Greetings,
This is Manuel Angeles with Exp Commercial.
Here is an update on the current National Commercial Office Real Estate Market in The United States of America as of March 10, 2024:
In the challenging landscape of U.S. office sales, a potential bright spot is that sales activity may have reached the cycle low. Despite a 56% year-over-year decrease in transaction volume to a 14-year low of $35 billion, quarterly sales activity remained stable throughout most of 2023, with 23Q4 volume slightly above the level set in 23Q1.
The early months of 2024 saw a significant shift in the market dynamics, with owner-users overtaking private buyers as the primary buyers of large office developments. This change marks a departure from the trend since mid-2022, where private buyers led acquisitions as REITs and institutional investors reduced their exposure. The first quarter of 2018 was the last time owner-users dominated net buying activity. Although this trend may be temporary, substantial pricing discounts could attract more corporate investment into the sector.
A notable example is CoStar's acquisition of Central Place Tower in Arlington, Virginia. The 31-story, 552,000-SF trophy office development was purchased in February at a significant discount due to upcoming vacancies, allowing CoStar to relocate 500 employees from Washington, D.C., into 150,000 SF. The property, sold by a joint venture between JBG SMITH and PGIM for $325 million, or $588/SF, was approximately 26% below its 2019 valuation.
Other examples include Lennar's acquisition of its Miami, Florida headquarters for $68 million, or $319/SF, and First Energy's purchase of its Akron, Ohio headquarters for $49 million, or $136/SF, both at substantial discounts to replacement cost.
Investors pricing deals at discounts to existing debt is a parallel trend. Two examples include R2 companies' acquisition of 150 N Michigan Avenue in Chicago for $90/SF and In-Rel Properties' purchase of 7500 Old Georgetown Road outside of Washington, D.C., for $92/SF.
Such steep discounts can be necessary as negative absorption and declining rent growth make it difficult to underwrite office today. With increasing vacancies, fewer deals are priced based on going-in yields. They are often based on a combination of unleveraged internal rates of return and discounts to replacement cost due to the scarcity of debt.
Where cap rates are used, they have seen significant movement off the 2021 lows, with 5-star properties seeing yields expand by 175-200 basis points. More commonly, 4-star properties have seen as much as 200- 250 basis points of expansion.
This range of cap rates is generally found in the upper 7% to 9% territory, indicating that office property values for transactions over $10 million are down by roughly 35% from the all-time high in 2021, excluding medical and owner-user sales.
Debt maturities pose challenges for 2024, with around $206 billion in office loans maturing this year and another $180 billion in 2025 and 2026 combined. With delinquency rates at 7.4%, there is a possibility that they will surpass post-GFC levels of 10.5% in the next year. However, as asset valuations become clearer, the vast pool of capital remaining in the sector could offer strategic opportunities for informed investors.
Here are several graphs illustrating the current national commercial office market in The United States of America:
Full Commercial Office Market Report Here: https://d2saw6je89goi1.cloudfront.net/uploads/digital_asset/file/11...
Access Exclusive Commercial Real Estate Market Reports in The United States Here: https://www.manuelangeles.com/
Contact me for a complimentary market analysis and valuation report for your commercial property, along with up-to-date commercial real estate listings (on-market and off-market): https://api.leadconnectorhq.com/widget/bookings/maexp
Thank you.
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Best Regards,
Manuel Angeles
Broker Associate
CalDRE #01985856
Mobile: (323) 900-5258
Email: manuel.angeles@expcommercial.com
Website: www.manuelangeles.com
Address: 155 N. Lake Avenue, 8th Floor, Pasadena 91101
Exp Commercial of California, Inc.
CalDRE #02134436
Office: (855) 451-1236, ext 300
Website: www.expcommercial.com
Address: 2603 Camino Ramon, Ste 200, San Ramon, CA 94583
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