owners – a wave of expiring mortgages in the next two years. This confluence of factors – rising interest rates, a tighter lending environment, and potential property value fluctuations – presents a unique set of obstacles for commercial real estate owners with maturing loans. And potentially a unique opportunity for investors to acquire some distressed assets. So lets talk about it.

The Numbers Game: A Looming Refinance Cliff

While pinpointing the exact number of expiring mortgages is difficult due to the decentralized nature of loan data, industry reports suggest a significant portion of Texas commercial real estate loans originated between 2018 and 2021 are set to mature in the next 24 months. This surge in refinancing activity coincides with a less forgiving lending landscape compared to a few years ago. Interestingly, on Thursday this past week, Bukowski Law Firm sponsored the North Texas CCIM May luncheon in Fort Worth. We had a great panel of lenders talking about this very topic. It was very insightful listening to what they are thinking.

The problem started, of course, because the Federal Reserve’s unprecedented interest rate hikes aimed at curbing inflation have significantly impacted the commercial mortgage market. Previously secured loans with historically low interest rates are set to expire, forcing borrowers to navigate a market with much higher borrowing costs. This can significantly impact a property’s cash flow and potentially make refinancing at the new rates untenable.

The question, then, is what happens when these mortgages do mature. And the properties do not work when the interest payments have greatly increased because of the rate hikes. While loan defaults and foreclosures are a huge concern, lenders may be hesitant to take back ownership of properties. Foreclosure processes are time-consuming and costly, and flooded markets with distressed assets are undesirable for lenders.  In general, banks do not want to foreclose. They would rather find a solution that allows the borrower to keep the property and continue making payments.*

And its not just rising interest rates that owners have to deal with. The recent economic uncertainty has also caused lenders to become more cautious. Banks are tightening their lending restrictions and demanding stricter loan-to-value (LTV) ratios. This “debt squeeze” means securing new financing at favorable terms might be a challenge, especially for properties that have experienced a decline in value.

Renegotiation Can Be a Path Forward

Given these complex factors, navigating the upcoming refinancing wave requires a proactive approach. At the CCIM luncheon, the banks were saying that they are hesitant to continue to extend and renegotiate mortgages anymore. I am a little dubious of that because I still do not think they want to own the property. Its not good for their ratios. As a result, renegotiation of those loans is still a possibility. That’s where a good commercial real estate lawyer can help by:

• Understanding Your Loan Documents:  We can meticulously review your existing loan documents to identify potential prepayment penalties, extension options, and other clauses that might offer some flexibility during negotiations.

• Loan Restructuring:  We can work with your lender to explore options such as extending the loan term, modifying the amortization schedule, or potentially negotiating a lower interest rate.

• Financial Strength is Key:   We can help you  develop a comprehensive financial package that demonstrates the property’s strong cash flow and potential for continuing debt service under the new loan terms.

• Transparency and Communication:   Open and honest communication with your lender is crucial. We can help you  frame a clear and realistic proposal that showcases your commitment  to maintaining the property and fulfilling your financial obligations.

• Exploring Alternatives:   While renegotiation is often the preferred course of action, we can also explore alternative financing options such as private lenders or bridge loans if the primary lender proves inflexible.

The Bottom Line: A Proactive Approach is Key

The coming wave of loan maturities presents a significant challenge for Texas commercial real estate owners. However, by taking a proactive approach and seeking the guidance of a qualified Texas real estate lawyer, you can navigate these obstacles and secure a solution that benefits both you and your lender.

Remember, early action is critical. Don’t wait until your current loan is about to expire to start the conversation.  By initiating the process well in advance, you demonstrate your commitment to finding a mutually agreeable solution and position yourself for a successful outcome.

*This holds for traditional lenders. It does not necessarily apply to third party lenders who may welcome the opportunity to own foreclosed property.

• A lot of citizens – on both sides of the issue – showed up at the latest Austin City Council meeting to discuss the possible adoption of the HOME 2 changes.
• On Friday May 17, the City Council adopted some changes that will greatly reduce minimum lot size and compatability requirements.
• These changes should help housing affordability in Austin.

More potential good news from the Austin City Council this week. Its really been pretty impressive how aggressive this City Council has been at opening up avenues for more housing development. 

At the May 16 City Council meeting, the main topic was the potential adoption of the HOME 2 changes to the development code. The council chambers overflowed with residents, both for and against the measure, highlighting the deep divisions within our community regarding how to address Austin’s growing affordability crisis. So lets talk about it.

Big Crowd on an Important Topic

Thursday was the big day at City Council. A lot of citizens showed up – on both sides of the issue. According to Jack Craver’s Austin Politics Newsletter, more than 2500 people had registered to speak on the matter – including 1,456 people for and 972 against it. The meeting lasted late into the night and, as you can tell, had a lot of interest on both sides. 

HOME 2: A Breakdown of Potential Changes

We wrote a few months ago about the initial HOME changes when the City Council adopted it. The big take away from that was to allow three separate units on a normal single family housing site. And now the City Council is back for more. On Friday May 17, they passed HOME part two.

What is Home 2 exactly? It’s the Home Options for Mobility and Equity changes to the Land Development Code (previously called Home Options for Middle-Income Empowerment). The new provisions will greatly reduce the minimum lot size for a single family home in Austin. Currently, the minimum size is 5,750 square feet. With the new amendment, the minimum lot size is decreased to 1800 square feet. 

In addition, the City Council also amended compatibility requirements throughout Austin. As we have discussed in previous articles, Austin has some of the strictest neighborhood compatibility requirements around. Previously, developers could not build tall buildings within 540 feet of a single family home. And that has stilted growth along transportation corridors and limited housing. After Friday’s vote, that number will be decreased to 75 feet.

Will These Changes Help Affordability

At this point, a big reason housing is so unaffordable in Austin is because of the lack of supply. It’s a basic economic principle – the demand for housing has outpaced the supply. This drives prices upwards. By increasing the total number of homes and apartments, city councils can help tip the scales back in favor of residents.

One concrete step city councils can take is to revisit minimum lot size requirements. That’s why the Austin City Council voted to do just that. By lowering the minimum lot size the City Council opens the door for more development on existing land. This allows builders to create more housing units on the same amount of space, effectively increasing supply without sprawling outwards.

And obviously, another strategy is to relax compatibility requirements. These standards often dictate building heights and density based on the surrounding area. While these can be important for maintaining a neighborhood’s feel, overly restrictive compatibility requirements can stifle the development of taller buildings along transit corridors.

Relaxing these requirements in designated zones can pave the way for the construction of apartments and condominiums. This targeted approach allows for increased density where it makes sense, near public transportation and job centers, without compromising the character of established neighborhoods.

Building a More Affordable Future

By adopting a thoughtful approach that prioritizes increasing housing supply, Austin can start to tackle its affordability crisis. Lowering minimum lot sizes and strategically relaxing compatibility requirements are just two examples of tools that can unlock new development opportunities. And the fact that this City Council continues to consider new approaches is a credit to them.