The troubled U.S. office property market may be nearing a turning point, according to analysts speaking with Reuters. A series of distressed property sales at significant discounts in the last quarter has set new pricing benchmarks, suggesting the market may be stabilizing. Since the pandemic, the U.S. office sector has faced challenges due to rising interest rates and a shift towards remote work, resulting in a 12.4% year-over-year decline in office building prices by the second quarter, as reported by the RCA Commercial Property Price Index.
Stephen Buschbom, research director at Trepp, remarked, “Peak distress is fully behind us,” emphasizing the importance of increased transactions to provide clearer pricing insights. “We still have price discovery left,” he noted, adding that a rise in transaction volume could make the market more appealing to property holders.
Throughout 2023 and into early 2024, many developers and lenders opted to extend maturing loans or postpone sales to avoid significant losses. Pre-COVID-19, average office sales reached $35 billion per quarter, but as property valuations declined amid ongoing vacancies and rising operating costs, the average fell to $13.4 billion per quarter in 2023, according to MSCI Real Capital Analytics.
Despite these challenges, some analysts report a resurgence in sales of distressed properties, suggesting a potential market rebound. “There are growing signs of market-bottom capitulation, with experienced property owners selling at substantial discounts, helping establish a new pricing benchmark for office values,” stated Kevin Fagan, head of Commercial Real Estate Economic Analysis at Moody’s.
Since the end of the first quarter, there have been seven office properties sold at discounts exceeding $100 million, compared to just one in the first quarter and two for the entirety of 2023, according to Moody’s report based on public records. Notable transactions include a Midtown Manhattan office building that sold for a staggering 97% less than its original price of $285 million, resulting in a loss of $276.5 million. Moody’s also identified sales in cities such as Chicago, Seattle, and Washington, D.C.
With limited pricing benchmarks, many property owners have been hesitant to sell, as decreased transaction volumes create discrepancies in pricing expectations. Instead, they have chosen to extend or refinance existing loans, waiting for a time when interest rates decrease to enhance their capacity to retain these assets.
The commercial real estate sector is grappling with low vacancy rates and declining revenues, complicating property owners’ ability to meet interest payments on their loans. Even with anticipated interest rate cuts, nearly 72% of approximately $19 billion in maturing loans over the next year could face refinancing challenges, as borrowers may need to contribute an average of 30-35% equity for new loans, according to Moody’s research.
Ryan Reiss, chief lending officer at EagleBank, noted, “There will be some large balances in the general market towards the end of this year and into early next year that go through a sales transaction.” The Federal Reserve’s recent interest rate cut of 50 basis points in September marked a shift in policy, but experts argue that a more significant reduction of 300-400 basis points is needed for a meaningful recovery in the commercial real estate sector.
An example of a lender advancing in the current climate is Parkview Financial, which recently offered $300 million in a mix of performing and litigation-affected multifamily and office loans for auction in New York, New Jersey, and Connecticut. CEO Paul Rahimian reported receiving multiple bids ranging from 95 to 98 cents on the dollar for four of these loans, which are expected to close within six weeks. The firm plans to use the proceeds for new lending.
According to Keerthi Raghavan, head of ABS strategy at Waterfall Asset Management, such transactions are creating opportunities. He emphasized that fundamental issues in the market won’t vanish quickly, with many commercial real estate assets still needing resolution, ensuring a continued supply in the market.
