Distressed Sales Signal Turnaround for Office Market

The US office property market is showing signs of stabilization—and a potential bottom—with more and more distressed sales at steeply discounted prices.

Jordan B. & Han-Gwon Lung
October 04, 2024

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Good morning. The US office property market is showing signs of stabilization—and a potential bottom—with more and more distressed sales at steeply discounted prices.

Today’s issue is brought to you by MHCI Group—the largest private owner of mobile home parks in Arkansas.

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Market Snapshot

S&P 500

GSPC

5,699.94

Pct Chg:
-0.17%

FTSE NAREIT

FNER

825.54

Pct Chg:
-0.77%

10Y Treasury

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3.851%

Pct Chg:
+0.001

SOFR

30-DAY AVERAGE

4.96%

Pct Chg:
0.0%

*Data as of 10/03/2024 market close.

PROPERTY REPORT

Distressed Sales Signal Turnaround For Office Market

The U.S. office property market, down 12.4% YoY, is seeing a surge in distressed property sales that may indicate the market is finding a bottom.

What happened: Since the pandemic, office property values have plummeted, dropping 12.4% from Q2 2022, according to the RCA Commercial Property Price Index. Office vacancies and high interest rates have pushed quarterly sales volumes down from a pre-pandemic average of $35 billion to just $13.4 billion in 2023. The slowdown has led many to wonder when, or if, the market would stabilize.

Surge in sales: Over recent months, the market has seen a notable increase in distressed property sales. Kevin Fagan of Moody’s reports that since early 2024, seven properties sold at losses over $100 million each, a significant rise from just two such sales in all of 2023. These transactions are setting new benchmarks for office property values, with some properties being sold at up to 97% below their original purchase prices.

Massive discounts: High-profile buidings have suffered dramatic price cuts. For example, New York’s 135 West 50th Street recently sold for a staggering 97% discount, with losses amounting to $276.5 million. Another major property, 1740 Broadway, was sold at a $416 million loss, marking the first AAA-rated bondholder losses on such assets since 2008.

Zoom in: In response, firms like Parkview Financial are offloading large loan portfolios to reinvest proceeds. According to Keerthi Raghavan from Waterfall Asset Management, while lower front-end rates might provide short-term relief, many office assets still need to be sold or resolved, which will likely keep supply elevated for some time.

➥ THE TAKEAWAY

Big picture: While the Fed’s recent interest rate cut offers some hope, experts believe that much deeper cuts are necessary to significantly improve property valuations. Many borrowers will continue to struggle with refinancing, as declining office values are forcing them to inject more equity to cover their maturing loans. The market’s recovery remains uncertain, with significant financial restructuring likely ahead.

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✍️ Editor’s Picks

RE expansion: Two Sigma opens its real estate unit to outside investors, focusing on housing and industrial assets while leveraging data science expertise.
Landlocked Las Vegas: Developers in Las Vegas are seeking federal land for development due to doubling land prices, with 88% controlled by the BLM.
Cap rates on the rise: For the 10th consecutive quarter, single-tenant net lease property cap rates increased slightly in 3Q23, with retail having the biggest impact.
Job uptick: Private payrolls grew by 143K in September, surpassing expectations and signaling resilience in the labor market.

🏘️ MULTIFAMILY

Rent ruckus: A new lawsuit alleges a landlord inflated initial rents at Tower 28 in Long Island City by evading stabilization laws, impacting affordable housing.
Revolutionizing rentals: Azora and Advenir formed a $3B partnership to boost US rental housing, aiming for 10K new units in 5 years.
Local luminaries: In Nashville, GBT Realty sold Parke West and Southcrest Reserve to Elmington Residential for a total of $96.5M.
Changing with the times: NYC issues an ‘eviction notice’ for the Elizabeth Street Garden to make way for Pennrose's Haven Green, a 123-unit affordable housing project.

🏭 Industrial

Data deal: Blue Owl is negotiating a $1B acquisition of IPI Partners, expanding its portfolio in digital infrastructure investments.
Expansion: Eli Lilly is expanding its presence in Indiana with a $4.5 billion R&D and manufacturing facility, boosting its total investment in the region to over $13 billion.
High-flying financing: JLL Capital Markets (JLL) secured a $115M loan for DFW Commerce Center Phase II & III, featuring three buildings near Dallas-Fort Worth Airport.

🏬 RETAIL

Spanish Soho: Isak Andic’s Punta NA bought a $26.9M, 19 KSF retail condo in Soho with a 5.9% cap rate.
Retail REIT rises: FrontView REIT (FVR) raised $250.8M by selling 13.2M shares at $19 per share during its recent IPO on the NYSE.
Brooklyn expansion: Empire State Realty Trust has acquired a Williamsburg building housing a Google store, as part of a $28.3 million push into Brooklyn’s retail market.

🏢 OFFICE

Tax troubles: Philadelphia faces tax revenue trouble with over $1B in lost office values, 20% in vacancies, and potential distress from mortgage loans.
Footprint downsized: German financial firm Allianz (ALIZY) will reduce its office footprint by 62% when moving to 155 N. Wacker Drive from 225 W. Washington St.
Flatiron fluctuations: ASB Real Estate Investments sold the Flatiron District office building for $22.8M, nearly half of its 2015 purchase price.

🏨 HOSPITALITY

Hotel mavericks: The NYC hotel industry, workers union, and Council member Menin finally reached a compromise on the Safe Hotels Act permitting licenses for operators.
Hotel refinance: Greysteel arranged a $19.4M refinancing for a dual-branded Hilton property in Brunswick, GA, securing favorable terms and financial flexibility for Newport Hospitality Group.
Miami moment: The Reuben Brothers are in advanced talks to acquire majority ownership of the W South Beach hotel in Miami for over $400M.

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📈 CHART OF THE DAY

CMBS dominates office-loan maturities

Source: MSCI Inc.

Weakened demand for U.S. office properties has led to steep price declines, drawing investor interest in upcoming refinancing opportunities, according to MSCI.

Around $80B in office loans are set to mature in the second half of 2024, with an additional $100B from earlier periods unrefinanced. CMBS lenders hold significant exposure, with nearly 30% of loans maturing by year-end.

FACT OF THE DAY

The tallest multifamily residential building in the world is Central Park Tower in New York City, which stands at 1,550 feet. Completed in 2020, this luxury skyscraper has 131 floors and offers some of the highest-priced residences globally, with some units listed for over $60 million!