Investors are Stepping up Buying Office Buildings Amidst Depressed Prices
The crash in commercial real estate prices in the U.S. has finally come. The delay was mostly due to the fact that no one knew how much commercial properties (especially office buildings) were actually worth.
The downfall began during the Covid pandemic, when many office workers conducted their duties from home. When the pandemic ended, many employers realized that they could function just as well with the partial work from home model. Businesses realized they could save a fortune in overhead when they rent far less space. Needless to say, all of this was just fine with the employees who could conduct business at home, while saving money on transportation.
Across America, investors are snapping up office buildings at steeply discounted prices. For example, a prime office building in Los Angeles sold in December for 45% less than its purchase price just a decade ago.
Some property owners will have little choice but to sell as their debt comes due, with current interest rates far higher. (Most commercial loans are not fixed for 30 years like they are with residential real estate. In commercial real estate loans balloon in 5, 7, or 10 years. Regardless of interest rates, an owner will need to refinance in 5, 7, or 10 years or sell the property to pay off the lender.) More than $1 trillion in commercial real estate loans are set to mature by the end of next year.
The fallout will be devastating for office building owners. In the past decade of rock-bottom rates, global investors piled into offices and other commercial buildings as a perceived safe alternative to bonds. American cities from Los Angeles to New York have counted on top-dollar office values. But now, with the new stay at home work model and very high interest rates, the owners are set to face severe losses.
“Top of Form
Bottom of FormAs more transactions add transparency to the market, investors will have to recapitalize loans to reflect lower values,” said Scott Rechler, chief executive of New York landlord RXR. His firm defaulted on a $240 million loan tied to the Manhattan office tower, 61 Broadway, after determining it wasn’t worth putting more money into it. Beyond very high borrowing rates, high inflation served to exacerbate the situation.
San Francisco, which for years benefited from booming demand from tech companies, had the country’s highest rate of available office space in the fourth quarter of 2023, at a stunning 37%, according to brokerage Savills.
The plunging U.S. values are being felt around the world because properties in top-tier American cities were once magnets for global investment. Offices buildings were seen as super safe bets backed by high-quality assets with long-term leases and rising rents. That’s now coming back to bite.
Big commercial real estate investment companies from Blackstone to Pacific Investment Management Company have walked away or defaulted on properties they don’t want to pour more money into. Although these and other firms unloaded office properties at significant losses, they are now re-investing due to rock bottom prices.
Blackstone, which had written-off the Manhattan office tower at 1740 Broadway two years ago, is looking to put money back to work. Blackstone, the world’s largest alternative-asset manager closed a record-breaking property fund last year after securing more than $30 billion in capital commitments.
As with any market dislocation, there’s opportunity: Potential buyers and investors have armed themselves with some $402 billion to target commercial real estate deals, according to JLL’s data as of October of 2023.
In San Francisco too, buyers are scooping up properties at steep discounts. The downtown office tower at 201 Spear St. was recently taken over at close to half of its value a decade ago after the previous owner turned the building over to its lender.
The CoStar Group, the highly respected Washington DC based provider of information, analytics, and marketing services to the commercial property industry in the United States, Canada, the United Kingdom, France, Germany, and Spain expects 2024 and 2025 to be the two worst years on record for office buildings in terms of the amount of floor space that tenants are vacating.
But quick deals could signal that the prices of office buildings have hit rock bottom, particularly for the buildings constructed decades ago.
For a deeper dive into the problems banks and investors are experiencing, this article just appeared in the New York Times (6/25/24), as I was proofreading the article above: