Exploring the Truth Behind Negative Headlines in the Office Sector: Opportunities for Investment and Growth
The office sector has faced its fair share of challenges in recent years, but there are still plenty of opportunities to be found. In this series, we have delved into various aspects of the office market, including debunking doom-and-gloom headlines and examining issues such as “give-backs” and debt maturities.
According to a report by Preqin released in July 2020, U.S. commercial real estate investment has primarily been focused on the office sector since 2014. However, recent data from Newmark shows a decline in Q3 2023’s office investment sales by 64% year over year and a drop of 54% in loan originations. Despite these challenges, analysts at Newmark note that tertiary markets and suburban assets have shown more resilience.
Experts believe that despite these setbacks, there are still opportunities for savvy investors within the troubled office sector. Eli Randel with CREXi comments that entrepreneurial investors may find deals at discounted prices if they can secure financing through creative means.
Tony Russo from Lee & Associates agrees with this sentiment stating that an opportunistic market like this presents great potential for those who can think outside-the-box with their investments.
Navigating Financing Challenges
One significant issue affecting commercial real estate is securing capital for purchasing or renovating properties due to lenders pulling back on loans across all sectors. However,
KDC’s America Mims suggests partnering with landlords facing loan maturity without sufficient funds to pay them off could provide cash-heavy investors an opportunity to invest creatively.
Adam Finkel from Tower Capital adds further insight noting well-located properties with stable occupancy rates under experienced operators may be able to secure financing through banks or life companies despite current lending restrictions; while those trading below replacement cost should consider bridge financing options instead.
Office Conversions Can Work Under Certain Conditions
There is much talk about converting office buildings to other uses, but many experts believe that not all properties are suitable for such transformations. However, there have been successful conversions in the past.
Ira Singer with Mosaic Construction points out that building conversions don’t necessarily have to be limited to residential use; they can also find new life as schools or churches. KDC’s Hayim Mizrachi adds that Class B or C buildings located in desirable areas may be acquired and converted into different types of commercial spaces.
On a more positive note, MDL Group’s Hayim Mizrachi mentions advising several owners on leveraging their vacancies by positioning their properties for sale as owner-user opportunities. For example, MDL is currently working with an owner of a 20,000-square-foot building who plans on creating four separate office condos at 5,000 square feet each after losing a 17,000-square-foot tenant.
Finding Opportunities Amidst Challenges
Despite the struggles faced by the office sector and potential value reductions in some markets,
Stream Realty Partners’ Adam Showalter believes this could present investment opportunities for those with capital available. He notes that top-performing assets may offer attractive yields due to cash flow stability and lack of debt expiration looming over them.
CREXi’s Eli Randel agrees stating how late Sam Zell excelled at finding distressed assets which he then turned into profitable investments worth billions before retiring from his real estate empire last year – leaving behind significant gaps others will undoubtedly try filling soon enough: “Others will buy low add value someday sell high,” Randel observes optimistically adding “I’m looking forward seeing these newcomers meet legacies.”
