Vacancy at the tower: Property values and sales volumes slammed by vacant office space
- September 1, 2023: Vol. 10, Number 8

Vacancy at the tower: Property values and sales volumes slammed by vacant office space

by McAlinden Research Partners

Office REITs have continued to sell off in recent weeks, coinciding with news that metro office property sales have slowed to a trickle. Moreover, the buildings that can be sold are increasingly being offloaded at steep discounts. Delinquency rates remain relatively low, but ticked up in the first quarter, as occupancy continues to be subdued.

With another potential rate hike still on the table at the Federal Reserve, properties carrying adjustable-rate mortgages remain vulnerable to considerable interest rate risk. Meanwhile, hundreds of U.S. banks exceed regulatory limits on exposure to commercial real estate and construction loans.

Office REITs were trading at their lowest level since 2009 during July, as the S&P Composite 1500 Office REITs index has declined by as much as –27 percent in 2023. REITs focused on commercial real estate have broadly underperformed this year, but office properties have been the hardest-hit subset of the commercial property market. Office towers lost nearly 20 million square feet of leases in first quarter 2023, according to real estate brokerage JLL. Forbes adds that a record 962 million square feet of office space is vacant in the United States, equivalent to 20.2 percent of the country’s entire stock.

CRE prices experienced their first quarterly decline since 2011 during the first quarter of this year. Moody’s data showed the drop was equivalent to less than –1 percent. But Mark Zandi, Moody’s Analytics chief economist, told Bloomberg, “Lots more price declines are coming.” That prediction appears likely to come true, as property owners have been offloading buildings at significant discounts. The Wall Street Journal reports that Silverstein Properties, owner and developer of the World Trade Center in Manhattan, has agreed to sell a 20-story office building on Fifth Avenue near Bryant Park for $105 million, or $66 million less than the amount Silverstein refinanced the building for in 2020.

MSCI data showed purchase volume for Manhattan office properties in the first quarter of 2023 dropped to less than $500 million, down roughly 90 percent from $5 billion in the same quarter a year ago. New York City’s commercial brokers have been feeling the squeeze as the Real Estate Board of New York’s gauge of confidence dropped for a sixth consecutive quarter in first quarter 2023, falling from –45.6 in the final quarter of 2022 to –74.7 most recently. That is the lowest level recorded since the New York Real Estate Board began its current iteration of the survey in third quarter 2017.

New York is just one example among many markets struggling to maintain any meaningful appetite for commercial properties. In the first three months of 2023, total sales volume in Miami was only $194 million, an –80 percent drop compared with the same period of 2022 when deal flow hit $977 million, according to DWNTWN Realty Advisors. Per The Real Deal, the office sector experienced the biggest decline, tallying only $6 million in sales volume during the first quarter, a –97 percent year-over-year decline.


This article was reported and written by McAlinden Research Partners, which can be accessed here.

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