It’s no secret that real estate has been struggling for the past few years. The industry is still reeling from the pandemic, which has forced many professionals to work from home and consumers to shop and eat at home. As a result, office space vacancy rates reached a 30-year high of nearly 18% by 2023, and large and small companies spent more space to adapt to new remote and hybrid-working trends. Some even terminated their leases early.
Now, for-sale house hunters are getting room for discounts of up to 70%, according to several reports from real estate information company CoStar.
“There has definitely been a trend of buying commercial properties at huge discounts,” said David Almaraz, a real estate attorney at Grant Shenon in Los Angeles with more than 20 years of experience. Good luck. “In the current situation, real estate is in crisis. People don’t want to go into an office anymore, and the days of wearing a suit and tie and walking 40 minutes to one place no longer appeal to the average worker.”
Other examples of deeply discounted real estate sales include an office building in downtown San Jose, which sold for about $56 million less than it did in 2017, according to CoStar, and a Manhattan office building that sold for about 67% off, a Bloomberg the report shows. Empire Capital Holdings and Namdar Realty Group bought the property for just under $50 million, according to Bloombergbut Related Fund Management paid a whopping $153 million for it in 2018.
While real estate as a whole is struggling, most of these steep discounts have been seen in the office sector.
“Office is clearly in a very bad shape compared to other types of buildings,” Joe Iacono, CEO of real estate firm Crescit Capital Strategies, told me. Good luck. “Some asset classes are suffering from higher interest rates, inflation—especially insurance and wages—and slower rental growth. The office has to deal with all these factors as well as vacancies and lack of demand. “
The steep discounts offered at retail outlets are the latest symptom of a struggling sector. One of the sad statistics that shows the crisis facing the commercial environment is the total number of debts that will mature in 2024. According to projections by the Mortgage Bankers Association, $929 billion of the $4.7 trillion in outstanding loans held by lenders and investors will come due. expected this year, according to a report released in February. This will be difficult for tenants looking to refinance in a high interest rate environment.
Commercial properties are highly marketable
Although many commercial properties have lost value over the past few years, not all are being offered at the 60% to 70% discounts mentioned earlier. Moody’s looked at various price indices that measure changes in repeated sales of similar properties over time and found that office prices have fallen by about 20% to 30% from their peak in 2021. However, some measures mean a discount of 30% to 40%, said Moody’s head of commercial economics, Kevin Fagan. Good luck.
“Some office buildings are seeing significant discounts from their previous prices or sale prices, but 70% is not uncommon,” Fagan said. “Although sales volume has been low and price discovery has been a major challenge for CRE participants over the past year or two, the sales that have occurred have provided a very mixed picture.” Indeed, some measures based on the market value of public REITs show a 60 percent decline, he adds.
It is also important to be aware of the complexities of individual real estate sales, especially when it comes to heavily discounted properties. Take the example of the Manhattan office building at 1740 Broadway. There was a “battle” between the bondholders and the special servicer (specialists in managing and resolving distressed loans) over the deal after Blacksone turned over the keys to the building, Fagan said, causing delays and the need to acquire the property. sold out quickly.
“All of those issues have led to a fire sale situation for the property, as opposed to an orderly sale that would increase the recovery value,” Fagan said. One such example was in Fort Worth, Texas, where multiple reports in May indicated that the Burnett Plaza building had sold for $12.3 million, less than one-tenth of the $137.5 million paid just three years earlier.
“The reality of this situation was very different,” explained Fagan, because the media reports only talked about the sales part. The foreclosure auction was for only mezzanine loans in the property, which are often used for acquisitions or development projects. The original mortgage on the building, estimated at $83 million, is still on the building.
“So even though the winning bid was $12.3 million, the buyer was also responsible for the original loan of $83 million, making the acquisition a little more than $95 million,” Fagan said. “This is still a significant drop from $137.5 million in just three years, but 33% is still a long way from 90%-plus. [discount] that was widely reported.”
Either way, it cannot be denied that many commercial property owners have a difficult time keeping their properties busy.
“Property owners are facing difficult conditions attracting and retaining tenants, especially in the office segment,” said Kevan Ventura, principal of law firm Goldberg Kohn’s real estate group. Good luck. “Simply put, reduced tenant demand is contributing to lower rental income and lower prices. Maintaining residency is essential to financial strength.”
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