Green Street Lowers Its Office Valuations. Again.
At least another 5%-10% decline on average is reasonable, according to industry conversations.
Plunging office valuations are creating challenges for analyst firms when assessing how low will they go.
A Green Street office report from June 28 states as such, adding that additional signs now indicate the firm’s estimates are too high – despite already marking down A-quality office values several times this year.
Green Street’s Commercial Property Price Index for REIT-quality office assets “has already been marked down 30% from pre-Covid highs prior to this recent reduction.”
The report indicated that conversations with private market participants suggest at least another 5%-10% decline on average is reasonable, adding that “this varies significantly by market,” authors Dylan Burzinski and Michael Manos, wrote.
As for making deals, Green Street said the “critical caveat” is how incredibly difficult it is to arrange new debt financing for assets in today’s capital markets environment.
“[This] remains one of the biggest challenges facing would-be buyers,” according to the report.
Burzinski and Manos said that higher-quality buildings (new, redeveloped assets, well-located, etc.) are holding values better than lower quality and that cap rates may no longer be as relevant for Class B office assets given their low existing occupancies and values that seem to be approaching “land plus lease” value.
The authors suggest that price per square foot “may be the more relevant valuation metric” in certain scenarios and that situation reminds them of the ‘B’ mall experience from the late 2010s.
West Coast Gateway REIT NAV estimates were impacted more than average, especially in the San Francisco Bay Area, and Sun Belt office values are getting hit as well, but “are arguably holding up better than coastal markets,” the report said.
For deals that can get done, Green Street said that smaller assets are much more liquid than larger ones.
“With little new debt available, investors are required to write larger equity checks making smaller assets more palatable to investors,” Burzinski and Manos write.