Office Market May Be Nearing Bottom, Says Moody’s

A current general problem for CRE, and office properties in particular, is the lack of price discovery. There haven’t been enough transactions over the past 18 months to provide comparable sales and an insight into how markets value the assets.

However, Moody’s in a new report said that two market signals are indicating that the office market may be approaching bottom.

The first signal is the annual year-over-year change in transaction volume. At the beginning of the fourth quarter of 2023, volume change stood at about -50%. By the end of the three months, the change climbed just over into positive territory. The first quarter of 2024 saw an increased gain as did the second quarter.

That data is based on volume in dollars, which can be deceptive. “If everything’s trading at a 20% or 30% discount versus when it last traded, that can distort volume on a value level downward versus the number of units,” Matt Reidy told GlobeSt.com. “If we were to look at it on a size-like number of units or square feet traded, we would probably see a little bit bigger pickup on transactions.”

Of course, things could shift downward again, but it also might continue as a trend, with a growing body of transactions, more price discovery, and more comparable property sales. Both buyers and sellers would start to become, if not happy, then reconciled with market valuations and how much they could realistically command bids and asking prices.

The other major factor Moody’s noted is increased activity at large losses. Over the last year and a half, there have been many major CRE players and analysts discussing the fall of office valuation. And yet, there hadn’t been that many large buildings selling at big losses. But that type of sale is important to finding a bottom.

“Usually that’s the sign that things are about as bad as they’re going to get. When people finally throw in the towel,” Reidy says. “We haven’t seen much of that in the larger transaction space until this most recent quarter. We didn’t see owners selling properties at really large dollar losses, like $100 million from when the property was acquired.”

He said that in 2022 and 2023, there were perhaps two or three such transactions and only one of that magnitude in the first quarter of 2024. “Since the end of the first quarter, we’ve seen 7 transactions, more than the last two years and a quarter combined.”

Perhaps banks were holding off from pushing sales, giving borrowers more time to turn around rather than having to sell at a big loss. Or maybe it was a desire for greater clarity from additional price discovery. But it has begun to happen.

Reidy pointed to the sale of 1740 Broadway in New York City, which he described as “an older Class B property that was poorly occupied.” Investors in the AAA tranche of the $308 million debt backed by 1740 Broadway in midtown Manhattan only got 74% of their investment back after the loan sold at a steep discount. Creditors in the five lower groups were wiped out.

It’s painful for those involved and losing some or all of their investments. But this is likely what will have to happen, and it could keep going for a couple of more years. “But we do think it’s a sign that we’re putting that bottom in,” Reidy said.