- Moody’s identified two key signals that suggest the U.S. office market may be nearing a bottom: higher deal volumes, and more sales at large losses.
- Recent major sales with big losses, such as the sale of 1740 Broadway in NYC, always tend to precede a ‘true’ market bottom.
- Despite these positive indicators, full recovery may take up to two years due to ongoing challenges with price discovery in the market.
Offices have faced significant challenges over the past 18 months due to a lack of price discovery and limited transaction activity, as reported in Globest.
However, a new report from Moody’s suggests the U.S. office market may be nearing a bottom—though it could take another two years for conditions to normalize.
Positive Signals
Moody’s highlights two major signals indicating that the office market might be bottoming out:
- Annual YoY growth in office transaction volume, which turned positive in late 2023 after a long period of decline. In fact, all of 1H24 showed rising deal volume, suggesting positive investor interest and momentum.
- Office properties are also trading at steep discounts, potentially distorting the true picture of market recovery. However, this may also be a strong indicator that ‘fear’ greatly outweighs ‘greed’ in the sector right now, which typically signals an impending bottom.
Eating Losses
Over the last year and a half, many analysts predicted falling office valuations, but few large buildings were selling at big losses—until recently.
Moody’s notes that office sales with steep losses spiked this year, particularly in Q2, which could indicate that the market is bottoming out.
A great example is the recent sale of 1740 Broadway, an older Class B office property, in NYC. Investors in the property’s debt faced steep losses, with those in the highest tranche only recovering 74% of their investment, while creditors in lower tranches were wiped out.
Of course, while these types of ‘blowout’ sales are painful for investors, they’re also a necessary step in reaching true price discovery and stabilizing the market.
What’s Next
While the latest office market indicators are promising, Moody’s warns that recovery will not happen overnight.
Moody’s analysts believe it may take another two years for the office market to approach normal conditions, as banks and investors come to terms with current valuations and continue the process of price discovery.
