It’s no secret that commercial real estate has struggled over the past few years. The industry is still reeling from the effects of the pandemic, which has forced more professionals to work from home and consumers to shop and dine at home. As a result, office vacancy rates will reach a 30-year high of about 18% by 2023, with companies large and small slashing space to accommodate new remote and hybrid working norms. Some even terminate their leases early.
Now, commercial real estate bargain hunters are grabbing space at steep discounts of up to 70%, according to several reports from commercial real estate information company CoStar.
“It’s become a trend for commercial buildings to be snapped up at deep discounts,” said David Almaraz, a Grant Shenon real estate attorney in Los Angeles with more than 20 years of experience. wealth. “Commercial real estate is in trouble under the current circumstances. People don’t want to go into offices anymore, and the days of wearing a suit and tie and commuting 40 minutes to sit in a cubicle are no longer attractive to the average worker.
Some examples of deep discounts on commercial real estate sales include an office building in downtown San Jose that sold for about $56 million less than in 2017, and an office building in Manhattan that sold for about 67% off. Burundi The report shows. Empire Capital Holdings and Namdar Real Estate Group reportedly purchased the property for less than $50 million. Burundibut related fund management companies paid a huge sum of US$153 million for it in 2018.
While commercial real estate as a whole is struggling, most of the deep discounts are occurring in the office tower sector.
“Offices are definitely in the worst shape compared to other property types,” said Joe Iacono, CEO of commercial real estate finance firm Crescit Capital Strategies. wealth. “Other asset classes are suffering from rising interest rates, higher fees (especially insurance and payroll) and slower rental growth. Offices have to contend with all of these factors, plus high levels of vacancy and lack of demand.
The deep discounts offered by commercial real estate are just the latest sign that the industry is in trouble. Another number that best illustrates the doom of commercial real estate is the total value of mortgage loans due in 2024. Billion dollars will come from expiration this year, according to a report released in February. This will be a hassle for tenants looking to refinance in a higher interest rate environment.
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While many commercial properties have lost value over the past few years, not all are selling at the steep 60% to 70% discounts mentioned earlier. Moody’s looked at various price indexes that measure repeat sales of the same property over time and found that office building values have fallen by about 20% to 30% since their peak in 2021. However, other measures would mean a discount of 30% to 40%, said Kevin Fagan, head of economic analysis for commercial real estate at Moody’s wealth.
“Some office properties have significant discounts to valuations or sales prices, but 70% discounts are not that common,” Fagan said. “While sales have been lower over the past year or two and price discovery has been great for commercial real estate stakeholders “A huge challenge, but the sales that have occurred are very complex.” In fact, other measures based on market prices for public REITs show peak-to-trough declines as high as 60%, he added.
It’s also important to be aware of the complexities of individual commercial real estate sales, especially when heavily discounted properties are involved. Take, for example, the Manhattan office building at 1740 Broadway. Fagan said after Blacksone handed over the keys to the property, a “battle” broke out over the deal between bondholders and the special servicer – which specializes in managing and resolving bad loans – leading to delays and the need to get the property to sell quickly. .
“All of these issues are leading to fire sales of assets, rather than an orderly sale to maximize the recovery value,” Fagan said. Another such example is a property in Fort Worth, Texas, which sold more than A report showed that the Burnett Plaza building sold for $12.3 million, less than one-tenth of the $137.5 million paid three years ago.
“The reality is much different,” Fagan explained, because media reports only covered some of the sales. Foreclosure auctions are only for mezzanine loans on the property, which are typically used only for acquisition or development projects. The building’s first mortgage, estimated at $83 million, remains active.
“So while the winning bid was $12.3 million, the buyer was also responsible for an $83 million first mortgage, bringing the acquisition amount to just over $95 million,” Fagan said. “That’s still a steep drop from $137.5 million in just three years, but 33% is still a long way from over 90%. [discount] This was widely reported.
Either way, there’s no denying that many commercial property owners struggle to keep their buildings in use.
“Building owners face significant headwinds in attracting and retaining tenants, especially in the office category,” said Kevan Ventura, a principal in the real estate group at law firm Goldberg Kohn. wealth. “In short, reduced tenant demand results in lower rental income and lower values. Maintaining occupancy is critical to financial viability.
