Aaron Jodka
- There is still much opacity in pricing levels.
- Data sources range from a loss of 38% to a gain of 3.5%.
- There is a clear bifurcation in newer built, highly amenitized, functional office product versus everything else.
- Maturing debt and challenged fundamentals will put the office sector in the headlines throughout 2023.
- Historically, the best times to acquire assets are during the most challenged capital markets/economic environments.
Investors will make a lot of money in the office sector, but when and how, along with the bottom in pricing for office assets, is yet to be determined. Data sources are all over the board when trying to pinpoint office values. Nareit reported that office REITs posted the weakest returns of all asset classes in 2022, down some 38%. On the other end of the spectrum, MSCI and CoStar’s repeat sales indices show 2.9% and 3.5% gains, respectively. Private capital is slower to realize price declines, which is clear with NCREIF and PREA data. Pricing was down 7.4% and 6.6%, respectively in 2022, but the rate of decline is accelerating (and being realized in recent data). Green Street falls in between, declining 17% from pricing peaks.
he market’s lack of clarity is weighing on transactions. Loan maturities and challenged fundamentals will further pressure the office sector. Headlines show assets being returned to lenders, indicating that distress is emerging. Upcoming comps from credit-challenged assets (foreclosure, defaults, restructures, workouts) will lead to new data points and repricing. Not all assets will be in this boat, but the most vulnerable ones will be.
More assets will come onto the market, but these uncertain times also present tremendous buying opportunities. Recent research by Revolution notes that when lenders tighten, the four-year forward price change vastly outperforms. Think back to the early 1990s savings and loan crisis, the dot-com bust, and the Global Financial Crisis. Those that acquired assets during those periods saw strong outperformance in the years that followed. Could now be the next great buying cycle?
