Why Private Capital Is Voraciously Buying Up Office Assets

Without question, the office sector has been the most challenging commercial asset class following the pandemic. Since 2021, office asset values have fallen 40%, and the office market is responsible for 41% of the value distress in commercial real estate. And yet, some investors are seeing silver lining.

Private capital—namely private equity firms, family offices and other non-institutional capital syndicates—are actively pursuing deals in the office sector, according to Karen Whitt, 2024 CREW Network president and president of Colliers U.S. Real Estate Management Services. This class of investors is seeing an opportunity to purchase assets at a discount in primary geographic markets that have followed a historical pattern of recovery after a market dislocation.

Buying at a Steep Discount

Attractive pricing is driving private capital to the office sector. Today, investors can find properties discounted 50% to 75% from their previous transaction, according to Whitt. Of course, these properties have a high vacancy rate and much different fundamentals than pre-pandemic. Still, the discount is providing an opportunity to drive value.

“As cash buyers, they can undercut the market to some extent, with their lower acquisition cost, allowing them to attract tenants who are seeking value or lower rents,” explains Whitt. “These owners can be aggressive in pursuing leases as they have capital for tenant improvements and commissions to increase occupancy, and thus property value.”

It isn’t unusual to see private capital turn to struggling market sectors. During times of economic turbulence, investors historically seek market distress in search of better returns—even at a higher risk. Whitt says the same happened during the Global Financial Crisis. “Private equity and non-institutional capital was the predominant buyer in that cycle,” she says.

CBDs Still Attract the Most Attention

When it comes to location, investors are sticking to the classics. They are targeting primary locations in central business districts over suburban or smaller markets. Although CBD office has been hit the hardest by remote work and migration outside of urban environments, they have been known to recover following economic dislocations.

“CBDs with a history of recovering in business cycles are strong bets,” says Whitt, adding that investors are looking at markets with strong demographic trends and the potential for business growth. On the other hand, geographies that have struggled with high vacancies in past cycles are not ideal candidates for a distressed office acquisition strategy.

In addition to location, investors are also looking at asset quality. High quality assets struggling with tenancy and income due to the market shift are the providing the best opportunity for investors to generate value. Older buildings or those in need of capital infusion, are much more difficult to pencil. “Revitalization of dated buildings can only go so far,” says Whitt. “With significant construction and re-leasing costs, it really questions whether the asset is worth reinvestment.”

All percentages and research courtesy of Aaron Jodka, Director of Research Capital Markets, Colliers.

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