Goldman Sachs Says Office Markets Have Bottomed
That’s the good news. The bad is that getting back to ‘normal’ is going to be difficult.
It’s a “good news but things will be pretty uncomfortable for maybe a long time” look at CRE by Goldman Sachs analyst Caitlin Burrows, as Benzinga reported.
One of the biggest problems in commercial real estate has been the crash of transaction volumes. Year over year, sales fell precipitously. Some of that is exaggerated in a sense. The amount of capital that poured into CRE during the pandemic, under a zero-interest rate policy when investors were trying to find ways to get a good return, drove prices and valuations upward. The historical top of any market makes for a standard, not a baseline. Almost by definition, it would be impossible to maintain.
Like climbing a tree and slipping a fall was inevitable, and like such a tumble, it has caused damage. After the Global Financial Crisis, it took eight quarters of decline before conditions began to improve, Burrows noted in her report.
But any downturn eventually comes to an end. Burrows said that leading indicators suggest the CRE market has seen the worst. She pointed to the Organisation for Economic Co-operation and Development’s U.S. Composite Business Confidence Index, which tends to lead U.S. office leasing volumes by two quarters. The index has been showing improvement in recent months.
Expecting improvement in the office market may seem odd, given the well-documented problems. However, the current bifurcated nature might help explain the possibility. Conditions are relatively good in newer Class-A and trophy properties. Vacancies are relatively low, and rents are holding up. It might be that a recovery will be in that sector, with B- and C-class office properties absorbing the worst of results.
Burrows said that Manhattan has seen strong leasing activity. That should have a positive impact on valuations and transactions. San Francisco saw 73% month-over-month and 30% year-over-year increases in office tour activity.
Nevertheless, there are continuing downward pressures. Under high interest rates and structural issues with office, like hybrid work, “It is likely to take longer to inflect positive,” Burrows wrote. And the bifurcation in property categories within office will continue to have an effect.