Class A Office Values Are 35% Down From Pre-Pandemic Peak

There’s an old Russian saying: the marvel of a dancing bear is not how well it dances but that it dances at all. In the case of office properties, the marvel is not how much values have fallen, but that they haven’t plunged down a deeper well.

Dylan Burzinski at Green Street in a recent analysis noted that the firm clocked Class-A office values as being down by 35% since pre-Covid highs, the equivalent of a “mid-7% nominal cap rate across the sector for REIT-quality office portfolios.” That’s notable in part because the average property type was roughly flat from the before times. Other types? According to Green Street, B-Class properties are “down much more.” And that isn’t even C.

Thus, the 35% figure could be pure misdirection. With transaction volumes being far off from normal, there is next to no price discovery and open debate over how far office values have fallen and the distance left to plunge.

But then Burzinski writes that public markets have priced in a “substantially more onerous decline in office values” with an implied cap rate in the 9% range based on gross asset values (GAVs). In turn, that might be correct or possibly not because public markets, while often good at indicating a direction of value movement, isn’t necessarily so canny at estimating the volume.

He notes that implied cap rates of offices are at “historically high levels given the headwinds” in the market. Looking at historical degrees of discounts, Burzinski argues that if GAV discounts reverted to previous norms through private market repricing rather than public market, the result would be “a further decline in private market office values in the range of 5%-15% and would bring the cumulative decline in A-quality office values to >40%, eclipsing the ~40% decline experienced during the Global Financial Crisis (GFC).” Nominal cap rates for high quality office properties would in in a low-to-mid-80s range.

None of this is certain, strange as the current conditions have been. “Overall, while it remains to be seen how much further office values will decline, the bias may be lower,” he wrote. “This may be an elongated bottoming process as opposed to one that plays out over a period of mere quarters.” During the global financial crisis, it took less than two years for the peak-to-trough drop to set in, with four years to recover. Currently, it’s been three years and still going on this time.