NEW YORK – The $2.4 trillion office building sector continues to struggle with property values falling for aging buildings, high interest rates on new loans and refinancing, and poor tenant demand after the pandemic.
Opportunistic buyers have found some large office buildings at a steep discount up to 70%, making the office market an opportunity for real estate investors.
Yellowstone Real Estate Investments purchased 1740 Broadway, a storied office tower near Columbus Circle in Manhattan for $185 million in April, which previously sold to Blackstone a decade ago for $600 million. Meanwhile, Bloomberg reported that two real estate firms snapped up a Midtown Manhattan tower for less than $50 million.
These deals, however, signal the distress in the office market, which could lead to large losses for banks and investors of real estate-backed loans.
Chad Littell, national director of U.S. capital markets analytics at CoStar, said, “Office vacancies are going to heights we have never seen before. As vacancies are rising, it’s difficult to get debt for buying or developing an office.”
CoStar expects 2024 and 2025 to be the two worst years on record for office buildings in terms of the amount of floor space that tenants are vacating. But quick deals could signal that the prices of office buildings have hit rock bottom, particularly for the buildings constructed decades ago.
Owners have had a difficult time refinancing their buildings or getting new mortgages because of high-interest rates.
Trepp reports that so far in 2024, 16 office buildings with mortgages that were packaged into commercial real estate bonds were foreclosed on or extinguished, resulting in $500 million in losses for investors nationally.
In 2023, 26 mortgages packaged into bonds were foreclosed on or extinguished, resulting in $265 million in losses for investors. According to Trepp, more than a quarter of those loans are on a watch list for potential problems, which suggest more distressed sales could emerge.
Source: New York Times (06/12/24) Goldstein, Matthew; Beachy, Susan C.
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