Here’s Some Optimism for Office

Doom and office are words that have been known to accompany each other these days. In terms of office properties selling for a loss more frequently, one analysis recently stated, “The doom loop for office properties appears to be a nationwide phenomenon.” And there’s been plenty of speculation that the combination of outmigration and fall in office use, along with the drop in property taxes, could mean a doom loop for cities.

But a new report from Integra Realty Resources suggests that despite serious issues facing the property type, the terms “urban doom loop” and “office apocalypse” bandied about may indicate too dour and certain a future.

“You don’t have to accept that vision to acknowledge that the office sector has taken a serious blow since 2020,” the report said. Office properties have experienced “double-digit negative appreciation returns” over the last year nationwide. Austin, Boston, Chicago, Denver, Houston, Los Angeles, San Francisco, Seattle, and Washington DC have all seen more than 20% declines. Transaction volumes are down 68.6% to 90.3%. Only 20% of markets are in recovery or expansion, while 63% of office markets are in recession and 18% in hyper supply.

But they also argue that two factors might bring a change in the direction office markets have been going. The first is a bet that Covid-19’s affects are now spent and the negative effect that work from home had on tenant occupancy has largely dissipated, while there are many parties — companies, landlords and their lenders, and municipalities — that would benefit from a return to the office. There isn’t an active coalition yet, but “previous crises over the past half-century have shown that downtowns left for dead have rebounded when mutual interests assert themselves collaboratively. All it takes is leadership.”

Second is the chance that additional increased interest rate hikes are probably over. “Cap rates for Class A office properties are nearing 8% on average, with 8.5% the norm for Class B assets,” they said. “Discount rates are above 9% across the property sector. The evident risks for office buildings may already be priced into rates. If so, further downward pressure on value could ease.”

Market rents are rising, they say. There’s some improvement in Class-B properties. “In sum, this is not a time to be a Pollyanna,” they added. “But neither is it a moment for despair.”